AKD Quotidian about — Pakistan Market: One Last Hurrah for 2012?

Karachi, December 14, 2012 (PPI-OT): Since the release of Oct’12 inflation data (CPI: 7.66%YoY followed by 6.93%YoY for Nov’12), the KSE-100 Index has gained 5.6% where, in addition to strong corporate results, AKD Securities attributes this extension of the bull trend to expectations regarding monetary easing.

According to AKD Securities, considering real interest rates stand at +1.5% (based on average 5MFYI3 CP1/+3% based on Nov’12 CPI), there appears to be justification to cut the DR even as BoP concerns steadily come to the fore and the PKR slips up vs. the US$ (swift depreciation of 0.80%WoW). in this regard, based on the Justified P/E methodology, AKD Securities estimates that the market has just about priced in a 50bps rate cut. AKD Securities believes status quo may erode 3%-4% from overall market capitalization while a 100bps cut should propel the Index above the 17,000 points level. Beyond the near-term however, risks to monetary tightening remain and concentration of T-bill bids in the 6m tenor indicates money expectations of a reversal in the SBP’s dovish stance before too long. In the interim, AKD Securities retains AKD Securities’ liking for POL, KAPCO, FATIMA, PTC, PSMC, DGKC and UBL.

50bps rate cut priced in: Based on the Justified P/E methodology, AKD Securities estimates that a 50bps rate cut could have a 6% rerating effect on PIE multiples, all else the same. Considering the KSE-100 Index has just about gained this much since release of Oct’12 inflation (CPI: 7.66%YoY), AKD Securities believes the market has priced in a 50bps rate cut. This appears to be affirmed by money market yields – the differential between T-bill yields and the DR has widened to 75bps vs. an average historical differential of 25bps.

BoP position thickens the plot: Total foreign exchange reserves stand at US$13.4 billion (import cover -3.5 months) while the PKR has shed 0.80%WoW vs. the US$. That said, news flow indicates that Pakistan could approach the IMF for deferring FY13 repayments while the US has committed to expeditious release of US$600 million in CSF flows. This could potentially allow SBP room to continue with its growth uplift policy where AKD Securities expects a rate cut of 50bps in the upcoming MRS. AKD Securities estimates that status quo on the DR front could erode 3%-4% from overall market capitalization while any rate cut in excess of 50bps (which may be accompanied by reduction in the savings a/c rate floor for Banks) will likely propel the Index above the 17k points mark. AKD Securities’ top picks include POL, KAPCO, FATIMA, PTC, PSMC, DGKC and UBL.