Jan14 CPI Preview With result season yet to pick pace, incoming macroeconomic data is likely to set the near-term tone. In this regard, after having clocked in at 9.2%YoY in Dec13, we expect headline CPI to remain in single digits in Jan14 to clock in at ~7.5%YoY. This translates into a 0.1%MoM increase which is much lower than the 0.9%MoM CPI average increase in 1HFY14. While SPI data suggests a steep 0.95%MoM decrease, the steady sequential price pressure in CPI is expected on the back of 1) impact of rental inflation (first month of the quarter), and 2) increase prices of non-perishable food items (particularly chicken). This should lead to 7MFY14 CPI averaging 8.7%YoY vs. 8.3%YoY during the same period last year. As a result, provided the exchange rate retains its newfound stability, the DR may remain unchanged in the next MPS as well (due in Mar14). This could provide the catalyst for further market performance across the next few months where so far incoming results (with the exception of EFOODS) have been robust. From an investment perspective, we would avail any dip in the market to build fresh positions in names such as UBL, NBP, NML, DGKC and ENGRO. Jan14 CPI Preview: We expect headline CPI in Jan14 to clock in at ~7.5%YoY implying a tepid 0.1%MoM increase. Note that this anticipated sequential MoM increase is much lower than the average 0.9%MoM increase in 1HFY14 and also lower than the SPI trend which suggests a steep 0.9%MoM decline. We expect the sequential rise in price pressure in CPI on the back of 1) impact of rental inflation (first month of the quarter), and 2) increase prices of non-perishable food items (particularly chicken due to seasonal factors). This should lead 7MFY14 CPI to average 8.7%YoY vs. 8.3%YoY in 7MFY13. Going forward, we expect full-year FY14 CPI to average close to 9%YoY as opposed to our earlier projection of 10%YoY. DR outlook: While the PkR has depicted stability of late (on steps such as ban on gold imports), risks on the external front remain in view of low fx reserves (SBP reserves stand at US$3.32bn implying import cover of just ~1 month) and potential lags in realization of foreign flows (e.g. Etisalat/privatization proceeds etc.). These could again lead to pressure on the exchange rate, leading to a second round impact on inflation. That said, provided the PkR retains its stability and CPI remains within single digits (real interest rates are more than +1% at present), we could see the SBP maintaining the DR at 10% in the next MPS (due in Mar14) as well as across the remainder of the fiscal year. Investment perspective: Contained inflation and a stable PkR could lead to a lull in the interest rate hike cycle across the next few months which could provide a trigger to the market particularly as incoming results (with the exception of EFOODS) so far have been robust. Within this backdrop, while the market has climbed by 5.6%CYTD, forward P/E at 8.79x remains at a 17% discount to the MSCI Asia Pacific Index where we would avail any dip in the market to build fresh positions in names such as UBL, NBP, NML, DGKC and ENGRO.
Posted on: Tue, 28 Jan 2014 07:24:06 +0000
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