State Bank of Pakistan sits on the fence; keeps DR intact at 10.0%

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Economy Overview

-The State Bank of Pakistan (SBP) in its Monetary Policy Statement (MPS) on September 20, 2014, kept the discount rate unchanged at 10.0% – inline with market’s expectations and ours.

-Given SBP’s (1) benign inflation outlook of 8%, (2) expectation of constrained LSM growth and (3) outlook of weak credit to private sector due to floods, we expect the Central Bank to cut discount rate by 50- 100bp in FY15.

-We believe resolution of ongoing political impasse will be the key decision driver for monetary easing.

-We believe the MPS is likely to be a non-event for KSE, where the ‘waitand- watch’ approach of SBP was mostly expected. However, we expect market to take some comfort from the wording of SBP’s MPS, where an easing bias is apparent.

-With the ongoing political standoff, we advise investors to adopt a ‘waitand- watch’ approach with portfolios tilting towards stocks having (1) high dividend yields and (2) strong earnings growth outlook.

-Our preferred plays are PPL, POL, KAPCO, MLCF and KEL.

SBP keeps DR intact at 10.0%
The State Bank of Pakistan (SBP) in its Monetary Policy Statement (MPS) on September 20, 2014, kept the discount rate unchanged at 10.0% – inline with market’s expectations and ours. Given SBP’s (1) benign inflation outlook of 8% (though elimination of power subsidy and imposition of Gas Infrastructure Development Cess remains a risk), (2) expectation of constrained Large Scale
Manufacturing (LSM) growth due to continued energy shortages and soft commodity prices and (3) outlook of weak credit to private sector market due to floods in Central and Southern Punjab, we expect the Central Bank will eventually decide to cut the discount rate going forward. We keep intact our expectation of 50- 100bp cut in policy rate by SBP in FY15, where resolution of ongoing political
impasse will be the key decision driver for monetary easing. We believe the resolution on the political front will remove most of the macro uncertainties that is keeping SBP on the fence, which includes (1) finalization of the fourth IMF review, (2) realization of expected privatization receipts and (3) issuance of dollardenominated Eurobond/Sukuks.

Market to take comfort from SBP easing bias
We believe the MPS will largely be a non-event for KSE, where the ‘wait-andwatch’ approach of SBP was mostly expected. However, we expect the market to take some comfort from the wording of SBP’s MPS, where an easing bias is apparent. With the ongoing political standoff, we advise investors to adopt a ‘waitand- watch’ approach with portfolios tilting towards stocks having (1) high dividend yields and (2) strong earnings growth outlook. Our preferred plays are PPL, POL, KAPCO, MLCF and KEL.

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