INTERVIEW WITH KHURRAM SHEHZAD, HEAD OF RESEARCH INVESTCAPITAL MARKETS LTD.

KHALIL AHMED
(feedback@pgeconomist.com)
Oct 17 - 23, 20
11

Khurram Shehzad is an MBA in Finance with distinction of 'gold medalist' and currently pursuing to complete his CFA Charter holder professional qualification. He is presently heading InvestCap's Financial & Economic Research Arm with a core team of analysts covering a wide range of sectors with overall economic and financial coverage.

Prior to joining InvestCap, he served at First Capital Equities and Investment Management Limited as an Assistant Portfolio Manager, where he performed various fundamental analysis and techniques to make informed advises on investment portfolio management.

Mr. Shehzad has been awarded as amongst the Top-4 'Best Analysts' in Pakistan consecutively for 2008-09 and 2009-10 by the CFA (Chartered Financial Analyst) Institute Association, Pakistan Chapter.

He has also extensively covered various sectors of Pakistan's economy from industrials and construction to oil & gas and FMCGs with effective capital market strategies as senior research analyst.

He has also been extensively recognized and received credits on individual basis for best research backing to achieve Asiamoney Award for InvestCap as 'Best Domestic Debt House for 2010-11.

Mr. Shehzad has on his credit the supervision of the World Bank's mandate given to InvestCap Research in coordination with the CCP (Competition Commission of Pakistan) related to the fertilizer sector to improve sector's business market practices.

PAGE: THE SHARE MARKET HAS WELCOMED MORE THAN EXPECTED CUT IN THE POLICY RATE AS PERCEPTIONS OF CHEAPER CREDIT LINES COULD GIVE A TREMENDOUS BOOST TO THE INVESTORS' PURCHASING POWER. YOUR VIEWS.

MR. SHEHZAD: Since the policy rate cut came in as a blessing for investors and the corporate sector, as expected, the KSE100 opened three per cent (346pts) up with most of the leverage sectors' scrips glued to their upper circuit. The reaction was due as both equities and money market expected a policy rate cut of 100bps, initially followed by 50bps and so, while the rate cut of 150bps came in as a pleasant surprise for both the financial markets.

However, since 100bps rate cut had already been factored in, we may see markets getting normalized gradually while inflation numbers in the coming months may set market direction for the rest of the year.

Keeping in perspective inflation for the rest of CY11 (with expected hike in electricity prices, and respite in the int'l commodities amid fears of another global economic recession) further rate cuts could be in the pipeline.

As such, we expect markets to rally on account of expectations of upcoming rate cuts in the months to come. Conservatively speaking, we keep our valuations at a risk free rate of 13 per cent for now and wait for the upcoming PIB auction for more refined adjustment of our valuation models accordingly (we take 10-yr PIB as risk free that traded at 12 per cent as we pen this down).

In the meantime, a decrease of a 200bps in the risk free rate (our prior valuations for listed corporate were at 15 per cent) leads to an average eight per cent change in the target prices of our sample companies.

However, recent strain in Pak-US ties and closure of the IMF program may impact foreign funding in the short term that may impact PKR and inflation with market feeling the impact in the coming months. We maintain our positive long-term stance on the market with our continued liking towards fertilizers, oil & gas, IPPs, cements and telecom.

PAGE: WHAT ARE YOUR COMMENTS ON CONSECUTIVE CUTS IN POLICY RATES, FIRST 50BPS IN JULY, AND 150BPS OF LATE?

MR. SHEHZAD: In its monetary policy decision for Oct-2011, the SBP decided to cut policy rate by an aggressive 150bps, above street consensus. As far as a cut of 50bps was concerned, it was not sufficient at all and did not make any difference as yet while bigger cuts like the latest one of 150bps, may grease up the economic vehicle to an extent with gradual revival in the credit off-take to the private sector and fresh investments/expansions to fulfill local demand.

On the other hand, high interest rates have only chocked economic activity while inflation could not be suppressed and remained in the double-digits in the last 3-4 years. Therefore, supporting economic growth is much more vital and a precursor to improve general purchasing power, investments and savings while handling inflation could be done more through effective supply-side management instead of choking demand growth by increasing or maintaining high interest rates.