EUR 9.39 For Business Accounts Only

Pakistan Strategy: Yields signal a road less travelled for markets, (AKD Daily, Aug 23, 2019)

• Following the results of the latest PIB auction (cut-off yields for 5yr/10yr bonds falling 25/40bps to 13.55/13.15%), we draw conclusions for monetary policy based on the inverted yield curve (yield spread between 3yr & 10yr widened to 110bps vs. 70bps in the July) significantly weakening the case for further tightening
• Making the case for an inversion being positive for domestic equities, we highlight major characteristics of Pakistan’s financial markets (thinly traded debt market limits predictive power of yields) that negate many of the widely held international trends based on this phenomenon (harbinger of recession), while flagging inflation reads for the months of 3QCY19 (and any additional revenue measures adopted along the way) to crystalize our rate cut forecast
• For Banks, longer tenor bonds, despite relatively stuffed spreads still offers appeal to Banks given, flat private sector offtakes, fresh lending yield of 50bps, and risk-free return on these investments where credit risks could surge in the ongoing macro environment (CY19/20F cost of provisioning: 0.7/0.8%).
• Contrasting macro, debt market (10yr PIB vs. DR spread) and equity market (forward P/E) metrics to ascertain the interactions between these variables, we highlight the largely inverse movements arising from yield inversion (long term maturity yields exceeding short term DR).
• While an overlay of consumption growth highlights a slow recovery scenario, based on splitting period returns and dissecting monthly market performance over the period of recovering spreads in the past, higher monthly gains, lends weight to additional period gains for market participants to leverage returns, on the bumpy road to macro recovery (influenced by policy, geopolitics). We adhere to our bias for hedged-income E&Ps (OGDC and PPL) followed by conviction calls on HBL, MCB and UBL accompanied by the growth tilt on offer in LUCK, HUBC and ENGRO.