THE FUND
During the month, the Fund went down by 0.1% as compared to the benchmark’s MSCI Pakistan Net (SEK’s) return of 1.8%. November 2017 saw the KSE nudge up slightly amidst political noise. The fund withstood volatility and slightly increased exposure in blue chip Materials sector while nominally reduced exposure in Consumer Discretionary and Financials. The out-performing sectors for the month were Materials and Information Technology while our exposure in Consumer Staples and Healthcare contributed negatively to returns.
THE MARKET
November witnessed another repetition of political deadlock in the country that had previously influenced investor sentiment. Protests in Islamabad, the capital city, by a minority religious party, resulted in the resignation of a federal Law Minister in order to avoid a nationwide backlash and a dent in the ruling party’s popularity.
Despite the political turbulence, the market was quiet throughout the month. Volumes remained fairly thin for most of the month except occasional episodes of traders in blue-chips. A major conglomerate, Engro Corporation, was downgraded to MSCI EM Small Caps Index and saw selling from the passive Fund Managers contributing to further foreign outflows from the country.
Economic managers saw some breathing room as Pakistan managed to issue 10-year USD 1.5bn Eurobond at 6.875% and a 5-year USD 1.0bn Sukuk bond at 5.625%. The bonds provided some cushion to scrape through a few quarters and assess the impact – if material enough – of (a) export subsidy worth USD 750m, and (b) regulatory duties imposed on import items. The Current Account Deficit (CAD) remains the most significant challenge for the economy as it touched 4MFY18 deficit at USD 5bn (1.6% of GDP). With no signs of improvement in the Trade Deficit, most of the investors stayed away from the index fearing a Rupee devaluation of 5-15%. The government appears to have bought more time with the bond issue to avoid rapid devaluation.
While the Index 1-year forward P/E has come down to 8x as investors still await clarity on the political front (Sharif family’s trial), any improvement in the CAD or a one-shot depreciation paving the way for new entrants to the market. Until such time, we are keeping our eyes focused on key factors that could switch the story from “Hold” to “Strong Buy.”
