By: BMA Capital Management Limited
Pakistan Economy: Inflation for the month of Oct’15 is expected to clock in at 1.65%, remaining below 2.0% mark for the fourth consecutive month. Cumulatively, CPI during 4MFY16 will average at 1.7% compared to 7.1% in the corresponding period last year. In addition to the favorable base impact, the depressed YoY trend in CPI can be primarily attributed to receding trend in food and transport baskets (cumulative weightage: 42%). However, on MoM basis, CPI is expected to rebound by +0.5% compared to 9MCY15 average and Sep’15 trend of +0.3% and ‐0.11%, respectively. The MoM recovery can be attributed to slight increase of 0.3%MoM in food basket (Sep’15 MoM: ‐0.5%) and quarterly adjustment in House Rent index (estimated: +1.1%MoM). With Oct’15 CPI announcement, the real interest rate of the country in Oct’15 and 4MFY16 will stand at ~4.3% and ~4.6%, respectively. Thus, we believe the upcoming CPI number at 1.7% may raise hopes of another rate cut in Nov’15 MPS. On the contrary, given a likely rebound in CPI above 4.0% from Dec’15 and onwards as favorable base effect subsides, we foresee minimal chances of another cut in policy rate during Nov’15 MPS. With Sep’15 result announcements of all major companies already completed, participation in the market may remain limited. We continue to recommend stocks with decent earnings growth and strong fundamental outlook with PSO, HBL, UBL, ICI, LUCK, PSMC and POL being our top picks.
Oct’15 CPI to increase by 0.5%MoM: We foresee CPI to rebound to 1.65% in Oct’15 compared to 1.3% in Sep’15, exhibiting a MoM increase of 0.5%. The uptick in MoM trend in Oct’15, compared to ‐0.1% in Sep’15 and an average 0.2% in 1QFY16, can be attributed to i) recovery in Food index by ~0.3%MoM (Sep’15: ‐0.5%) and ii) routine uptick in house rent category (up 1.1%MoM). At the same time, low base effect in transport segment due to unchanged petroleum prices in Oct’15 (Sep’15 decline: 3.5%‐4.0%) will further keep MoM CPI on the higher side.