THE FUND
The Fund rose 16.6% during the month, compared to the Fund’s benchmark index MSCI Pakistan IMI Net TR (SEK), which rose 14.1%. Good stock selection was the main reason for the outperformance, especially in the Materials sector and Pharmaceuticals sector. Among individual contributions, Abbot Laboratories rose 43% during the month, General Tyre rose 50% and Pioneer Cement rose 47%. In November, the Fund added Pakistan State Oil to the portfolio. The government’s efforts to pay down circular debt in the Energy sector is expected to reduce financial costs and improve the profitability of the company. With this monthly letter, we also enclose a short travel diary from our recent trip to Pakistan containing our overall impressions.
MARKET
In November, MSCI Pakistan IMI Net TR (SEK) rose by 14,1%, MSCI FMxGCC Net TR (SEK) fell 1,4% and MSCI EM Net TR (SEK) fell 1,2%. The good index performance was primarily due to strong buying interest by local HNWI: s and mutual funds enticed by cheap valuations in the anticipation of an economic recovery. The positive momentum was supported by economic data releases, which all indicate that the economy has stabilized. During the month, foreigners invested USD 0.71bn in local currency treasury bills that took FYTD (from June 30th) inflows to USD 1.15bn. These inflows assisted the Central Bank to increase FX Reserves by 4% to USD 8.68bn up until the 22nd of November. We conclude that the Central Bank seems to have decided to use the ongoing carry trade (foreigners buying local currency debt) to build reserves, rather than to let the currency appreciate, which we believe is prudent at this stage. Furthermore, the current account turned positive in Oct’19 and registered at USD 99m surplus, which was last witnessed during 2Q FY16. This can be compared to a USD 1,280mn deficit during the same period last year. Exports increased by 6% YoY while imports decreased by 17% YoY. However, these gains were slightly offset by a 2.9% YoY decline in remittances.
During the month, the Central Bank announced its monetary policy for another two months, where the policy rate stays unchanged at 13.25%. This decision was predominantly expected by the market participants despite the decline in bond yields in the secondary market a month earlier. Moreover, the Central Bank kept its inflation and GDP projection unchanged at 11-12% and 3.5%, respectively, in spite of a slight divergence from the recent economic data.
On the political front, the protest by a small political party in Islamabad ended peacefully after negotiation with the ruling government’s coalition partner. Furthermore, the decision on the extension of the Chief of Army Staff (COAS) and the temporary lift on the traveling ban of Ex-PM on medical grounds settled without any prolonged political scenes. The ruling government inaugurated its flagship project, Kartarpur Corridor, to promote religious tourism in the country. Kartarpur Corridor gives access to the 24m Sikh population living in India to visit one of the holiest pilgrimage sites in Pakistan without any passport requirement. This corridor was completed and inaugurated on time despite the currently strained relationship between India and Pakistan. Moreover, the commerce ministry announced the National Tariff Policy, which is expected to reduce custom duties on raw material from the next fiscal year. Having that said, the details on the policy are scarce at the moment, but we believe (if implemented with letter & spirit) this would benefit the Manufacturing sector in the country. Additionally, the second phase of China-Pakistan FTA is expected to be implemented at the beginning of 2020, which would provide Pakistan an opportunity to grow its exports by at least USD 500m over the next twelve months.
Just before the release of this monthly letter the inflation for November was announced at 12,67% (12,49% expected). The significant jump (11,06% for October) was due to a sharp increase in certain perishable goods which is expected to subside in the months to come. Thus, the market did not respond to the figure. It is, however, an indication that the base case for a rate cut remains March 2020 with a certain risk of being delayed further. Also, the market’s attention is likely to be on the current account number for November, due sometime in December. We do not believe that the October surplus will be repeated but we expect a deficit of between USD 200-400m, which might disappoint investors short term. Whether it is enough to cause significant profit-taking is uncertain as we note a continued strong interest in buying coming in on dips. The medium-term momentum for the economy remains strong and the market still trades at a 30% discount to its 10-year average P/BV ratio.
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