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Karachi, March 18, 2015 (PPI-OT): Backed by the Govt decision to reduce its GST (General Sales Tax) rate on petroleum products (barring HSD) in order to maintain prices coupled with the high base effect of CPI based inflation, AKD Securities Limited estimates headline inflation for Mar’15 to read at ~2.52%YoY (+ve 0.25%MoM).
This compares favourably when pitted against CPI of 8.5%YoY recorded in Mar’14, despite increase in certain food items. Furthermore, this implies 9MFY15 CPI average of 5.14%YoY vs. 8.64%YoY in 9MFY14, the lowest level witnessed since FY04.
In this regard, AKD Securities Limited believes a 50bps rate cut by the SBP in its upcoming Mar’15 MPS cannot be ruled out. AKD Securities Limited’s belief is further cemented by the money market expectations, reflected by declines in MTB (45-60bps) and PIB yields (60-109bps) since the last MPS. A rate cut will serve as a much needed catalyst for otherwise lacklustre market, which has been on a bearish run since its highest in Feb’15 (losing 5.2%). In connection with this, AKD Securities Limited believes the current levels provide a good entry point for investors sitting on cash.
Mar’15 CPI Preview: Based on SPI data for Mar’15, AKD Securities Limited forecasts headline inflation for the month to read at ~2.5%YoY (compared to 8.5%YoY in Mar’14), reflecting a 0.2%MoM rise. While an increase in certain food items (staples and poultry) is likely to push CPI numbers higher, inflation will remain restricted by (i) continued low fuel prices (backed by GoP decision to reduce GST on petroleum products) (ii) high base effect.
This implies 9MFY15 CPI average of 5.14%YoY vs. 8.64%YoY in 9MFY14, the lowest level witnessed since FY04, reflecting real interest rates of +3.3%. With int’l oil prices bottoming again, soft inflation trend is expected to sustain for the remainder of fiscal year with the FY15 average rounding up at the lower end of SBP’s 4.5-5.5%YoY forecast.
Low Yields Hint Monetary Easing: In the upcoming Mar’15 MPS AKD Securities Limited expects SBP to reduce policy rate by 50bps to 8.0% on the back of (i) low inflationary environment (ii) strong reserve position with Fx reserve at US$16bn (import cover: 4.8m) and (iii) dovish stance of other central banks globally (South Korea reduced 175bps).
Market expectations of continued monetary easing are reflected through marked decline in PIB and MTB yields. PIB yields in the secondary market have tapered down by more than 50bps across all tenors (up to 109bps for 5yr PIBs) since the Jan’15 MPS. A similar shift is also observed in MTB yields, which have come off by 45-60bps over the same period.
Lower yields for 12m papers (7.95%) than those for 3m (8.05%) reflect anticipation of policy rate cut in near term. Cut-off yields in latest auctions for 3m, 6m and 12m MTBs have come-off by 19bps, 31bps and 40bps, respectively, from the last MPS policy in Jan’15. Similarly 3yr, 5yr and 10yr PIB cut-off yields in Feb’15 auction dropped by 39bps, 61bps and 21bps, respectively.
Investment perspective: The market has been on a bearish run, with lower than expected inflation in Feb’15 (3.24%YoY) failing to provide a boost on the back of (i) foreign investment outflow (net sell: US$110mn CYTD), (ii) concerns about market regulations and (iii) political and security concerns. The KSE-100 index has lost 5.2% since the high of Feb’15 wiping out 7.2% gains seen in Jan’15.
However AKD Securities Limited sees this as transitory with a rate cut in the upcoming MPS as a potential trigger that can drive a period of valuation expansion, where AKD Securities Limited reiterates AKD Securities Limited’s Jun’15 index target of 37,000 points for the index. In a backdrop of soft inflation theme AKD Securities Limited sees the current downtrend as an opportunity where AKD Securities Limited’s preferred plays include BAFL, UBL, POL, MLCF, ENGRO and HUBC.