Foreign outflow on the back of Pakistan’s entry into emerging market space, and political turmoil following the dismissal of Nawaz Sharif were some of the chief determinants pulling the local bourse southwards. As a result, the market slid around 15% during the year, and the benchmark shed 23% value since its peak on May 24, spiraling to an almost 16 month low.
The year 2018 may yield lucrative returns, making the current market correction a good point of entry.
Market overview
Pakistan’s market closed the year 2017 at a forward price per earnings ratio (P/E) of around 7.5x, which is lower than the historic 10 year average. Moreover, the market’s discount to MSCI Emerging Markets Asia has widened to about 50%, as compared to the last 10 year average of 25%. As such, the market presents an appealing entry point going into 2018.
The much awaited devaluation of the Pakistani Rupee has also finally materialized which should address structural issue of ballooning current account deficit & draw the interest of foreign investors.
Positive developments have followed the delimitation bill passed by the parliament, potentially paving way for elections to be held this year as per schedule.
On the economic front, the successful issuance of a EuroBond and a Sukuk in the International market cumulatively raised US$2.5 billion. This has provided a cushion to the deteriorating current account position, indicating that Pakistan is being considered as a strong investment case by international investors. The sovereign debt issues of the country are still oversubscribed, highlighting the confidence of investors.
Ongoing development projects worth over US$60 billion under the umbrella of CPEC are well on track, and materialisation of these energy and infrastructure projects will stimulate economic activity in the country.
The election year may bring some turbulence and hiccups, but expected political stability post-elections should lead to a positive trend in the market. Historical trends also support the notion that while political turbulence may affect market valuation, the potential to bounce back has always been present.
Al Meezan encourages investors to remain confident about long term investment in its Sharia Complaint Equity Funds. A small case analysis shows that investors have significantly gained over the long term so it is not advisable to exit the market every time there are hiccups.
MUTUAL FUND INDUSTRY REVIEW
The financial year 2015-16 remained challenging for the Mutual Funds Industry. The assets under management slightly increased from PKR 443 billion on June 30, 2015 to PKR 490 billion as on June 30, 2016. During the year, 34 new open-end funds were launched up to June 30, 2016.
Equity funds (both Conventional and Shariah Compliant) dominated the AUMs of the industry with the largest share i.e. 39.35 percent.
Income funds (both Conventional and Shariah Compliant) held the second largest market share i.e. 28.21 percent, followed by Money Market funds (both Conventional and Shariah Compliant) with market share of 12.28 percent.
The Securities and Exchange Commission of Pakistan (SECP) notified the amendments in the Non Banking Finance Companies & Notified Entities Regulations on November 21, 2015. In light of strong determination of the SECP to promote ‘ease of doing business’ in all the areas under its ambit, SECP also amended the Non Banking Finance Companies (Establishment & Regulation) Rules, 2003 allowing asset management companies to obtain licenses to manage Real Estate Investment Trusts (REITS) and Private Equity Funds.
Mutual Funds Association of Pakistan (MUFAP) has been proactively involved in bringing transparency and good governance in the industry and we hope to continue this process with great vigour.
This year has been very challenging for the mutual fund industry with continued changes in the tax laws adversely affecting institutional investment in mutual funds. Declining interest rates and mostly bearish market conditions during the year under review further hindered growth of the mutual fund industry.
The mutual fund industry closed the financial year at PKR 490.37 billion up 10.57 percent over last year. The Equity Funds category (both Conventional and Shariah Compliant) constituted of PKR 178.17 billion up 12.17 percent from last year followed by income fund category at PKR 127.73 billion up 25.83 percent and Money Market category at PKR 55.58 billion which was down 30.67 percent from the previous year.
The Shariah-compliant funds category continued growing faster than the conventional category and closed the year at PKR 157.49 billion, recording the growth of 26.78 percent over the previous year.
A variety of mutual funds are being offered in this category to suit the varied needs of investors by asset management companies.