KASB Morning Shout Equity Strategy| Pakistan Monday, 26 January 2015 Pakistan Strategy SBP slashes DR by 100bp; KSE-100 en route to 41,000 Summary Amid divergent expectation, SBP cut policy rate by 100bp to 10-yr low of 8.5%. With monetary policy geared towards inflation targeting, we now expect another 50bp cut in policy rate to 8% in 2HFY15. Whilst Pakistan’s macro stability has significantly strengthened, four key risks to watch out for are (1) fiscal deficit, (2) potential worsening of energy deficit, (3) progress on privatization and (4) oil prices A sharp rate cut reinforces our non-consensus call of market re-rating in Nov’14and should heighten focus on high D/Y and leveraged stocks. We lift our year-end KSE-100 target to 41,000 pts (from 39,500pts). DR cut by 100bp to 8.5%; expect further easing Amid divergent expectation, State Bank of Pakistan (SBP) announced an unusual big cut of 100bp in policy rate to 10-yr low of 8.5% on 24th Jan. We had expected SBP to adopt a more measured stance and content itself with a 50bp rate cut. With monetary policy geared towards inflation targeting, we now believe SBP is unlikely to pause its easing campaign and expect another 50bp cut in policy rate to 8% in 2HFY15. A sharp rate cut reinforces our non-consensus call of market re-rating in Nov’14and should heighten focus on high D/Y and leveraged stocks. We lift our year-end KSE-100 target to 41,000 pts (from 39,500pts). SBP paints more optimistic outlook for 2H A sharper rate cut is primarily influenced by central bank’s assessment of steep drop in inflation and relatively improved external account outlook, in our view; and is largely inline with recent monetary policy framework of more neutral stance agreed with the IMF (see our report dated 24th Dec 2014). A striking highlight in the SBP’s comment on policy decision is the positive tone on GDP, inflation, external account and private sector credit growth. SBP now expects GDP to grow by 4-5%, CPI of 4.5-5.5% and M2 growth of 11-12% in FY15. We concur with the central bank’s assessment on growth and external account. Latest demand data on cement and steel is largely encouraging. Furthermore, recent incentives for agriculture sector have improved the outlook for agri-growth (21% of GDP). Benign inflation outlook in FY15 We believe the revised SBP forecast seems reasonable to some extent; whereby barring any price shock in the form of huge gas tariff hike or impact of GIDC imposition, inflation should average at 5.0-5.5% in FY15, in our view. Average inflation in 1HFY15 stands at 6.1%. It is noteworthy that potential CPI reading in Jan-15 should clock in around 4% YoY (~0.1% MoM), which is lower than usual trend seen historically – driven lower by (1) POL price cuts and (2) potential upward gas price revision delayed. While we had earlier projected headline readings in 2H to hover between 5-6%, we now see CPI to average well below 5% in 2HFY15 due to potentially benign inflation expected in Jan-15. As second round impact of lower oil price kicks in and will likely drag average FY15E CPI to below 5%, this would give room for another 50bp cut in DR to 8% in the best case. Few risks remain We don’t expect a meaningful upcycle in credit demand as yet. Energy and security issues, besides policy uncertainty in certain sectors, are the key impediments for pick-up in private sector credit and investment. Without effective measures on energy supply addition, we believe pick-up in aggregate demand can in-fact exacerbate the energy shortages and may lead to worsening of trade deficit in coming months. Interestingly, risk of fiscal deficit – one of the two risks highlighted by SBP in its last report – remains high on account of higher security related expenditure, drop in tax revenue from oil (0.1% of GDP shortfall) and legal challenges (GIDC-0.5% of GDP, power subsidy). (Continued on page 2) KASB Securities and Economics
Posted on: Mon, 26 Jan 2015 12:01:33 +0000
Trending Topics
Recently Viewed Topics
© 2015