AKD Quotidian about — Inflation and MPS preview

Karachi, March 26, 2013 (PPI-OT): AKD Securities expect s Mar’13 CPI to clock in at 6.62%YoY, the lowest since Jul’09 even as this implies a O.45%MoM increase.

According to AKD Securities this is corroborated by the SPI trend which also suggests a O.5%MoM increase. As a result, 9MFYI3 CPI should average 8%YoY, whereas the 12m moving CPI average is expected at 8.9%YoY, inline with the GoP’s FY13 inflation target. Benign VoY inflation is largely on the back of a high base while the rise in sequential price pressures in expected on the back of 1) increase in clothing group due to seasonal factors and 2) 0.5% increase food inflation even as wheat prices are lower due to arrival of new crop. Going forward, AKD Securities expects full- year FY13 CPI to average below -8%YoY, going by an assumed 1%MoM incremental increase. While headline CPI remains benign, Balance of Payments risks are gradually coming to the fore. As a result, AKD Securities believes the monetary easing cycle (cut of 450bps in DR since Jul’11) has ended. This is supported by the latest T-bill auction with -90% of bids in the 3m tenor and no offers in the 12m tenor. While the SBP may maintain status quo in the Apr’13 MPS, interest rates could begin to rise from Jun’13.

Inflation outlook: Taking AKD Securities cues from SPI, AKD Securities expects CPI in Mar’13 to increase by O5%MoM to register at 6.62%YoY, the lowest since Jul’09. This should lead 9MFY13 CPI to average 8%YoY. Going forward, assuming a 1%MoM increase in CPI over the next three months. full-year FY13 CPI will average below -8%, still lower than the Discount Rate (9.5%). That said, Trimmed (Core) CPI stood at 9.2%YoY in Feb’13 and could potentially rise on the back of increasing GoP borrowing. While FY13 CR is expected to be relatively benign, inflation may return to double digits in FY14 due to 1) erosion of base effect, 2) a potentially weaker PkR/US$ parity and 3) increase in power tariffs going forward, particularly if international oil price depicts an uptick.

Interest rate outlook: Even as real interest rates remain in `ye territory, AKD Securities believes the SBP will now adopt a more cautious stance due to a weakening external position (lower fx reserves amidst a potential return to IMP arnbit) and risks to sequential price pressures (imported inflation if PkR weakens, deficit monetization). AKD Securities does not expect any change in the DR come the next MRS but this may not be the case in the Jun13 MPS which could mark the start of a new tightening cycle. Note that the money market appears to anticipate the same – bulk of interest in the previous T- bill auction came in the 3m tenor while no offers were received in the 1 2m tenor.

Investment perspective: While the equity market appears be focusing on politics (excitement surrounding the incumbents of the caretaker setup) and the next set of corporate results is around the corner, AKD Securities expects macros to dictate investor sentiment over the next three months. Specifically, potential IMF talks with a view to enter a new SBA and announcement of the FY14 Budget will be key checkpoints and these may temporarily override corporate profitability and attractive market valuations (CY14F PIE: 6.4x). While AKD Securities retains AKD Securities ends-Dec 13 Index target of 19,250 points, AKD Securities believes a rally is more likely to materialize in 2HCYI3 rather than the Upcoming quarter.

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