AKD Securities Limited – Pakistan Market: Positive macros make for bullish case

Karachi, February 18, 2015 (PPI-OT): AKD Securities Limited projects headline inflation for Feb’15 to clock in at 3.92%YoY (-0.28%MoM), marginally higher than 3.88%YoY observed in Jan’15. In this regard, SPI data reflects that CPI will likely remain in check on the back of (i) slumping commodity prices and their effect on heavyweight food items and (ii) substantial reduction in domestic fuel prices.

As a result, headline inflation for 8MFY15 is forecasted to average at 5.55%YoY vs. 8.65%YoY in 8MFY14. With low levels of inflation expected to sustain in FY15, AKD Securities Limited sees space for a 50bps cut in the upcoming Mar’15 MPS, with soft CPI complemented by continued external a/c strength (total Fx reserves to soon cross US$16bn + Jan’15 trade deficit of US$1bn vs. 1HFY15 avg. trade deficit of US$2bn/mth).

From an investment perspective, with the KSE-100 down 1.98%MTD (clipping CYTD gains to 5.20%), AKD Securities Limited believes the confluence of +ve macro data and strong corporate results merits buying at current levels. Preferred plays include POL, MLCF, DGKC, FFBL, FATIMA, NML and the Big-6 Banks.

Feb’15 CPI Review and Outlook: Inflation for Feb’15 is expected to sustain at its soft clip, clocking in at 3.92%YoY, only slightly higher than 3.88%YoY observed in the previous month. This translates in to a 0.28%MoM decrease, contrary to the 0.08%MoM rise in Jan’15 (periodical impact of rental inflation).

Based on SPI trends, down 0.13%WoW and 0.57%WoW consecutively this month, CPI will likely remain restricted on the back of (i) slumping commodity prices which have kept prices for the basket heavyweight Food in check and (ii) substantial cut in domestic fuel prices with the GoP transferring benefits of global low oil prices. As a result, headline inflation for 8MFY15 is forecasted to average at 5.55%YoY compared to 8.65%YoY in 8MFY14. Within this backdrop, SBP’s forecast of 4.5%-5.5%YoY average CPI for FY15 seems plausible particularly if int’l oil prices remain subdued.

MPS Expectations: With price levels on track to meet SBP’s inflation targets for the fiscal year, AKD Securities Limited sees space for a further 50bps DR cut in the upcoming MPS next month (a view backed by several banks’ treasuries).

Besides +ve real interest rates (+2.8% going by 7MFY15 avg. CPI of 5.7%YoY), AKD Securities Limited’s view on interest rates is backed by (i) continued external a/c strength (Fx reserves to cross US$16bn on receipt of US$700mn CSF + Jan’15 trade deficit at US$1bn was 50% lower than avg. 1HFY15 trade deficit of US$2bn/mth) and (ii) the global trend of central banks extending their dovish stance. Notwithstanding the sharp shift into longer-term PIBs last year, a DR cut will help to reduce the cost of borrowing for the GoP (1HFY15 fiscal deficit: 2.2% of GDP) besides further encouraging private sector credit offtake (+9%YoY in CY14).

Investment Perspective: The KSE-100 Index has shed 1.98%MTD, which has clipped CYTD/FYTD gains to 5.2%/14%, to trade at a FY15F P/E of 9.3x (FY16F P/E: 8.7x). Despite continued +ve macro data and buoyant incoming corporate results (combined profit for a small sample of AKD Universe companies is up 28%YoY), the market has ostensibly chosen to opt for profit taking after its strong run last month.

AKD Securities Limited believes the same should prove transitory as underlying fundamentals remain intact where AKD Securities Limited retains AKD Securities Limited’s Index target of 37,000 points. Accordingly, AKD Securities Limited recommends adding positions where preferred plays include POL, MLCF, DGKC, FFBL, FATIMA, NML and the Big-6 Banks.

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