In line with our expectations, State Bank of Pakistan has decided a 100bps cut in the discount rate to 8.5%. This was stated by SBP Governor while unveiling the Monetary Policy statement.

SBP trims inflation estimates for FY15
SBP has reduced inflation estimates for FY15 in the range of 4.5% to 5.5% well below initial estimates of 8% on account of lower oil prices, curtailment of government budgetary borrowings and exchange rate stability owing to better foreign inflows. Recent reading of CPI for the month of Dec’14 showed that it came down by 4.3% YoY due to lower food prices and decline in petroleum product prices. As per AZEE estimates inflation to settle around 5.6% in FY15.

Trade deficit to remain under control
Due to lower global oil prices, trade deficit to remain in comfort zone going forward as oil import contribute around 33% in total oil imports. However lower cotton prices and stable exchange rate would also keep exports on lower side. We expect exports to remain lower due to lower cotton prices and weak global demand. Thus trade deficit to remain manageable while higher workers remittances would provide support to current account deficit. Furthermore recent successful completion of 4th and 5th review under IMF’s EFF and issuance of International Sukuk have also contributed to improvement in overall Balance of Payment (BoP) position.
Equity market to remain positive
As KSE-100 Index has gained 6.25% since 1st Jan’15 after releasing of lower CPI inflation number, it appears that market has rightly adjusted the above cut but selective companies to perform well. As Cement (top pick: LUCK, DGKC, MLCF, FCCL) and textile (top pick: NML) utilizes debt in their balance sheet. Power sector valuations likely to improve by 8.2% on account of lower risk free rate. Fertilizer sector players to enjoy the cut as well and we expect 7.8% increase in their earnings/valuations for CY15 but ENGRO and FATIMA are highly leveraged thus their earnings to improve by 10% for CY15.

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