Karachi: Having registered at 13.77%YoY in Jul’11, CPI inflation for Aug’11 has now clocked in at 11.56%YoY in Aug’11 while 2MFYI 2 CPI has averaged 11.99%YoY.
According to AKD Securities, the fall in overall CPI is largely due to the change of base to FY08 from FY01 where the weight of `Food’ in the CPI basket has come down to 34.83% from 40.34% previously. In this regard, AKD Securities understands that Aug’11 CPI would have clocked in at 12.93% under the previous base. On a MoM basis, CPI is up by 1.4% which, in AKD Securities’ view, is likely due to higher food inflation where AKD Securities attributes this to the Ramadan run-up in prices. Interestingly, Core inflation (Non Food/Non Energy) has registered at 1O.1%YoY in Aug’11 although it remains unclear whether House Rent inflation calculation methodology has shifted to actual surveys. If this is true, AKD Securities believes the SBP could potentially shift to core inflation targeting rather than CPI targeting going forward. Although the PkR/US$ parity has depreciated by 2.1%FYTD, AKD Securities believes significantly +ve real interest rates tilt the balance in favour of continued monetary easing. This should provide positive rerating impetus at the KSE (benchmark Index closed up almost 1.5% yesterday), particularly for leveraged scrips. These include ENGRO, EF000S, EPCL, PTC & DGKC.
Aug’11 CPI with changed weights
|Group Weight (%)||Indices||% Change|
|Food & Non-Alcoholic Beverages||34.83||177.95||157.18||13.21%|
|-Non perishable foods items||29.84||177.48||150.91||17.61%|
|-Perishable food items||4.99||180.78||194.66||-7.13%|
|Alcoholic Beverages & Tobacco||1.41||160.77||150.04||7.15%|
|Clothing & Footwear||7.57||144.7||127.28||13.69%|
|Housing, Water, Elec,|
|Equip & Mntnc.||4.21||148.31||132.15||12.23%|
|Recreation & Culture||2.03||139.07||131.4||5.84%|
|Restaurant & Hotels||1.23||178.46||150.63||18.48%|
|Source: FBS &AKD Research|
Monetary easing to continue: In AKD Securities’ view, potential exit from the IMF SBA program may add to economic challenges going forward, meriting a wary stance beyond the near-term. That said, even as the PkR/US$ parity has depreciated by 2.1%FYTD, AKD Securities believes the significantly +ve real interest rates (post rebasing) should provide room for continued monetary easing over the course of FY12. AKD Securities now expects the SBP to reduce the Discount Rate by at least 50bps to 13% in the next monetary policy statement (Oct 811). The market appears to believe as much – the KSE 100 Index closed up almost 1.5% yesterday.
The leveraged stocks: Continued monetary easing should lead to a rerating of valuation multiples going forward. In the last, monetary easing cycle (Apr09-Nov’09), PER for the AKD Universe expanded from 7.2x to 9.9x, although this was partly influenced by post meltdown recovery. Based on this, and considering the AKD Universe trades at a forward PER of 6.4x, AKD Securities sees broader Index upside of at least 15% from current levels (based on target price mapping). In this immediate term, investor interest may shift towards leveraged scrips. Within AKD Securities’ coverage, these include ENGRO, EFOODS, EPCL, PTC & DGKC.