AKD Quotidian about — Pakistan Market: Shift sector allocations post DR hike

Karachi, September 16, 2013 (PPI-OT): Citing risks to the fiscal position, currency weakness and inflation expectations ahead, the SBP has raised the Discount Rate by 50bps to 9.5%. Going forward, AKD Securities believes interest rates are likely to inch up by at least a further 50bps in FY14F.

According to AKD Securities in the immediate term, considering the market’s recent rally (+1,443 points or 6.6% from the Sep 2’13 low of 21,724 points) was primarily driven by broad expectations of status quo being maintained, the SBP’s surprise move may cause the KSE- 100 to eventually correct even as the Index is up -0.5% in intraday trade today. Specifically, leveraged sectors such as Cements (ex- LUCK which has largely deleveraged), Textiles and selected Fertilizers could come under pressure.

That said, support should come from the heavyweight banking sector with higher interest rates to propel CY14F earnings. At current levels, AKD Securities preferred banking plays are UBL (TP: PkR145/sh), BAFL (TP: PkR24.5/sh) and NBP (TP: PkR55/sh). At the same time, AKD Securities retains conviction on OGDC, PTC, ENGRO, LUCK and NML where AKD Securities believes any dip in share price should be taken as an driven by expectations of status quo being maintained in the Sep’13 MPS particularly in the after iriath of the Lol submitted to the IMF.

Sector allocations – focus on growth: With the rate hike cycle to likely lead to some valuation compression for the broader Index, AKD Securities believes that earnings growth will now separate the winners from the also-rans. In this regard, AKD Securities flags Banks and E and P as two sectors poised for strong growth next year. Importantly, with these two sectors combining for -50% of free float market capitalization, the overall Index should withstand undue pressure.

Even so, leveraged sectors such as Cements (ex-LUCK which has largely deleveraged), Textiles and selected Fertilizers could come under pressure in the immediate-term. Drilling down, the rate hike further firms AKD Securities convictions on Pakistan Banks where AKD Securities preferred plays are UBL (TP: PkR145/sh), BAFL (TP: PkR24.5/sh) and NBP (TP: PkR55/sh) while high beta MCB may also outperform in the near-term. At the same time, AKD Securities retains conviction on OGDC, PTC, ENGRO, LUCK and NML where AKD Securities believes any dip in share price should be taken as an opportunity to build fresh positions.