By: Usman Zahid
BMA Capital Management Ltd.
In an expected development, the State Bank of Pakistan (SBP) reduced the discount rate (DR) by 50bps citing limited impact of floods and a favorable trend in global commodity prices. While the cut will likely lead to a muted impact on earnings given low magnitude, valuations across the BMA Universe increase by an average of 3.6%. We believe a 50bps had already been incorporated by the market, the KSE nevertheless opened on a bullish note with the KSE-100 reaching a high of 348 points in intraday trading today. Traditionally adversely impacted by DR cuts, the Banking sector will likely stand out as the prime beneficiary of quant easing this time around given high unrealized gains on AFS PIB portfolio. Apart from Banks, other beneficiaries include leveraged plays such as Cements (MLCF), Textiles (NML, NCL, GATM) and Fertilizers (ENGRO, EFERT). Moving ahead, with inflation likely to remain contained given falling oil prices and declining food prices (winter) coupled with a stable PKR given disbursement of USD1.1bn tranche from the IMF, the SBP may potentially cut the DR by a further 50bps (in Jan’15) should economic indicators permit.
The MPS – DR eased by 50bps: In its Nov’14 Monetary Policy Statement (MPS), the SBP reduced the DR by 50bps citing limited impact of floods and a favorable trend in global commodity prices. While highlighting its expectation of inflation ending FY15 on the lower side, the SBP identified potential risks including a i) reversal in commodity prices, ii) cut in subsidies, iii) levying of GIDC and iv) pressure on core inflation. The SBP again highlighted the need for structural reforms to broaden the tax base for achieving fiscal consolidation while also noting the likelihood of foreign exchange inflows remaining on track.