Pakistan’s Islamic equity funds: A wild roller coaster ride

As Pakistan’s economy was badly hit by the rising price of the barrel, tremendous political instability and a deep balance of payment crisis, the performance of Shariah compliant equity funds tumbled from a positive to a negative double-digit yield at the end of the 2018 fiscal year. However, with a new prime minister to be sworn in and a bailout package on the horizon, fund managers are confident of a brighter future as the country’s economic fundamentals remain strong. MARC ROUSSOT reports.

The Opposition is still rejecting the results of Pakistan’s general election. Even though Imran Khan, the prime minister-designate, has not taken office yet, Pakistan seems to be entering a new era after turbulent times due to the removal from office in February of former prime minister Nawaz Sharif as a result of corruption charges.

The Supreme Court’s guilty verdict further increased an already high level of uncertainty, creating a domino effect affecting Pakistan’s economy and financial health and resulting in the fall of Shariah compliant equity funds from the remarkable highs of double-digit yields per year to the unbelievable rock-bottom double-digit negative yearly returns.

During the 2017-18 fiscal year which ended on the 30th June, the JS Islamic Fund was the second-worst performer with a -19.77% yield while it was the best performer the previous year displaying an outrageous 46.06% yearly return.

“The market first plummeted because of a dramatic turn in the political situation. It fell further when we found out that the government was leaving behind a balance of payment crisis and that Pakistan needed to be bailed out soon, which would consequently slow down the economy,” explains Zahid Ullah Khan, the chief investment officer and fund manager at JS Investments. “The fall was very sudden and to be honest, we were not expecting the market to fall that quickly,” he shares.

“All of this happened against the backdrop of a rising price of the barrel which was already impacting the country’s economy as Pakistan is a net importer of oil,” adds Taha Khan Javed, the head of equities at NBP Fullerton Asset Management whose funds, namely the NAFA Islamic Energy Fund, NAFA Islamic Stock Fund and NAFA Islamic Active Allocation Equity Fund, displayed returns ranging from -11% to -14% whereas they had yields above 30% the year before.

With Islamic equity funds performing poorly, investors could still enjoy positive returns by tapping Shariah compliant income funds with yields between 1.1% and 5.24%.

Only way is up?
To go back up the slope, put an end to the balance of payment crisis and cover at least five months of imports, Pakistan needs US$20-25 billion. Therefore, the new government is expected to negotiate a bailout package with the IMF and China.

Funds could also be raised by tapping the international capital market through the issuance of Sukuk and a diaspora bond of some sort, Asad Umar, the finance minister-in-waiting, reportedly said. The IDB is also poised to lend US$4 billion to Pakistan once Imran takes over as the new prime minister.

“Imran Khan does not have a magic wand to fix everything at once but if the new government succeeds in obtaining a bailout package from the IMF with not-too-harsh terms, such as reducing fiscal spending but not in key areas like infrastructure, then the economy will not face a drastic slowdown. The growth rate would be around 3-4% instead of 5%,” believes Zahid who also foresee a further devaluation of the rupee as Pakistan is a major textile exporter and needs to remain price-competitive with its rivals like Vietnam, Bangladesh, Turkey and India.

“The new government to be sworn in has a clear agenda of simplicity, expenditure reduction and no lavish lifestyle. People are seeing that as a positive change and the market has been going up since the results of the election. So the political issue is solved but the economic problems remain,” analyzes Taha. “Oil price is also going to be key and could badly impact Pakistan’s economy if the price of the barrel goes up and vice versa,” he says.

Overall, both JS Investments and NBP Fullerton see yearly returns around 12-15% for the 2018-19 fiscal year and in the mid-term, the country can capitalize on its young population, the strong fundamentals of its economy and massive investments from the Belt and Road initiative that are expected to have a positive impact on Pakistan’s economy for years. Yields of Shariah compliant equity funds could then potentially see an upside.

This article first appeared in IFN Volume 15 Issue 33 on the 15th of August 2018

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