Pakistan Economy_SBP ups the ante! (AKD Daily, Jun 26, 2020)
Pakistan Economy: SBP ups the ante!
- In an emergent meeting yesterday, the MPC of the SBP has cut the policy rate by a further 100bps to 7%, clearly prioritizing economic growth over inflation. The latest move takes cumulative easing to 625bps over the past three months or so.
- The rate cut is a balancing act from the authorities, where lack of fiscal stimulus has been aptly balanced through emphatic monetary stimulus. The improved external situation post materialization of funding flows from multilaterals also provided the space for another bold cut when the domestic currency was under pressure.
- After an aggressive easing of cum 625bps and with the real interest rate on a forward-looking basis close to zero, the room for further easing has clearly narrowed. We expect the central bank to be on a ‘long pause’. The yesterday MPC meeting has rendered the scheduled meeting in Jul’20 as a non-event, where we expect the MPC to hold interest rate steady.
- With the timing more-so than the quantum of easing a surprise, it remains to be seen whether the latest interest rate cut acts as a catalyst to market performance. On the valuation side, however, market appears a clear long term buy with E/Y (earnings yield) at 15.6% vs. risk free rate (DR) at 7.0%, an astounding difference of 8.6%.
- Top plays include Cements (LUCK, MLCF), Fertz (FFC with D/Y at 11%) and Technology (SYS). Despite interest rate cuts, we continue to like Banks on valuations (MEBL, UBL).
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