Motnhly comment – June

The market

It is often touted that the external shocks only come into action when they are least expected. The predictability of such, therefore, is only accurate when it is least expected. Such has been the politico-drama in Pakistan lately. Not until long ago were the majority of pundits, businessmen, masses and foreign investors believing that the coast is clear for a clean sweep for the current government in the general elections headed next year. The electioneering, nonetheless, seem to be getting more competitive day by day.

The media hype around the aggressive – rather stern -behavior of the Joint Investigation Team (JIT), formed by the Supreme Court to investigate Prime Minister’s money trail, has seemed to have rung the alarm bells within the corners of ruling government. From the Prime Minister himself to his Federal Ministers, the tone against the members of the JIT and slight hinting of possible derailment of democracy and warnings of street agitation are signs that (over) confidence in the ruling team has mellowed a bit. Although the JIT has been given a deadline till 10th July 2017 to submit its findings, further scrutiny could linger on over another few weeks or months. Often the Prime Minister has cited the “bigger JIT” – referring to the general elections – to show his strength. Or that could also reflect the preparedness for any adverse judgment potentially disqualifying the Prime Minister in extreme cases and bringing in the next generation into the driving seat. In eventuality, the heir-apparent is planned by major political parties, but in this case a rather honorable change of leadership would not be a bad outcome considering the fragility of the impact on the voters.

Economically, the country seems to be dragging along somewhat reasonably also. Although, the Current Account Deficit of 3.2% for 11MFY17, has re-invited the fears of PKR depreciation, the falling FX reserves to an import parity of 4.5Months are still nudging forward on the back of expected foreign loans and investments. To arrest the run-rate, the government has resorted to higher import duties and protectionist measures to encourage local capacity expansion and import substitution.

The current inflation numbers of 3.9% also remain manageable for the foreseeable future, delaying further chances of immediate monetary tightening. Surprisingly, we saw PKR depreciate 3.25% versus USD on 5th July 2016, however, to have appreciate again by almost 3% the very next day as the Finance Minister summoned bankers and termed the rise “artificial”.

Post the recent highs, the ~15% correction has brought the Index down to an attractive Forward Price-to-Earnings ratio of 10x. Companies with very sound business prospects, much lesser downside in the profitability and lesser correlation with political impasse have corrected by ~20-25% also opening up screaming valuations in terms of the prices. However, the buyers are staying put, and the fall in the market is with lower volumes, primarily indicates the anxiety levels among the current holders of stocks. With all eyes on JIT, the coming month of July appears to be a crucial factor in the history of Pakistan’s politics. Leaders pushed to prove their innocence is a new wave of accountability that can go a long way in improving the business climate in Pakistan and enhance the level of transparency, efficiency and honesty across the country

The fund

During the month, the fund declined 9.8% as compared to the benchmark’s MSCI Pakistan Net (SEK)’s decline of 9%. The month of May’s disappointment continued in June as investors were wrong-footed by the absence of Net Foreign Inflows on MSCI Emerging Market upgrade. The month was dominated by political uncertainty stemming from the ongoing investigation by Joint Investigation Team (JIT).

The underperforming exposures in June were the Healthcare and Information Technology sectors whereas the outperforming contributors were our underweight stance on Energy and Utilities. The fund trimmed its exposure in Oil and Gas exploration, Banks, IT and Consumer sectors while increased exposure in the Cement and Insurance sectors.

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