THE FUND:

During the month, the fund went up by 1.6% as compared to the benchmark’s MSCI Pakistan Net (SEK)’s return of 3.4%. March also saw KSE-100 on a marginally upward trend. The out-performing exposures include Consumer Discretionary and Materials while Energy and Real Estate under-performed.

MARKET:

Doubts over possible delays in elections and/or the installation of a “technocratic” government amidst peak political uncertainty continued well into the month. Reassuringly, politics have taken a turn for the better. Despite emerging as the single largest party in the Senate elections, PML-N was surprised to witness growing numbers of Senate Members from opposing parties. Opponents backed a Senate Chairman from a smaller province, Balochistan, and a PPP-backed Deputy Chairman. Thankfully, the Senate elections are behind us, despite strong criticism of election manoeuvring levelled against PML-N. We are sure that PML-N, even if re-elected, will be unable to pass laws easily to bring Nawaz Sharif back into power or to restrict the judiciary’s active oversight of the political set up.

The news reported a recent discussion between the Chief of Army Staff and a journalist, citing his displeasure over the government’s excessive distribution of tax to the provinces, cash-transfers to poor people, and excessive spending on infrastructure while neglecting the need for a strong defense budget in a volatile region. Sensing an opportunity to mend relations, Shahbaz Sharif, PML-N’s nominee for P.M., contacted the Army Chief to assure him of the availability of financial resources. Sitting P.M. Abbasi echoed this sentiment. The P.M. also held a low-key meeting with the Chief Justice of Pakistan to hear out the judiciary’s concerns in an attempt to mend fences. On the whole, March indicated a lowering of tensions between the Executive-Military-Judicial triumvirate.

A ~5% depreciation in the currency – a cumulative 10% decrease in less than 4 months – to reduce pressure over the falling FX reserves (2.4 times import cover) also captured headlines. February’s Current Account Deficit (CAD) declined month-on-month to $1.2bn, though we believe it should be under $1bn (annually <4% of GDP). Ruling out any short-term Eurobond issuance – and even going to the IMF – the Ministry of Finance has hinted at securing loans ($3-5bn) from “friendly” countries i.e. China, GCC. Any such move would cushion the government along with market investors, the latter are finally seeing some signs of policy action to rein in a possible Balance of Payments crisis.

Despite worries over a sharp slowdown, Cements showed a demand in double-digits allowing cement players to increase their prices by 7-9%, complementing to your fund’s over-weight stance. It appears that the manufacturers have decided to hold a discussion to rule out a full-blown price war, which hurts everyone. Unless there is a sharp increase in the Discount Rate or a further depreciation in the currency resulting in declining demand, we expect the factors under discussion to have a moderate impact and keep the demand for cement close to the long-term growth rate of 7-8%.

The government is planning to unveil the last budget before elections on April 27^th. According to reports, there may be a hefty reduction in income tax rates of middle-class taxpayers. This change will definitely improve purchasing power to ~0.1-0.2% of GDP. There are also indications that the budget will scrap minimum support prices on certain agricultural products and export duty rebates to relieve the pressure created by subsidies. Proposals for the stock market include removing bonus tax, reduction in Capital Gains Tax rates, horizon and incentives for capital formation. As an additional impetus, it is rumoured that the government of Punjab (where most of the expensive RLNG is consumed) may subsidise the gas tariff for RLNG based exporters to enhance regional tariff competitiveness. These measures, despite a moderate growth in PSDP allocation, may well act as positive triggers for the market combined with a potential tax amnesty on foreign assets.

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