AKD Quotidian about Monetary Policy and FIPI Flows

Karachi: The SBP will announce the next monetary policy on May 21’11. While CPI has declined over the last few months and core inflation remains in single-digits, AKD Securities Limited believes the SBP will retain a cautious stance and keep the Discount Rate constant at 14%. In AKD Securities Limited views, the SBP will be influenced by 1) the upcoming FY12 Budget and 2) potential increase in near-term inflation. Going forward however, AKD Securities Limited maintains that domestic interest rates have most likely peaked.

According to AKD Securities Limited, this is because a high base (primarily induced by post-floods supply shock) should see basket heavyweight food inflation come off by autumn. This should open up prospects for monetary easing in Pakistan by Sep’11. As a result, Pakistan should increasingly appear on the radar of international fund managers, particularly as its weight in MSCI Frontier Index remains stable at 4% with prospects of improvement going forward.

Status quo for now: In AKD Securities Limited views, the SBP will likely keep the Discount Rate unchanged at 14% in the May 21’11 monetary policy where the central bank will retain a wait-and-see stance ahead of 1)the FY12 Budget and 2) potential increase in near-term inflation due to recent pass-through of higher petroleum prices and rise in power tariffs. The SBP may also adopt a cautious stance in the wake of the latest round of IMF-Pakistan talks and question marks regarding US-Pak ties (and associated foreign aid) going forward.

Easing on the horizon: Although risks remain, the Pakistan economy has depicted improvement of late particularly on the external account. Barring any untoward shocks, AKD Securities Limited believes macroeconomic consolidation should continue. As a result, AKD Securities Limited believes that the SBP will be in a position to resume the monetary easing process by autumn this year. Based on Apr’11 data, the SBP has already been cautious; CPI and core inflation-based real interest rates are +ve 1% and +ve 4.5%, respectively, at present.

Increased FIN flows into Pakistan? Pakistan has received net FIPI inflows of US$68mn CYTD. While continued foreign participation in Pakistan equities will depend on a host of factors including politics and law & order, AKD Securities Limited believes recent macroeconomic consolidation may lead to a potential decline in the Discount Rate by autumn. This will be in contrast to regional economies (particularly China and India) that will likely continue to tighten. As a result, Pakistan should increasingly appear on the radar of international fund managers, particularly as its weight in MSCI Frontier Index remains stable at 4% with prospects of improvement going forward.

Investment Perspective: While SBP will likely retain a cautious stance and keep the Discount Rate unchanged at 14% in the May 21’11 monetary policy, AKD Securities Limited believes that the monetary easing process may begin by Sep’11. This will be in contrast to regional economies where the tightening process will likely continue. As a result, Pakistan may benefit from a shift in FIPI flows from the region. The KSE-100 Index trades at FY12F PER of 7.1x. At current levels, AKD Securities Limited convictions calls are NBP, AKBL, POL, NML, HUBC and LUCK.

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