By: BMA Capital Management Limited
Pakistan Economy: We foresee inflation for Nov’15 to clock in at 2.59%, re‐surfacing above 2.0% mark, compared to 1.6% and average 1.7% in Oct’15 and 4MFY16, respectively. The expected rebound in CPI by +0.5% compared to 10MCY15 average of +0.3% can be attributed to an increase of 0.7%MoM (FY16TD average MoM: +0.1%) in food basket (weight: 34.8%) and slight uptick of 0.8%MoM in Transport basket (weight: 7.2%) due to 2%‐3% increase in petroleum prices. Cumulatively, CPI during 5MFY16 will average at 1.8% compared to 6.5% in the corresponding period last year. Muted trend on YoY basis can primarily be attributed to favorable base effect and weak global commodity prices. With Nov’15 CPI announcement, the real interest rate in Nov’15 will likely contract to 3.4%, down 120bps compared to 4MFY16 average of 4.6%. It is pertinent to note that Nov’15 will mark the end of a ‘high base impact’ period and consequently, we foresee CPI to rebound above 4.0% in Dec’15 and likely average at 5.0%‐5.3% in 2HFY16. Thus, we believe interest rates (TR: 6.0%) have reached the trough.
At the same time, we also expect limited chances of a hike in interest rate during early CY16 given weak global oil and other commodities. SBP may also opt to provide continuous support to private sector credit in 2HFY16 where the latter may find further support from increasing development activity and better energy supplies. With the conclusion of monetary easing phase in Sep’15, we believe Nov’15 and future CPI announcements to remain non‐events for the market. We continue to recommend stocks with attractive valuations and strong fundamental outlook with PSO, HBL, UBL, ICI, LUCK, PSMC and POL being our top picks.