Karachi, October 31, 2012 (PPI-OT): Headline CPI inflation has depicted a consistent downtrend to enter single digits in 1QFY13 and AKD Securities expects this trend to continue in Oct’12.
According to AKD Securities, while SPI is flattish MoM, AKD Securities expects CPI to increase by 0.5%MoM but still register at a benign 7.7%YoY in Oct’12. AKD Securities attributes this to 1) subdued Food inflation, 2) downward adjustment in gas price index in Jul’12 and lower fuel prices and 3) encouraging GoP retirement of SBP debt (by PKR 216 billion FYTD). As a result, AKD Securities trims AKD Securities’ FY13F average CPI forecast to 9.5%YoY. A single digit CPI average across FY13, particularly in the near-term, pushes the case for a further 50bps cut in the Discount Rate. In this regard, latest bond yields indicate the money market’s anticipation of a continued dovish monetary policy stance where T-bill yields fell by 4bps-10bps to register in the 9.64%- 9.69% range. That said, while Core (Trimmed and NFNE) inflation has been on a downtrend as well, it still stands above 10%. This could potentially convince the SBP to err on the side of caution with latent Balance of Payments risks potentially coming to the fore by 2HFY13 (pressure on fx reserves amidst a weaker PKR as well as fiscal laxity ahead of general elections). As such, AKD Securities believes any cut in the DR in the next MPS is likely to be the last of the monetary easing cycle.
Oct’12 CPI Preview: AKD Securities expects CPI in Oct’12 to increase by 0.5%MoM but still register at a benign 7.7%YoY. The last time CPI was below 8% was in Oct’09 (rebased data). This should lead 4MFY13 CPI to average 8.8%YoY. Assuming a 1%MoM increase in CPI going forward, full-year FY13 CPI will average -9.5%YoY, inline with the GoP’s target. While NFNE and Trimmed inflation remain in double-digits (both at 10.4%YoY in Sep’12), both measures of core inflation are also depicting a downward trend. That said, risks to inflationary pressures remain in view of 1) fading out of high base effect, 2) increasing pressure on PKR /US$ parity (depreciation of 1.4%FYTD) with IMF repayments and fx erosion going forward and 3) potential fiscal indiscipline ahead of general elections.
Monetary Policy Outlook: Based on Oct’12 CPI projections, +ve real interest rates stand at 0.5%, giving room to the SBP to cut the Discount Rate by 50bps in the next MPS in Dec’12. In this regard, the bond market appears to be in unison with this view going by the latest T-bill and PIB yields. Latest Balance of Payment concerns and relatively sticky Core inflation may curb the SBP dovish stance however where AKD Securities believes that any rate cut in Dec’12 is likely to be the last of the current monetary easing cycle. Key swing factor remains materialization of foreign flows (3G auction, Etisalat dues, CSF dues and grants/loans from IDB and Saudi Arabia) that will determine timing of a re-entry into an IMF program.
Investment Perspective: While risks remain, the SBP may take one last shot at reviving private sector credit offtake and thus cut the DR by 50bps in the upcoming MPS. AKD Securities sees obvious benefits for leveraged plays (Textiles and Cements in particular) that are likely to extend their bull run for the next few months. Beyond Dec’12 however, AKD Securities believes the current policy rate cycle is likely to reverse by 2HFY12 particularly if an IMF program looms large. As such, while momentum plays can outperform in the near-term, AKD Securities believes Banks can put in a strong showing next year.