MARKET
MSCI Pakistan Net (SEK) declined 15.1% during August compared to positive returns of MSCI Emerging MARKETs Net (SEK) and MSCI FMxGCC Net (SEK) of) 0.5% and 1.2% respectively. Continuing its negative trend post Sharif’s disqualification, investors remained on the sell side. PML-N remains in power with new Prime Minister Shahid Khaqan Abbasi sworn in as a replacement, but a stern stance by the party leader (Sharif) against the judiciary and establishment has kept the political temperature high. As the political noise faded by end of the month with Sharif’s departure for London, geopolitical noise rose. The Trump administration has once again reiterated the decades long U.S. rhetoric of ’Do More’ and blamed Pakistan for the failures of allied forces in Afghanistan. The Pakistan government is seemingly disappointed (as the human loss reaches 70k deaths and monetary loss of ~USD 120bn) and is in the process of formulating a new U.S. foreign policy. As NATO and allied forces continue to use Pakistan as a supply route and need Pakistan forces to protect the Pak- Afghan border, we do not see much deterioration in the relationship. The economy seems to be on track of its upward trajectory and inflation remains subdued at 2.9% for July, however the concerns on current account deficit (CAD) and falling FX reserves are creeping up. During July, the Current Account Deficit (CAD) stood at USD 2.1bn and FX reserves were down to USD 20bn (however, still more than 3-months import bill). A large part of the imports is related to increased economic activity, with energy and machinery heading the list. However, in the absence of equivalent Foreign Direct Investment (FDI) Pakistan has to resort to new financing channels. Pakistan is currently contemplating issuing USD 500mn to USD 1bn of Eurobonds and re-entering a new IMF program in 2018 should the CAD situation continue to deteriorate. Many corporate results also disappointed, where we saw earning declines in Banking, Cement, Power and Pharma, to name a few. In addition, Pakistan’s largest bank, Habib Bank (HBL), got into hot water in the U.S. The U.S. authorities are seeking to impose a penalty of USD 629mn on the bank’s New York branch due to non-compliance with AML rules. HBL carries the highest weight in the index and if the fine is approved, it’s likely to erode ~25% book value of the bank. MARKET seems trigger less at the moment however any positive steps by the new PM and decisions on how to handle the CAD situation may prove to be the impetus to regain lost grounds.
THE FUND
The fund decreased 11.7% during August compared to MSCI Pakistan Net (SEK) which declined 15.1%. Our underweight in the index heavy Energy, Utilities and Financials (mainly HBL and UBL) contributed to the relative positive performance. On the negative side, our off-benchmark bets in Consumer Staples and Materials did not perform well for the fund. The fund added value stocks in Materials by the end of the month.
