THE FUND

In February, the fund went down 3.6%, compared to the benchmark MSCI Pakistan Net (SEK), which went down -2.6%. The month was marked by heightened geopolitical tensions between Pakistan and India despite much needed improvements in macroeconomic indicators being seen.

In the outgoing month, the fund´s main underperforming exposures were Materials and Communication Services, whereas the outperforming exposure accrued from underweight in the Financial as well as the Energy sector. During the month, we reduced our exposure in liquid blue-chip banks and increased our exposure in the attractive consumer linked Materials sector.

MARKET

In February, Pakistan was embroiled in heightened geopolitical tussles with India when Pakistan downed two Indian fighter jets in Pakistani territory, in which one pilot survived and was captured, but later released as a “gesture of peace”.  The circumstances have raised fear and the hostilities between the two nations have intensified. However, the US, UK, China, Saudi Arabia, and UAE has intervened resulting in decreased tension between the two nations. The Prime Minister of Pakistan, Imran Khan, has repeatedly, and for some time now, empathized “give peace a chance” as one of his core values and has offered to investigate the attack cooperatively. Given the electioneering in India, and Prime Minister Modi’s aggressive postures, sentiments could remain dampened until material triggers prop up.

From the market’s perspective, the macroeconomic stabilization – currency adjustments of 33% and interest rate tightening of 450 bps – seem to have yielded results. In January, the Current Account Deficit clocked in at ~USD 800m (3.5% of GDP) from peak’s 7% of GDP, and the Trade Deficit declined more than 30% to USD 2.4bn. Naturally, the currency depreciation led to increased inflation CPI to 8.2% (with unsustainable price changes in some vegetables). After plugging in the gaps in external financing through China, Saudi Arab, and UAE’s loans and oil credit facilities, the government is apparently navigating with the IMF’s bailout terms, which would more beneficial than if the bail-out package was undertaken in September-October last year. The reduction in the Current Account Deficit’s run-rate is sustainable and probably the catalyst equity investors were eyeing.

Meanwhile, the government has put most of its energy towards a) increasing Foreign and Local Direct Investments b) improving exports and c) targeting increased Tax-to-GDP ratio from 11.6% to 14.6%. Further on, the government welcomed Saudi Arabia’s Crown Prince, Muhammad bin Salman, with investments worth USD 20 bn in refinery, power, and food processing. Out of the commitments, USD 6bn should be pocketed within short term by selling RLNG power plants and awarding renewable projects. In order to show seriousness over tax (non) compliance the Federal Bureau of Revenue (FBR) has taken hardened measures involving catching tax evasion worth PKR 2bn (USD 14.2m) by a chief of Oil Marketing Company, sending notices to 6,000 rich non-filers to recover PKR +2bn, unearthed PKR 6bn loss from a battery manufacturer, live-integration of retail sales, registering the bearer prize-bonds used primarily in whitening sources of wealth and the Prime Minister’s resolve to improve and simplify tax-collection and ease of doing business. In a recent statement, PM is reported to have proudly reduced number of corporate taxes down from 46 to 17.

What we are seeing in tangible improving in the prospective economic climate in the country. We understand there would be a lagged negative fallout of rapid currency depreciation and abrupt monetary tightening the peak of which should be visible in a few months albeit reports cite IMF still demanding massive hikes in gas/electricity tariffs and the discount rate. The demand contraction is visible with ebbs being seen in the cement and oil sales. Well incorporated are those factors in the Index valuation right now, that too is trading at attractive asset values and in the business cycle, equity prices are similar to levels seen in 2013. We expect positives to outmaneuver negatives in this and next calendar year. In the short term, despite electioneering in India, the risks seem worth taking for value-hunters.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.