MPS - Equities to extend gains on monetary easing Written as on January 26, 2015 In todays Value Seeker, we present a review on the Monetary Policy Statement (MPS) issued last Saturday by the State Bank of Pakistan (SBP) for next two months along with our outlook on the same. SBP slashes DR by 100bps to 8.5% In the latest MPS, the SBP reduced Discount Rate (DR) by 100bps to 8.50%. It is pertinent to note that SBP slashed DR by 50bps in Nov-14s MPS. The low paced inflation due to decline in international commodities prices coupled with healthy foreign inflows remained the major factors which supported the SBP decision. Lower CPI - the key backer After partially passing on the impact of lower international oil prices to local market, the CPI is expected to slow down during the remaining period of FY15. The CPI for Dec-14 remained at 4.3%YoY while the core inflation (Core NFNE) settled at 6.7%YoY in Dec-14 mainly on the back of lower food inflation. Along with decline in oil prices, Jan-15 CPI is expected at below 5%YoY. The CPI for FY15 is likely to settle below 6%YoY thus revealing real interest rates at ~250bps. Healthy foreign inflows to back BoP Countrys FX reserves improved significantly in Dec14 and crossed the benchmark of USD15bn as against USD13bn at Nov14 end. This healthy improvement was due to payment received from IMF amounting USD1.1bn owing to EFF installments and USD1.0bn by floating Sukuk in international market. Similarly, 15% improvement in workers remittance to USD8.9bn in 1HFY15 will also improve current account balance and thus BoP situation of the country. These healthy foreign flows paved the way for 100bps DR cut in recent MPS. Going forward govt has submitted documents for 6th review of IMF and is quite hopeful that it will receive next installment on time. Furthermore, USD 670mn of CSF and USD 500mn from International Bank for Reconstruction and Development after accomplishing USD15bn benchmark is also expected in remaining part of FY15. On payment front, only routine payments of SBA arrangement are likely in 2HFY15. Market Outlook: Positive In general, valuation of all sectors is expected to increase due to decline in cost of capital assuming 100bps drop in PIB rate which is taken as a substitute of risk free rate. However, highly leveraged sectors particularly Textile & Cements would be the major beneficiaries and will offer handsome gains to investors. In addition to this power, OMCs, Autos (affecting auto financing), and fertilizers are also expected to take benefit from such decline. lrfan Saeed irfan.saeed@investcapital
Posted on: Tue, 27 Jan 2015 06:10:20 +0000
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