Morning Shout Pakistan Daily Notes Macro: Some more respite as IMF review ends successfully The successful conclusion of talks under the IMF’s fourth and fifth review comes in as a major breakthrough and is likely to pave the way for an approval of US$1.1bn tranche in early Dec‐14. From KSE’s perspective, this adds to positive news flows on the economic front and builds a case for unwinding of recent de‐rating of vals from 8.3x (CY15E earnings) at the start of political stalemate in Jul‐14 to current 7.5x, in our view. An added catalyst should be the expected 50bp easing in Nov‐14 MPS, where (1) exchange rate stability on expectations of FX surpassing 3‐months of import cover by Jun‐15, and (2) high real rate form a compelling case. Going forward, we highlight pending Dec‐14 quarter benchmarks that will require political consensus include (1) privatization of PIA and (2) passing of SBP autonomy bill, while (3) filling vacancies in NEPRA board and debt management office will likely be scrutinized as well. Crucial milestone achieved for IMF installment… In an important development over the weekend, the government and the IMF announced successful conclusion of staff level discussion under fourth & fifth reviews of IMF’s EFF facility. A clean chit from the IMF staff mission has effectively paved the way for the eventual release of US$1.1bn tranche by mid‐Dec following an exp ected approval from the IMF Board. The development comes in as a major break‐through and should raise investor’s confidence on the continued progress on reform agenda and economic stability despite recent set‐back on government’s divestment plans and political stalemate in the past few months. …further building a case for market rerating… 10 November 2014 Sarah Mazher Kamran Sarah.kamran@kasb.com Mohammad Fawad Khan, CFA Fawad.khan@kasb.com KASB Securities Limited +92 21 111 222 000 Chart 1: Real interest rate at 4%; DR cut seems imminent in the Nov MPS 500 400 300 200 100 0 ‐100 ‐200 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan‐11 Jun‐11 Nov‐11 Apr‐12 Sep‐12 Feb‐13 Jul‐13 Dec‐13 May‐14 Oct‐14 Rea l ra te DR Source: SBP From the equity market perspective, solid progress on release on IMF installments adds to a slew of positive news flows on economic front and builds a case for unwinding of recent de‐ rating of market’s valuation from 8.3x (CY15E earnings) at the start of political stalemate in Jul‐ 14 to current 7.5x, in our view. We believe equity market is likely to take a more lenient view on government’s decision of scrapping the bidding process for divestment of OGDCL’s shares given difficult timing, legal and market challenges. Energy stocks are likely to be in the limelight given likely renewed optimism on resolution of long‐standing circular debt issues. Oil price volatility has already resulted in big underperformance of energy stocks relative to broader KSE‐100 index in the past three months. Similarly, details on government‘s action plan for meeting FY15 fiscal target of 4.8% remain crucial for the development spending target and in turn for cement offtake. We sense a sharper‐than‐expected cut in development spending may be warranted which can nominally drag cement demand growth in FY15. We remain positive on E&Ps, Banks, Cements, IPPs and select fertilizer. …and setting the stage for policy easing in Nov‐14 We reiterate our call of potential 50bp discount rate cut in Nov‐14, where our view is strengthened by IMF’s expectation of reserves surpassing 3‐months of import cover (~US$12.4bn) by end of FY15, signaling a potential increase of ~US$3.8bn from current levels. This points towards relative stability in exchange rate going forward, which has been a key criteria for the SBP in its MPS stance. In addition, soft Oct CPI, over 400bp real rate, reduced political risk and firm commitment of the government, reiterated in recent IMF talks, towards future reform agenda poses compelling case for DR cut. We point out that the reference in the IMF’s latest statement of SBP remaining committed to prudent monetary policy should largely be seen in the context of recent cautious approach of SBP (DR unchanged in two MPS in 1QFY15) rather than any future commitment to keep DR unchanged. Refer to important disclosures on page 3 Page 1 morning shout Key positives highlighted by IMF KSE‐100 Intra‐day Movement The IMF’s mission statement has a relatively positive undertone and highlights improving macroeconomic landscape amidst challenges. These include (1) expectations of FX reserves surpassing 3‐months of import cover by end of June 2015 (which is crucial for a stable exchange rate outlook); and (2) growth projection at 4.3% for FY15, lower than the government’s target of 5.1%. However, while post‐flood damage GDP growth may be short of target by 0.5‐1%, we may see upward revision in IMF’s forecast going forward in our view on potential increase in wheat crop and demand outlook. In addition, as per the statement, waivers have been granted on three areas where slippages were seen in quarters ending Jun‐14 and Sep‐14, i.e. (1) net international reserves (2) net domestic assets of SBP and (3) government borrowing from SBP. 30,995 30,885 30,830 30,775 30,720 Building political consensus is crucial for progress on reforms Detailed reports including revised MoUs signed between Pak authorities and IMF alongside the talks will likely shed more light on conditions, if any, that may need to be met before Board’s approval of tranche, and certain revisions in quarterly macro targets for December onwards. That said, we flag that future progress on a few important issues is contingent on building political consensus among ruling and opposition parties though government’s commitment on reform program stands re‐affirmed. To this end we highlight pending qualitative benchmarks that will likely be under scrutiny for now (1) legislation to enhance SBP autonomy (long pending), (2) privatization of 26% stake of PIA's shares to strategic investors and privatization of three distribution companies, and (3) details on settlement of GIDC collection issue (legal challenges) is another key area that needs to be tracked due to its fiscal implications (revenue collection of PRs145bn or 0.5% of GDP targeted in FY15). Low 30,671 30,665 9:15 AM 10:39 AM 2:33 PM Source: KSE Index Data & Volume Leaders KSE30 KSE100 KSE All Share OGDC LUCK PSO PPL NML ` OGDCL sell‐off put off on poor response (BR) The CCOP in its meeting held here on Saturday decided not to go ahead with divestment of 10 percent of government stake in OGDCL. Finance Minister Ishaq Dar chaired the meeting through a video link from Dubai. The Chairman Privatisation Commission, Mohammad Zubair, informed the meeting that a total of 311 million shares were offered for sale in the market at the floor price of PRs216/sh and after three days of open bidding demand for only 52% shares could be ascertained. High 30,999 30,940 3:57 PM Close % Chg 20,328.32 0.8% 30,930.04 0.9% Vol. US$ mn 65.50 99.20 22,694.15 225.02 451.48 344.69 206.31 119.49 129.39 7.32 5.66 5.29 4.95 4.89 1.0% 1.5% ‐0.3% 1.6% 2.5% 5.0% Source: KSE KSE‐100: Top Gainers & Losers JSCL TRG Technical View Ahmed Hanif ahmed.hanif@kasb.com KSE‐100: Steady closing at all‐time highs to continue uptrend MARI HUMNL GATM The index (on Nov 7) formed another all‐time high, tested the 31,000 level and gave another positive closing above its previous all‐time high. PCAL BATA Whenever the index closes above its previous all‐time high (in this case, 30,640), it tends to form a new high unless it closes below that level (30,640). With the index closing above 30,640, it is thus set to form new highs. PKGP The next target of the index could be 31,500‐31,800 area, which is the bullish trend line resistance. Only a closing below 30,640 could make our view neutral. JDWS ARM Cement sector (LUCK, MLCF and DGKC) and banking sector (MCB, HBL and FABL) are looking attractive active at the current levels. It is recommended to accumulate positions on weakness. ‐6% Source: KSE ‐3% 1% 5% Page 2 morning shout World Markets and Commodity Prices International Equity Markets Asian Markets (Closing Rates) Price All Ordinaries Shanghai Composite Hang Seng BSE 30 Jakarta Composite KLSE Composite Nikkei 225 NZSE 50 Straits Times Seoul Composite Taiwan Weighted KSE‐100 Index European Markets (Last Trading Session’s Rates) Price Abs. Chg. % Chg. Abs. Chg. 5,522.10 2,418.17 23,550.24 27,868.63 4,987.42 1,824.19 16,880.38 5,418.99 3,286.39 1,939.87 8,912.62 30,930.04 42.9 ‐7.7 ‐99.1 ‐47.3 ‐46.8 ‐7.8 87.9 15.4 ‐4.6 3.4 21.6 266.3 0.8 ‐0.3 ‐0.4 ‐0.2 ‐0.9 ‐0.4 0.5 0.3 ‐0.1 0.2 0.2 0.9 ATX BEL‐20 CAC 40 DAX AEX General Swiss Market FTSE 100 % Chg. 2,196.69 3,144.59 4,189.89 9,291.83 411.43 8,816.92 6,567.24 ‐2.7 ‐19.3 ‐37.8 ‐85.6 ‐1.7 ‐47.0 16.1 ‐0.1 ‐0.6 ‐0.9 ‐0.9 ‐0.4 ‐0.5 0.2 17,573.93 4,632.53 4,160.51 2,031.92 19.5 ‐5.9 ‐3.6 0.7 0.1 ‐0.1 ‐0.1 0.0 American Markets Dow Jones Ind. Average NASDAQ Composite NASDAQ ‐100 S&P 500 Index, RTH Source: Bloomberg Foreign Portfolio Investment in Equities Country Day (US$mn) Pakistan India Indonesia Japan Philippines South Korea Sri Lanka Taiwan Thailand Vietnam Abu Dhabi Qatar WTD (US$mn) (3.2) 170.5 (15.1) N.A (9.2) (43.7) 5.6 69.7 41.3 5.1 7.1 8.6 MTD (US$mn) 26.0 408.0 (14.9) 8,054.7 (17.9) (43.7) 6.1 797.4 129.9 8.9 7.1 8.6 YTD (US$mn) 12M (US$mn) 26.0 408.0 (14.9) 5,177.1 (17.9) (292.7) 6.1 797.4 129.9 8.9 16.9 27.2 421.7 14,367.0 3,951.4 2,046.5 765.0 5,801.0 109.2 11,994.0 (455.2) 181.2 1,065.3 2,339.3 441.6 17,911.7 3,328.1 44,010.4 546.9 4,537.2 111.4 12,816.7 (2,964.9) 242.6 1,227.6 2,497.8 Date 07‐11 05‐11 07‐11 31‐10 07‐11 07‐11 07‐11 07‐11 07‐11 07‐11 07‐11 07‐11 Source: Bloomberg, NCCPL Forex and Money Market snapshot 6‐Month KIBOR (Offer) 12‐M T‐Bill (Average) 10‐ year PIB (Average) PkR/ US$ Source: KASB Money Market Current Previous Chg. 10.12 9.85 11.88 102.34 10.15 9.93 11.98 102.49 ‐0.03 ‐0.08 ‐0.10 ‐0.15 Commodity Prices Price WTI (Crude Oil) Gold CRB Index Source: Bloomberg 78.65 1,177.98 270.66 Abs. Chg. % Chg. 0.7 36.1 1.5 0.9 3.2 0.6 KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. 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