Here's an excerpt from the latest SEC filings, keeping in mind events changed dramatically recently, as with any other emerging economy of the world:
For the six months ended June 30, 1997, The Pakistan Investment Fund, Inc. (the
"Fund") had a total return, based on net asset value per share, of 19.71%
compared to 20.55% for the IFC Global Pakistan Total Return Index (the "Index").
For the one year ended June 30, 1997, the Fund had a total return, based on net
asset value per share, of -20.14% compared to -15.61% for the Index. For the
period from the Fund's commencement of operations on December 27, 1993 through
June 30, 1997, the Fund had a total return, based on net asset value per share,
of -59.36% compared with -38.88% for the Index. On June 30, 1997, the closing
price of the Fund's shares on the New York Stock Exchange was $5.25 representing
an 8.1% discount to the Fund's net asset value per share.
The Fund's relative under performance versus the IFC benchmark is directly
related to the increased concentration of the IFC Pakistan Index. Due to IRS
diversification restraints, the Fund is unable to fully match the IFC's
weightings in key holdings such as Hubco, Fauji and PSO. During periods of
economic slow down and market uncertainty such as that experienced in Pakistan
until very recently it is usual for the largest market cap stocks to fare better
than the broader market. However, as the economy improves and moves into a
higher growth phase, as we expect the Pakistan economy to do over the coming
12-18 months, the broader market not only catches up but tends to out-perform
the larger cap stocks. We believe that while the broader diversification of the
Fund was a disadvantage during the economic down cycle in terms of relative
performance to the IFC benchmark, in the expected up cycle this will lead to
relative out performance. We have already begun to see such results in our
performance relative to the local index. Compared to what we feel is the more
representative local Karachi Stock Exchange Index (KSE-100), the Fund
outperformed the benchmark by 3.7% for the half year.
Going forward, we feel that the Fund's portfolio is now well positioned to
capture the upside of the broader market as the government's structural reform
initiatives take form. The Fund's portfolio now covers not only the traditional
large cap holdings but selective mid size stocks as well -- with particular
emphasis on the banking, consumer goods and textile sectors.
With the end of fiscal year June 30, 1997 the full extent of the previous
administrations' economic mismanagement has become clear. Real GDP growth shrunk
to 3% from 6% a year earlier as industrial and agricultural growth stagnated. As
a result, tax revenue fell far short of the budget target causing the fiscal
budget deficit to rise to 6% of GDP. The previous government was forced to fund
this large gap through extensive borrowings from the domestic banking system
causing sharply higher interest rates.
The new government of Nawaz Sharif has embarked on a bold, albeit risky strategy
of reform. It has launched a series of supply side measures designed to foster
economic growth by reducing the tax burden on both the individual and corporate
sectors. The 1997/98 budget has not ignored the demand side either as it has
curtailed growth in government expenditure (the defense budget was cut in real
terms for the first time in the history of Pakistan). In sum, one can easily say
that the 1997/1998 budget was a revolutionary event; by not increasing taxes and
by keeping expenditures in check, the budget is effectively setting the stage
for a liquidity-induced recovery of the Pakistan economy.
In our first quarter report, we had identified several institutional reforms
which we believed essential to whatever reform-minded budget the government
planned to introduce. The government has now begun implementing most of these
reforms. Restructuring and downsizing of the public sector is now the top
priority of the government. The privatization process has resumed with the
successful divestment of Habib Credit & Exchange Bank, the proceeds of which
have gone to retire high cost domestic debt. Financial sector reform is now
underway and a new foreclosure law has been passed making it much easier for
banks to move against defaulters.
We believe that these policy initiatives, together with the fresh budget
initiatives, will allow the economy to stabilize over the coming 12-18 months by
restoring investor confidence, raising agricultural income, enhancing corporate
profitability and ultimately reducing the dual burdens of fiscal and current
account deficits.
While the headline budget targets seem optimistic (6% GDP growth and a budget
deficit of 5% of GDP), we feel that the IMF will lend support through its ESAF
loan program as long as the direction of reforms and progress in implementation
remain positive. If ESAF is in place by early in the fourth quarter of 1997,
Pakistan will become eligible for a host of general and project linked long term
concessional finance of up to US$ 3.5-4.0 billion over the next two years. These
inflows will go a long way towards boosting forex reserves and helping repay the
bulk of high cost short term borrowings due over the coming twelve months. With
a bit of luck on the agricultural front, rising exports should then allow the
structural trade deficit to start narrowing. While there is some way to go
before it can be said that the Pakistan economy is once and for all out of its
current danger zone, we see compelling evidence the renewed emphasis on
structural reform is succeeding.
The most important development in the second quarter of 1997 has been the
increase in PTCL's (Pak Telecom) weight in the KSE-100 Index from 6% to 30%. The
government now seems aware of the importance of PTCL's performance in terms of
overall investor (especially foreign investor) sentiment. Recent tariff and tax
reforms announced in the budget have significantly improved its earnings outlook
leading to a 30% rerating of its stock price in the six weeks ended June 30,
1997. With further tariff reforms expected, we feel that PTCL, and with it the
stock market, will perform well in the second half of this year. Consequently we
have increased our weighting in PTCL from 11% to 17% to reflect both the higher
weighting as well as the improved earnings prospects for the company.
We have also made several other weighting changes. These include Lever Brothers
(from 2.5% to 4.2%), which, after its merger with Brooke Bond and a major
internal reorganization, will become the dominant force in tea and personal care
products, Muslim Commercial Bank (from 3.2% to 3.4%), the first privatized bank,
poised to show a massive earnings explosion starting in 1997; and Packages (from
0.7% to 1.4%), the premium packaging and paper company which has just completed
a significant capacity increase.
The Pakistan market as a whole has one of the most attractive valuations in the
region with 1998 forecast price to earnings multiple (PER) of 8 times and
consensus earnings growth estimates for 97-98 of over 30%. If, as we expect, the
ESAF facility is in place by the fourth quarter of 1997 the country risk premium
will fall and the potential devaluation risk will reduce leading to an upward
re-rating of the market. The Fund's portfolio is now well positioned to take
full advantage of this change in market sentiment.
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