THE FUND

During the month, the fund went down by 7.9% as compared to the benchmark’s MSCI Pakistan Net (SEK)’s return of -5.4%. The month of October 2017 saw the KSE 100 Index nosedive as a result of the political climate and lack of economic clarity. The main contributors to the underperformance were our stock selection within Consumer Discretionary as well as within Materials. The Fund increased exposure in blue-chip Materials as certain companies, with sound growth and diversification plans, started to trade at very attractive valuations with low earnings risk. (changes in SEK)

THE MARKET

The broader equity market failed to gain momentum in October 2017 as domestic politics continued on a confrontational path with the military. Conflicting statements from the ruling government followed by immediate backtracking created doubt among equity investors and the military. US Secretary of State Rex Tillerson’s recent visit changed tone from a relationship of allies and spoke more about objectively acting on terrorist hide-outs within the country; coupled with ousted P.M. Nawaz Sharif’s selection as chief of PML-N has added to the ambivalence. Meanwhile, in the latest huddle of PML-N’s top leadership, some senior party members voiced that Shahbaz Sharif, Nawaz Sharif’s younger brother and Chief Minister of Punjab, should be the back-up nominee for the P.M. role in the upcoming elections (August 2018) if Nawaz Sharif remains ineligible to run for office. Shahbaz Sharif is pragmatic, energetic and wields significant influence in Punjab, Pakistan’s largest province and PML-N vote bank. His nomination would allay investor fears in the lead up to the general elections.

Economically, in order to rein in widening Current Account Deficit (CAD), the government has (i) relaxed conditions for export subsidy worth Rs 180bn (USD 1.7bn); (ii) imposed regulatory duties on various consumer products aimed at reducing imports by USD 2-3bn; and (iii) plans to raise Eurobond and Sukuk up to USD 2bn in a few months to cushion falling FX reserves equaling 3 months of imports. We believe, these measures allow the government some breathing room for the fiscal year. Further, once the new electricity power plants are operational and Pakistan puts power outages behind it for the first time in a decade, they will have enough points on the economic scorecard to go electioneering.

The sentiment has yet to turn green despite very compelling valuations. The index will become compelling for investors once there are indications that a 5-year (2018-2023) stable political set-up is on the cards. At the moment, with no clear winner in sight, the race is going to be competitive classifying Pakistan as a classic example of high-risk high-return Frontier Market. (changes in SEK)