July-Aug Investment Thesis

SBP announced that it will hold its first monetary policy meeting for the second half of the year on the 29th of July. The market, in expectation of that meeting, will begin to price in rate cuts and once the rate cut (expected 150 bps cut) occurs, dividend-yielding stocks will rally due to yield compression.

Post SBP’s June 2023 monetary policy meeting where a 150-bps rate cut was announced, high dividend-yielding stocks – particularly banking stocks – rallied. One can refer to the BKTI index for a clear visualization of this.

UBL, BAFL and MCB gave returns in excess of 25% within a few days of the meeting. A clear trend was observed between the secondary market for bonds and the stock market. Bond yields fell sharply but the stock market priced in the yield compression with a considerable lag. This lag might be shorter this time around as there is greater confidence regarding the possibility of a solid rate cut given that SBP has already begun the rate cutting cycle.

As the above shows, bond yields fell sharply over the last week hinting that yield compression might be in play in the stock market very soon. High-yielding banks should be an investor’s go-to in this scenario. The stock market has shown a tendency to price in yield compression first followed the pricing in of growth following it. The recent rally in the EV-related stocks (auto assemblers and battery manufacturers) depicts this could adequately.