THE MARKET

The month was dominated by two key events – the MSCI Emerging Market upgrade and the last federal budget of the current government. Surprisingly, both surprised the market. The rally over the last year or so in stocks which are now part of the MSCI Emerging Market Index has already re-rated the valuation of the companies and it was just a matter of time before investors booked gains. Perchance, the expected exuberance of passive flows was not countered by the active fund managers. The active funds, on the other hand, saw a terrific opportunity to have “ready buyers” for the stocks they have been carrying for long. Thus, the outflows disappointed the masses expecting unrealistic inflows and the stocks corrected sharply later on.

Additionally, the budget announcement seemed to be a continuation of fiscal prudence on a development-oriented theme. With Public Sector Development Program (PSDP) touching a PKR 1 trillion mark, the government continued to focus of rebuilding the economic infrastructure of the country and thereby creating a ripple economic effect post-infrastructure splurge. Our understanding is that the government avoided imprudence primarily with an assumption that any mess would be cleared by the government themselves if they are re-elected in the general elections next year; a highly probable scenario based on projections. What may have disappointed investors the most is the lack of removal of taxes on bonus shares and an increase in the capital gain tax to 15% for filers regardless of the holding period. The government seems to be counting on revenue-enhancing measures now that Pakistan is back into the MSCI Emerging Market Index.

On a positive note, the government has allocated a much higher amount for the PSDP, continued the economic growth projection of 6% and fiscal deficit target of 4.2%. An optimum mix of growth and fiscal prudence witnessed in the budget is commendable contrary to expectations of large splurge of wealth for pro-election campaigns.

THE FUND

During the month, the fund fell 1.5% (EUR) underperforming MSCI Pakistan Net (-0.8%). The month of May began with hopes of MSCI related inflows only to be faded post inclusion of Pakistan into the MSCI Emerging Market index. The fund was underweight in Banks, Cements and Energy – blue chips of which sectors saw the highest price movement upwards in anticipation of the passive flows. The fund has increased exposure in the cement sector marginally owing to expectations of improved local demand stemming from housing and infrastructure driven demand.