AKD Quotidian about — Pakistan Economy: CPI to remain in double-digits

Karachi, December 19, 2013 (PPI-OT): After registering at 10.9%YoY in Nov’13, AKD Securities expects headline CPI to remain in double digits in Dec’13 but moderate slightly to 10.25%YoY.

According to AKD Securities, this translates into a deflationary trend of – 0.35%MoM, in contrast 13.5% to the average 1.3%MoM CPI increase in 5MFY14. The fall in sequential price pressures, corroborated by the SPI trend, is expected on the back of 1) decline in perishable food items post end of the transporters’ strike and 2) flattish trend in the housing and transport groups. As a result, 1HFY14 CPI should average 9.1%YoY in comparison to average 1HFY13 CPI of 8.3%YoY and 12m moving CPI average of 7.8%YoY. Considering the SBP has raised the DR by a cumulative 100 bps to 10% in the first 2 monetary policy statements of FY14, it is clear that the central bank is taking its cue from the increasing inflation trend and risks on the external front. Regarding the latter, the PkR/US$ parity has shed 7.7%FYTD with any recovery contingent upon release of foreign flows and realization of privatization proceeds. AKD Securities maintains AKD Securities’ stance of a 50bps-100bps increase in the DR across the rest of FY14.

CPI to remain in double-digits: After registering at 10.9%YoY in Nov’13, AKD Securities expects headline CPI to remain in double digits in Dec’13 but moderate slightly to 10.25%YoY. As a result, 1HFY14 CPI should average 9.1%YoY. While this is lower than the DR (10%), current trajectory suggests CPI will exceed 10%YoY in full-year FY14. As such, the SBP will have to raise the DR by 100bps across the next six months to maintain a positive real interest rate of ~1%.

Investment perspective: There has been a clear uptick in price pressures over the last few months, driven by fiscal adjustments (increase in power tariffs) and a weaker PkR. Considering the KSE-100 Index has gained 22%FYTD even as broad expectations are for the interest rate hike cycle to continue, it appears the market is attaching weight to the macroeconomic buffer provided by the new IMF program.

While AKD Securities sees market valuations sustaining if not expanding (FY14F P/E at 8.5x is un-stretched), AKD Securities’ preferred stocks include a blend of growth (NML, DGKC, UBL) and defensive (HUBC,FFC, KAPCO). Unfolding regulatory developments particularly within the OMCs (product margin revision), Fertilizers (resolution of Engro’s gas price issue) and Pharmaceuticals (product pricing) are also likely to bring said sectors/companies (PSO, ENGRO) into the limelight.

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