Dear Clients,

We project N-CPI to register at 11.02% during Apr’21 (consensus: 10.7%-11.0%) as against 9.05% recorded in Mar’21 and 8.53% in Apr’20. The increase in inflation projections during Apr’21 is largely a product of: 1) higher food inflation (+2.1% MoM), and 2) dissipation of the high-base effect. Cumulatively, N-CPI is projected to average 8.62% YoY during 10MFY21 as against 11.24% SPLY.

– Ramzan pushes food prices even higher: The increased demand for food products in Ramzan, coupled with the prevalent supply issues, has pushed food prices even higher. We project food inflation to register at +2.1% MoM/+15.7% YoY in Apr’21, emanating from rising prices of key commodities in the food basket, including Tomatoes (+53% MoM), Potatoes (+17% MoM) and Wheat (+3% MoM).

– …while core inflation continues to remain under control: Core (NFNE) inflation has remained under control at 6.5% FYTD, highlighting contained demand in certain segments amidst the pandemic. Since FY21, N-CPI has outpaced core inflation by 2.1pps, suggesting the recent trend of elevated inflation can be credited largely to food and energy, which have primarily faced supply-side constraints.

– Tariff hikes to keep inflation outlook high: The planned electricity tariff hikes, in-line with the IMF program and the circular debt management plan, are projected to keep inflation upward sticky for the remainder of CY21. Potential respite to inflationary pressures, however, may emanate from the strengthening Pak Rupee (+4% YTD) and easing oil prices. Nevertheless, we project N-CPI to average 9.03% in FY21, slightly above SBP’s projection range of 7.0-9.0%.

– Negative real interest rates likely to continue: We project the SBP to continue depicting comfort over the prevalent negative real interest rates (estimated at -4.0% during Apr’21) as economic recovery takes precedence over inflationary pressures. In spite of the IMF program resuming, the SBP is likely to remain wary of the 3rd COVID-19 wave and its potential to instigate stricter economic restrictions. Moreover, the current account surplus (+USD 969mn during 9MFY21) gives the SBP ample room to keep interest rates low without the risk of inducing external account imbalances.

– Secondary market yields reflecting our stance: Since the start of Apr’21, secondary market yields have declined by 19bps – 56bps over different tenures on concerns over the 3rd COVID-19 wave and the imposition of stricter economic lockdowns. If the trend persists, we may be compelled to further push-back our stance on the eventual monetary tightening from current expectations of Jul’21.

– Cyclical stocks remain our preferred plays: We continue highlighting our preference for cyclical stocks as we believe the long-term macroeconomic recovery theme will play out. We recommend building positions in cements and automobiles sector in which our top picks include LUCK (TP: PKR 1,342/sh; upside 56%), DGKC (TP: PKR 189/sh; upside 63%), and INDU (TP: PKR 1,926/sh; upside 77%).

KASB Research