AKD Quotidian about — SBP cuts discount rate by 50bps

Karachi, June 24, 2013 (PPI-OT): The SBP has reduced the Discount Rate by 50bps to 9% effective today. In doing so, the central bank has accorded a higher weight to low inflation and depressed private sector credit off take, which together have out weighted BoP concerns.

According to AKD Securities in addition, the SBP has taken cues from the apparent improvement in sentiment as gauged by the reaction of the stock market, the money market and the central bank’s own surveys measuring consumer confidence.

Barring any negative reaction on the exchange rate, the market should take a positive cue from the policy rate reduction where the AKD Universe companies (ex-financials) average 2014 EPS increases by 0.6% while market valuations should also see a positive rerating effect. In terms of sector allocations, Banks may witness a kneejerk downward reaction. On the flipside, AKD Securities flags stock such as ENGRO, FATIMA, EFOODS, P50 and smaller Cements/Textiles as key beneficiaries that could rally in the immediate-term.

50bps cut not a huge surprise: In cutting the DR by 50bps to 9%, the SBP has accorded a higher weight to low inflation (May’13 CR1: 5.1 %Y0Y) and depressed private sector credit off take (÷5%Y0Y), which together have out weighted BoP concerns.

In this regard, AKD Securities believes the SBP believes that Ix reserves will be shored by a rollover IMF program where as much has recently been hinted at by the Finance Minister. Interestingly, the SBP has taken cues from the apparent improvement in sentiment as gauged by the reaction of the stock market (KSE-1 00 up 28%CYTD), the money market (lower yields coupled with move towards 12m tenor) and the central bank’s own surveys measuring consumer confidence

Market reaction: Barring any negative reaction on the exchange rate (FYTD depreciation of 4.2% vs. the US$) particularly with QE in the US now expected to wind down, the market should take a positive cue from the policy rate reduction.

In this regard, AKD Securities estimates that AKD Universe Companies (ex-financials) average 2014 EPS to increase by 0.6% while market valuations should also see a positive rerating effect – ceteris paribus the current forward market PIE of 7.7x may rerate to 8.3x. As such, while foreigners have been a key driving force behind the KSE’s rise, un-stretched valuations and a mainly cash only market provide cushion on the downside.

Look to the leveraged plays: In terms of sector allocations, Banks may witness a kneejerk downward reaction with their NIMs already under pressure (Apr13 sector average spreads of 6.2% are at an Syr low). On the flipside, AKD Securities flags stock such as ENGRO, FATIMA, EFOODS, P50 and smaller Cements/Textiles as key beneficiaries that could rally in the immediate-term. At the same time, US$-hedged sectors such as EandP (top pick: POL) and Electricity (top pick: HUBC) should also rebound.

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