The SBP in i~ Jan14 MPS kept the discount rate unchanged at 10%. In line with AKD Securitiesí expectations. Based on the IHFYI4 average CPI of 8.89%. this brings real interest rates to +1 %. In this regard, the SBP kept the Discount rate unchanged due to 1) lower than expected increase in CPI 9.2%YoY in Dec13), 2) decline in repayments to IMF In2HFYI4ofUS$1.l6bnvs US$1 .Obn in IHFYI4, 3)fiscal consolidation effort and 4) recovery in private sector credit demand. According to AKD Securities , at the same time the MPS cited risks to the economy, on the external front (SBP reserves currently at: US$3.4bn ; <1m import cover) and building up of inflationary expectations. Going forward, the FY14 CPI will likely average in single digits close to 9%YoV while foreign inflows are still awaited (3G auction/Eurobond/loans from multilateral and bilateral agencies), speculation on the currency remains a key risk. Within this backdrop, AKD Securities expects the SBP will maintain stabs quo for the remainder of FY14 leading to a positive real interest rate of 1%. With the result season right ahead, AKD Securitiesí favored stocks in the AKO Universe include KAPCO, HUBC, FATIMA, UBL, DGKC and NML. Status quo DR: The SBP has kept the Discount Rate unchanged at 10% in Jan'14 MPS in line with AKD Securitiesí expectations. This is attributed to 1) lower than expected increase in CPI, 2) expected materialization of foreign inflows in 2HFY14 (3G auction/Floatation of Eurobonds/loans from multilateral and bilateral agencies), 3) declining repayments to the IMF ( US$1 .l6bn in 2HFY14 compared to Us$1 .9bn n IHFY14) and 4) pickup n private sector credit off take (SMFY14 loans to the private sector clocked in at PkR1 61 bn vs. just PkRl6bn in the corresponding period last year). Going by the 1 HFY14 CPI average of 9%, this brings real interest rates to +1% at present. CPI outlook and investment perspective: AKD Securities expects FY14 CPI to average in single digits dose to 9%YoY in FY14. That said, materialization of foreign inflows in 2HFY14 will play a critical rate in meeting IMF's FX reserve target for Mac~14 as well as the PkR-US$ parity. In this regard, SBP in the MPS has highlighted a relatively low risk of demand-driven inflation (given sluggish economic activity) but maintained its FY14 inflation outlook at 10- 11% (less than GOT target of 8%). This is expected so the back of expected delayed impact of fiscal adjustments which include increase is GST and recent substantial hike is electricity tariffs. With the result season right ahead, AKD Securitiesí favored stocks ii the AKD Universe include KAPCO, HUBC, FATIMA, UBL, DGKC and NML.
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