Karachi: Within the backdrop of weaker global equity markets, the KSE-100 Index has gained -500 points or 4.5% since Sep 19’11 (rebased inflation numbers announced on Sep 20′ll).
According to AKD Securities, they attribute this bullish momentum to expectations of monetary easing with CPI of 11.56%YoY in Aug’11 and then 1O.46%YoY in Sep’11. While almost every quarter is expecting interest rates to come off in tomorrow’s MPS, rate cut projections range from 50bps to as high as 250bps (CPI-based real interest rates are +3% with DR currently at 13.5%). Based on the Justified PER multiple for the market, AKD Securities estimates that the KSE-100 Index has already priced in a rate cut of 75bps-I 00bps. Similarly, going by the DR-l2mTbill yield differential, AKD Securities believes the money market is expecting a rate cut of at least 50bps. In AKD’s view, any rate cut below 75bps may lead to a near-term reversal in the equity market’s recent bull move. However, a rate cut in excess of 100bps would likely extend the rally. In any case, with monetary easing likely to continue over the near- term, AKD Securities flags high dividend-yield plays (PTC, FFC, FFBL, KAPCO, NBP & POL) and leveraged stocks (ENGRO, DGKC & NML) as attractive options.
Justified PER and Index re-rating
|Equity Risk Prem.||5%||5%||5%||5%|
|Avg. Nom. GDP||9%||9%||9%||9%|
|Justified PER (x)||6.16||6.49||6.67||6.85|
|*base on Sep 19’11 closing of 11356.64 points|
Justified PER: Based on the Justified PER multiple (payout/(k-g)), AKD Securities projects that a 50bps cut in the DR would, all else the same, lead to PIE rerating of 5.3%. Considering that the KSE-100 Index has gained 4.5% since Sep 19’11 (release of lower rebased CPI the next day started fuelling rate expectations), it appears the market has just about priced in a 50bps rate cut. However, the recent dip in Pak-US relations has likely also had an impact leading us to believe the KSE-100 Index has priced in a rate cut of 75bps-100bps.
DR-12mTbill differential: Since late 2009, the DR-12mTbill yield differential has averaged 25bps which has widened to 75bps in the Oct 5’11 T-bill auction. Going by this, it appears the money market is expecting a rate cut of at least 50bps. Accordingly, T-bill yields are unlikely to shift much should the SBP choose to cut the DR to 13% tomorrow.