AsiaNet-Pakistan Premier Editorial Content and Press Release Distribution Service
Karachi, March 24, 2015 (PPI-OT): In line with AKD Securities Limited’s expectations, the SBP (State Bank of Pakistan) in its latest MPS (Monetary Policy Statement) has reduced the policy rate by 50bps to 8%. The SBP’s decision to continue with its on-going monetary easing stance received support from improving macro-economic indicators such as: 1) considerable slowdown in headline inflation (8MFY15 avg. 5.47%YoY vs. 8MFY14), 2) sustained strength in the external a/c with 8MFY15 CAD shrinking 34.2%YoY to US$1.6bn and 3) Fx reserves lying comfortably at US$16.2bn. Resultantly, the SBP’s discount rate has now come to a multi-year low where the rates last time were seen this low in March FY05, during the same period the KSE-100 Index was trading at a P/E of 12.7x.
This reduction in the policy rate is likely to act is a catalyst for the market which has been going through a correction phase (since Feb 3’15) where the market’s P/E came down from 9.1x to current 8.5x. In addition to this, the KSE-100’s discount to its regional and MSCI Asia (Ex-JP) peers has gone up to 31% from recent 27%. Within the backdrop of expansionary monetary policy AKD Securities Limited continues to favour leveraged players within the AKD Universe and flag MLCF, ENGRO, PSO, HUBC, FFBL and POL as AKD Securities Limited’s preferred plays.
Low Prices Lead DR Cut: In an expected move, the SBP announced a 50bps cut in the policy rate to 8.0% in the Mar’15 MPS, maintaining the rate at 10yr lows, a third sequential DR cut since the onset of monetary easing cycle in Nov’14.
The SBP’s aforementioned move was backed by recent macroeconomic stability with key themes being: 1) considerable slowdown in headline inflation (8MFY15 avg. 5.47%YoY vs. 8MFY14 avg. 8.65%YoY) as well as NFNE core inflation (7.3%YoY in 8MFY15 vs. 8.3%YoY in 8MFY14), 2) sustained strength in the external a/c with 8MFY15 CAD shrinking 34.2%YoY to US$1.6bn (mainly on receipt of US$717 under CSF) and 3) Fx reserves lying comfortably at US$16.2bn.
In addition to this, with expected slump in global commodity prices to continue, the SBP also revised its forecast for FY15 CPI inflation to 4.0-5.0%YoY from 4.5%-5.5%YoY earlier (AKD Securities Limited forecasts Mar’15 inflation at 2.5%YoY). Furthermore, real interest rates still lying above +2.5% (based on 8MFY15 CPI) vs. 5yr avg. of +1.5%, point towards room for further monetary expansion in the next MPS.
Impetus for growth: SBP’s dovish action is expected to prove beneficial in reviving the private-sector credit cycle, which has failed to pick pace so far. Credit growth as of Jan’15 stood at 7.3%YoY, much lower than 11%YoY increase witnessed at end FY14, as banks continued to put money in govt. bonds (banks holding of PIBs as of Feb’15: 69.6%). The lagged effect of the last MPS as well as the current rate slash can re-trigger credit off-take over the medium term, as banks shift from PIBs as yields are expected to decline further in upcoming auctions.
Investment perspective: With the latest 50bps reduction in the policy rate, interest cost saving of AKD Universe companies will translate into annualized earnings growth ranging from 0.6% to 3.1%. While at the same time with reduction in the discounting factor TPs of AKD Securities Limited’s universe companies would augment by 1.5% to 7.4%.
By way of numbers, financial impact of the aforementioned rate cut does look marginal, however, AKD Securities Limited believes this will provide a much needed boost the overall investors’ sentiment and will lead to increase participation at the bourse. Trading at FY15E P/E of 8.5x, the market looks impressive where AKD Securities Limited remains bullish against AKD Securities Limited’s Jun’15 index target of 37,000. AKD Securities Limited reiterates AKD Securities Limited’s liking for leveraged plays within the AKD Universe (MLCF, ENGRO and PSO) as well as high D/Y stocks (HUBC, POL and FFBL).