AKD Quotidian about — Dovish FOMC to further support KSE

Karachi, August 23, 2012 (PPI-OT): The recently released Federal Open Market Committee (FOMC) Aug’12 meeting minutes indicate that most Committee members are in favour of additional monetary accommodation should the need arise.

According to AKD Securities, in this regard, recent data does appear to support the case for additional stimulus where: 1) US GDP growth is likely to remain moderate over coming quarters, 2) sticky jobless rate of 8%+ since Feb’09, 3) and stable long-term inflation expectations and 4) fallout risks to global economy from lingering Eurozone problems. Considering the Fed Funds Rate is already in the 0%-0.25 range (FOMC may at best extend the time period for a highly accommodative monetary policy stance beyond mid-2014), a third round of large-scale asset purchases seems to be building consensus. Recall that in the previous two rounds of asset purchases (totalling to US$2.3tn), the S and P depicted a strong rally. Closer to home, the KSE-100 Index is likely to react as well – the Index gained 78% during QE1 (Mar’09-Mar’10) with net FPI of US$354 million. This may come about due to a potential rally in global commodities (45% of KSE market cap is commodity-linked), particularly in the backdrop of the US drought. At current levels, AKD Securities likes NML, int’l oil prices, potentially leading to BoP issues and a return to an IMF program.

Potential for QE3: Beyond extending its time frame for a “highly accommodative” monetary policy stance. Most FOMC members are of the opinion that additional monetary stimuli may be needed if recent data trends (Jul’12-Jul’12) entrench. In this regards, the FOMC has noted that 1) economic activity increased at a slower pace in 2Q, 2) labor market conditions were little improved, 3) consumer sentiment was relatively downbeat and 4) broader manufacturing indicators were subdued. In conjunction, further measures to stimulated growth may be witnessed in the Eurozone (ECB has cut its benchmark rate by 25bps while BoE has increased the size of its asset purchase program) as well as China (beyond easing bank reserve requirements). Over in the US, inflation-indexed TIPS continue to be sold at close to record negative yields amid money market speculation that the Federal Reserve will add more stimulus (US 10yr treasury yield now exceed TIPs rate by ~2.25%).

SBP ahead of the curve: Within the backdrop of potential concerted global central bank action to stimulate growth, the SBP’s recent decision to cut the policy DR by 150bps to 10.5% – levels last seen prior to the global financial crisis – certainly appears prescient. At the KSE, in addition to the rerating impetus to valuation multiples, propulsion of easy money through the global economy may lead to another FPI-driven rally in the Index ala QE1 and QE2 where the KSE-100 Index rallied by 78% and 18%, respectively.

But risks remain: In contract to the historical dislocation argument, it appears that the KSE is correlated with the global financial markets, albeit with a lag. However, risks on the macroeconomic front could potentially cause divergence in performance beyond the next 3-6 months. Specifically, these risks emanate from fiscal indiscipline ahead of elections, a volatile political environment and BoP concerns (if int’l oil prices remain upward) leading Pakistan into another IMF program (EFF instead of SBA). Nevertheless, AKD Securities retains AKD Securities’ Dec’12 KSE-100 Index target of 16,000 points with top picks being NML, FATIMA, LUCK, POL, UBL and BAFL.