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Pakistan Market: Currency & Commodities Provided the highest return in Pakistan in 2018

• In today’s note, we review the returns of various asset classes in Pakistan for the year 2018. Among the top performing was the 1-Year US$ Term Deposit Receipt (TDR), providing a return of 26.8% in PKR terms, followed by 23% return for those who invested in Gold, thanks to US$ gaining 27%.
• Not surprisingly, the worst performing asset class remained Pakistan equities with -5% return (US$ -25%), as the year went through economic and political challenges.

Equities

• Pakistan market continued to post negative returns for the second consecutive year, posting 5% decline in PKR terms in 2018YTD vs. 15% in similar period last year while the decline in dollar terms was 25% vs. 20% in previous year. Weak macros such as higher Current Account Deficit (CAD) and lower dollar reserves shattered investors confidence while foreign selling of more than US$500mn (highest since 2012) further exacerbated the market’s performance.

Real Estate

• Real Estate transactions remained dull during the outgoing year, as per our channel checks as political and legal headwinds kept investors at bay. However, activities picked up near general elections in Jun-Aug 2018 which led Pakistan Housing Prices index to grow by 5% in 2018YTD vs. 2% in similar period last year, as per Zameen.com (Pakistan’s leading online property portal).

FICC (Fixed Income, Currency & Commodities)

• Fixed Income: As macroeconomic variables worsen and inflation inched up, Pakistan’s Central Bank raised policy rate by 425bps to 10% in 2018YTD.
• While return on 1-Year fixed income instruments such as T-bills and National Saving Scheme (NSS) remained flat at 6% (assuming investment at beginning of 2018), those invested in 6-month tenure and re-invested in the same, generated a slightly better return of 6.5% due to higher rates in later part of the year.
• Currency: Challenging economic environment and need to devalue PKR against US$ as per Real Effective Exchange Rate (REER) Index led to PKR depreciation of 21% in 2018YTD. To note, REER index stood at 115.12 in Jan 2018 (124.2 in Nov 2017.
• MSCI EM Currency Index (Morgan Stanley Composite Index for Emerging Market Currencies) gained 21.8% in PKR terms in 2018YTD. However, in US$ terms, the index declined by 4.2%. To note, the weights of each currency in MSCI’s EM Currency Index is equal to the relevant country weight in the MSCI EM Index (Pak’s weight is estimated at around 0.04% in MSCI EM Index).
• Commodities: Bloomberg’s commodity index declined by 12.4% in US$ terms vs. 3% gain in similar period last year. However, in PKR terms, index was up 13.6% with Gold providing 23% return vs. 12% return last year in Pakistan. We believe that Gold in the international market lost steam in the outgoing year due to strengthening of US Dollar against other currencies.
• Similarly, international oil prices fell in 2018YTD  due to weakening of global demand and oversupply concerns. The recent Organization of Petroleum Exporting Countries (OPEC) and non-OPEC meeting also failed to uplift investors sentiments. During the outgoing year, Arab Light Crude (benchmark for Pakistan E&Ps) fell 17% while West Texas Instrument (WTI) declined by 29%. However, in rupee terms, Arab Light Crude generated 5% return due to rupee weakening against US$ as mentioned above.