AKD Quotidian about — CPI has likely bottomed out

Karachi, June 04, 2013 (PPI-OT): CPI for May’13 has clocked in at 5.13%YoY/O.51%MoM, inline with AKD Securities 5%YoY forecast.

According to AKD Securities the sequential uptick has largely emanated from food inflation (+1.2%M0M with a 6.3%MoM increase in perishable food items) and clothing and footwear (+O.8%M0M). At the same time, Core (trimmed mean) inflation has dropped to 6.7%YoY in May’13, coming down from 7.6%YoY in the previous month. This brings the IIMFY13 CPI average to 7.5%YoY and the I1MFYI3 Core (trimmed mean) CPI average to 9.2%YoY, both below the below the Discount Rate at 9.5%.

While this suggests room for further monetary easing, AKD Securities reiterates that the SBP will likely maintain status quo in the upcoming MPS due to: 1) small differential between I1MFY13 Core (trimmed mean) CPI and the DR, 2) inflation trajectory where headline CPI may return to double-digits in FY14 and 3) the Balance of Payments position. Beyond Jun’13 however, any clarity on materialization of foreign flows can potentially extend the monetary easing cycle.

CPI Review: May’13 CPI clocked in at 5.13%YoYIO.51%MoM, inline with AKD Securities estimates and bringing the 11MFY13 CPI average to 7.5%YoY, comfortably below the Discount Rate at 9.5%. Uptick in sequential CPI is larg’y due to food inflation (+1.2%MQM with a 6.3%MoM increase in perishable food iteiris) and clothing and footwear (-i-O.8%M0M).

At the same time, Core (Trimmed Mean) CPI, which AKD Securities understands is tracked more closely by the SBP, softened to 6.7%YoY in May’13 compared to 7.6%YoY in Apr13, thereby bringing its 11 MFY1 3 average to 9.2%YoY. In retrospect, this appears to justify the 450bps cut in DR from Jul’11 till date.

Inflation Outlook: Assuming headline CPI increases at O.5%MoM, the trend of single-digit inflation will likely extend across FY14. That said, incremental price pressures should emerge in view of 1) traditional price run-up associated with Ramadan, 2) potential increase in electricity tariffs going forward and 3) potential weakness in the PkR/US$ parity as BoP concerns come to the fore.

These factors may combine to drive inflation upwards by end-CY1 3. In this regard, AKD Securities reiterates that the SBP will I maintain status quo in the upcoming MPS due to: 1) small differential between Core (trimmed mean) CPI and the OR, 2) inflation trajectory where headline CR1 `nay return to double-digits in FY14 and 3) the Balance of Payments position. Beyond Jun’13 however, any clarity on materialization of foreign flows can potentially extend monetary easing.

Investment Perspective: While AKD Securities remains unconvinced that the SBP will cut the DR in the upcoming monetary policy statement, AKD Securities are more open towards a possible reduction in interest rates across subsequent policy meets provided foreign flows materialize (e.g. deferred payment oil facility/privatization and foreign placements).

Within such a backdrop, considering that Banks have gained a strong 19%MoM in May’13, AKD Securities believes investors should look to lighten on banking sector shares. For fresh entry, AKD Securities recommends longer term exposure to the larger banks, capable of paying consistent dividends.

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