AKD Securities Limited Equity Research – Daily Report

Karachi, December 22, 2014 (PPI-OT): Pakistan Market: CY14 to end with 5% CPI

Based on SPI data (-ve 1.2%MoM), down for the second consecutive month, AKD Securities Limited projects Dec’14 CPI at 5.0%YoY (-ve 0.3%MoM). This will bring the CY14/1HFY15 CPI average to 7.3%YoY/6.2%YoY, implying real interest rates of at least +ve 2%. While CPI will pick up going forward, it could conceivably stay within the 7%YoY mark over the next 6m.

Together with anticipated incremental strength in the BoP position, this should enable the monetary easing cycle to pick momentum where AKD Securities Limited expected the DR to come off by 100bps to 8.0% in the Jan’15 MPS. With political noise appearing to drawdown, valuation multiples are likely to rerate – AKD Securities Limited sees the market’s forward P/E inching up to 9x across 2015, up from 8.3x at present, which should help drive the Index towards AKD Securities Limited’s Jun’15 target of 35,000 points. At current levels, AKD Securities Limited likes DGKC, MLCF, PSO, HUBC and PSMC, EFOODS and PTC. At the same time, AKD Securities Limited believes pockets of value are available in Banks (UBL) and E and P (POL).

CPI outlook: Based on leading SPI data (which suggests a 1.2%MoM decline), AKD Securities Limited projects Dec’14 CPI to come off by 30bps MoM to settle at 5.0%YoY. In doing so, MoM CPI would decline consecutively for the first time in at least the last 4yrs, the recent dip in price pressures arising from lower fuel and food prices (primarily vegetables).

As a result the CY14/1HFY15 CPI average would settle at 7.3%YoY/6.2%YoY, implying real interest rates of easily more than +ve 2%. While AKD Securities Limited expected CPI to pick up going forward, it could remain below the 7%YoY mark over the next 6m going by precedence (+0.7%MoM), provided international oil prices remain largely stable.

MPS outlook: Considering the BoP position is expected to depict continued strength across the coming year (AKD Securities Limited expected SBP import cover to cross 3m by mid-2015), the monetary easing cycle is likely to continue. Historically, the SBP has maintained interest rates at an average of 170bps above headline CPI – going by this, AKD Securities Limited expected the central bank to cut the DR by 100bps to 8.0% in the Jan’15 MPS.

This is partly vindicated by the continued fall in secondary market bond yields. While further rate cuts in subsequent monetary policies would likely be a function of oil prices, AKD Securities Limited ventured that single-digit interest rates are likely to extend across the whole of 2015.

Investment perspective: While there are risks to global liquidity in 2015, AKD Securities Limited believes Pakistan’s decoupled monetary policy should unlock a period of sustained valuation expansion particularly as political noise appears to have come off with the end of the PTI sit-in.

In this regard, AKD Securities Limited sees the market’s forward P/E inching up to 9x across 2015, up from 8.3x at present, which should help drive the Index towards AKD Securities Limited’s Jun’15 target of 35,000 points. At current levels, AKD Securities Limited likes DGKC, MLCF, PSO, HUBC and PSMC, EFOODS and PTC. At the same time, AKD Securities Limited believes pockets of value are available in Banks (UBL) and E and P (POL).

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