Pakistan Strategy: Policy rate hiked; SBP staying ahead of the curve
We positively view central bank’s decision to lift policy rate by 100bps in its bi-monthly policy review. The latest action adds to the list of similar measures by both fiscal and monetary authorities aimed at stabilizing country’s fiscal and external account.
At a time when the fiscal authorities have started to respond to growing macro challenges, the latest above-expected rate hike appears an attempt by the central bank to keep a lid on inflationary expectations.
We now expect at least one more rate hike of 50bps before Mar’19 (policy rate of 9.0% vs 8.5% earlier) and see possibility of further devaluation in near-term (4-5%). Latest data suggests early signs of slowdown in aggregate demand.
Concerns on rate hike and fiscal deficit are overplayed though agg. demand is likely to slow down as a result of policy action, in our view. Our bottom-up analysis shows <2% downside in our estimates for corporate earnings from 100bps hike in policy rate.
In terms of recent market performance, the overhang from politics in 1Q19 is giving way to uncertainty on further policy action and lack of clarity on FX flows. We expect market to continue its range-bound activity. Cyclical names may remain out of fashion for now. Steel, IPPs, & Consumer Durables are three most leveraged sectors in our universe.
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