AKD Daily December 03, 2013 Nov’13 CPI Review & Outlook! Nov13 CPI has risen by 1.27%MoM to clock in at 10.9%YoY, higher than consensus expectations. As a result, 5MFY14 average CPI has registered at 8.8%YoY vs. 8.4%YoY during the same period last year. The steep sequential rise in inflationary pressures has come on the back of increase in Food inflation (particularly perishable food items up 43%YoY/12%MoM), 2) second round impact of increase in electricity tariffs and 3) inflationary expectations. Similarly, Core inflation maintained its upward trajectory to come in at 9.2%YoY in Nov13 vs. 8.8%YoY in Nov12. Going forward, CPI could continue to register in double digits across the rest of the fiscal year which may push the FY14 CPI average above 10%. As a result, we believe the interest rate hike cycle is set to continue particularly in the backdrop of currency weakness. In this regard, while we believe the market has largely priced in a rising interest rate environment, vindicated by the KSE-100s rebound yesterday after an initial kneejerk reaction to high CPI, we advocate a more balanced approach at current levels. Our preferred plays include NML, DGKC, ICI, UBL, NBP, HUBC and KAPCO. Nov13 CPI review: Headline CPI accelerated to double digits in Nov13 to clock in at 1.27%MoM/10.9%YoY, the first time price pressures have entered double digits in the last 1.5yrs .The rise in sequential price pressures came about due to 1) increase in Food inflation (particularly perishable food items up 43%YoY/12%MoM) due to transporters strike, 2) second round impact of increase in electricity and 3) waning base effect/inflationary expectations. As a result, the 5MFY14 CPI average stands at 8.8%YoY, whereas the 12M moving CPI average stands at 7.6%YoY. Going forward, even if inflation increases by 0.7%MoM (much lower than the 5MFY14 sequential run rate), FY14 average CPI would tag in at 10.3%YoY. The currency risk! Considering the PkR has shed 9.7%FYTD vs. the US$, there will likely be a second round impact on overall inflation as imported inflation feeds into prices. We estimate that a weaker PkR has a direct impact of ~10% on the CPI basket. Risks on this front may materialize if 1) targeted foreign flows are inordinately delayed and/or 2) the privatization process is not quickly revived. This may force the SBP to continue with the interest rate hike cycle where although the 5MFY14 CPI average is still more than 100bps below the DR, inflation trajectory has depicted a sharp inflection point since Oct13. We see the DR rising to 11% by end-Jun14. Investment perspective: The KSE-100 Index recovered to gain 0.4% yesterday, although intraday gains were pared to 0.2% on the release of a higher than expected CPI figure. In our view, this reinforces the likelihood of the market having already priced in a rising interest rate trajectory. That said, with Pakistans discount to the region presently lower than the historical average (30% now vs. 36% historically) coupled with tangible risks on the external front (SBP reserves imply 1M import cover), we recommend a mix of growth (NML, DGKC, ICI) and high D/Y plays (UBL, NBP, HUBC, KAPCO).
Posted on: Tue, 03 Dec 2013 07:51:39 +0000