Karachi, October 02, 2012 (PPI-OT): CPI for Sep’12 clocked in at 8.79%YoY/0.79%MoM, the lowest in 33 months and below AKD Securities’ forecast of 9.0%YoY.
According to AKD Securities, this brings 1QFY13 average CPI to 9.15%. At the same time, Core/NFNE inflation registered at 10.4%YoY in Sep’12 vs. 10.8%YoY in Aug’12. Considering the SBP appears to have been targeting CPI, +ve real interest rates of ~1.5% suggest the central bank has ample space to cut the DR swiftly where AKD Securities eyes a rate cut of at least 100bps in the Oct 5’12 MPS. The sequential fall in overall CPI trend is largely due to 1) below expected 0.71%MoM increase in food inflation and 2) flattish 0.03%MoM increase in housing and utilities. White inflation is likely to depict an uptick in the coming months, (to enter in double digits from Dec’12), FY13 CPI should still average ~10.2%YoY. AKD Securities believes this will be the last round of monetary easing considering risks to the economy including 1) potential increase in government borrowing, 2) speculative pressure on the currency leading to imported inflation and 3) weakness on external front with non-materialization of earmarked foreign flows that may lead to forex reserves depletion. AKD Securities believes the efficacy of monetary easing (3%Y0Y growth in pvt sector credit offtake despite 350bps cut in DR) has become limited with existing chronic structural deficiencies which are more important to be addressed. In view of likely near-term monetary easing, AKD Securities recommends a portfolio shift away from margin- oriented Banks and selectively prefer UBL, NBP and BAFL and into leveraged scrips with a conviction in NCL and FATIMA.
CPI review and Outlook: CPI for Sep’12 has come in at 8.79%YoY, the lowest in 33 months. AKD Securities attributes the 0.8%MoM increase in CPI primarily to increase in petroleum prices (Transport group up 4.1%MoM) and rise in food items (i-0.71%MoM). That said, 1QFYI3 CPI is still in single digits ~9.15%, implying real interest rate of 1.5% AKD Securities expects CPI to likely depict an uptick in the next few months but nevertheless to average ~10.2%YoY in FY13. On a cautionary note, Core/NENE CPI at 10.4% vs 10.8% in Aug’12, should also pickup on the back of deficit monetization. Considering SBP targets headline inflation, AKD Securities expects SBP to cut the discount rate by atleast 100bps in the upcoming MPS (Oct 5/12). While this may extend the KSEs recent bull run, AKD Securities cautions that the monetary easing cycle may end soon with risks emanating from 1) persistent price pressures going forward, 2) risks on the external front (expected CA deficit of US$4 billion) and 3) fx reserves erosion with IMF repayments particularly if earmarked ~US$2.5 billion in foreign inflow does not materialize. As a result, AKD Securities does not rule out rate increases over the medium-term.
KSE outlook: With further monetary easing on the anvil, AKD Securities continues to prefer leveraged plays including Cements, Textiles and selective Fertilizers (ENGRO and FATIMA). Autos assemblers could also be in for a relief rally as lower interest rates should stimulate car financing (+ve for PSMC). While AKD Securities recommends near term caution on banks on threat of margin compression, possibility of 3QCY12 result surprises (capital gains), improving asset quality as well as potential of lowering of ceiling on savings rates could catalyze sector performance. As such, AKD Securities retains AKD Securities’ Jun’13-end index target of 17000 points, where a lower CoE could result in upward revision in AKD Securities’ target.