AKD Quotidian about — Pakistan Economy: Feb’14 CPI expected at Less than 8°/O

Karachi, February 26, 2014 (PPI-OT): Based on leading SPI data, AKD Securities expects CPI to moderate by O.8%MoM in Feb44. This should result in Feb14 CPI of 7.4%YoY vs. 7.9%YOY in Jan14 and 7.4%YoY in the corresponding period last year.

According to AKD Securities, as a result, the 8MFYI4 CPI average should dock in at 8.6%YoY. Considering the DR is already at 10% and full-year FY14 CPI is expected at 9%YoY, there appears little reason for the SBP to push interest rates higher in the near-term particularly as the PkR has retained its stability vs. the US$ (appreciation of 0.7%CYTO).

Within this backdrop, and cognizant of generally weak market sentiment (KSE-100 Index has shed 6% since us recent peak), AKD Securities believes high DIV stocks should come into the limelight where AKD Securities flags KAPCO, POL and FFBL as preferred plays. For Banks, while a lull in the interest rate hike trajectory may impinge on spreads (Jan14: 5.98%), AKD Securities believes that regulatory risk on interest rate margins has largely panned out, with growth to be led by balance sheet expansion and lower credit costs. AKD Securities retains our liking for the larger banks with UBL our preferred pick.

Feb’14 CPI preview: Based on SPI data which shows a O.9%MoM decline, AKD Securities expects CPI to moderate by O8%MoM in Feb’14. This should lead to Feb’14 CPI clocking in at 7.4%YaY. Lower than 7.9%YoY in Jan’14 and the lowest since Sep’13.

The sequential reduction in price pressures is expected to arise on the back of lower food inflation (expected to lower by -25%MoM on lower prices for chicken, onions and tomatoes, among others) while other heavyweight contributors to the CPI basket (housing and utilities/fuel) have remained flat. As a result, the BMFYI4 OFF average should clock in at 8.6%YoY while full-year FY14 CPI should not exceed 9%YoY.

DR outlook, The SBP last raised interest rates by 50bps to 10% in Nov’13, with no change in the Jan’14 MFS due to a lower than expected inflation rate even as risks to the BOF position remain. Considering these factors have not depicted a material change (inflation continues in the single digits while the PkR has gained O.7%CYTD vs. the US$), it is likely that the SBF will maintain the DR at 10% in next month’s MFS. Furthermore, with bank spreads coming in below 6% for the first time in 8yrs, AKD Securities does not believe the central bank will take any step to further tighten interest rate margins.

Investment perspective: Within the backdrop of a lull in the interest rate hike cycle and generally weak market sentiment (KSE-100 on track to lose 4.6% in Feb’14 and is down 5.7% since its peak on 27,104) AKD Securities believes high D1Y’ stocks should come into the limelight where AKD Securities flags KAFCO, POL and FFBL as preferred plays (other stocks with a double-digit D1Y’ include FF0, HUBC and NBP). For Banks, AKD Securities believes that regulatory risk on interest rate margins has largely panned out, with growth to be led by balance sheet expansion and lower credit costs. AKD Securities retains our liking for the larger banks with UBL our preferred pick.