ISLAMABAD: The trend in the capital market during the upcoming week will solely depend on the announcement of the interest rate, which, according to several analysts, has now peaked; however, inflation is still scary, but one cannot rule out the surprise from the State Bank, but the adjustment has been due as the index in little over a month has scored more than 4200 points.
The consistent appreciation of the Pakistani rupee ended, resulting in the domestic currency closing at Rs 280.57 against the greenback, depreciating by Rs 1.77 or 0.64 on week-on-week basis. In the open market, the trend was subdued and moved between Rs 280 to Rs 281.50. The pressure bit mounted because of the fall in the foreign exchange reserves, declining by $220 million to $7.5 billion.
The index was down mainly because of the profit-taking last week despite a couple of positive news for the market men. The decision to increase gas prices clearly showed that the government had accepted one of the demands of the IMF to qualify for the next tranche. Moreover, the current account deficit of $8 million in September, along with the primary balance showing a surplus of around Rs 400 billion in the first quarter, is also a good Omen. Overall, the market closed at 50,944 points, increasing by 212 points or 0.42 percent on a week-on-week basis.
Foreigner selling was witnessed during this week, clocking in at $3.47 million compared to a net buy of $2.32 million last week. The major sales were witnessed in Technology and Communication at $4.73 million and Food and Personal Care Products at $0.4 million.
Salman Ahmad, head of institutional sales at Aba Ali Habib, said two main happenings could anchor the stock prices in the upcoming week. The State Bank of Pakistan announced monetary policy on Monday. The majority of the market players believed that the central bank might keep the interest rate unchanged. However, surprises could not be ruled out; the decision to raise the rate or cut would change the mood of the investors’ sentiment and the market to perform accordingly.
Salman said that another driving force for the market men has been the commencement of the IMF meeting. The government has achieved all the criteria of the IMF, including the latest one, which has been the primary balance showed a surplus in the first quarter, also a positive for talks. The talks with the IMF are likely to end with a positive nod and allow the country to get $700 million comfortably. He said the release to help strengthen the rupee, which recently saw some appreciation in the forex market on higher demand from importers and debt repayments.
Sheheryar Butt, Portfolio Manager at Darson Securities, said that the market has been in an overbought zone where the index could see the level of 50400 points as the index is seeing resistance around 51300. The index in the month period saw gains of 4700 points, with the index reaching over six and half year high mark, creating room for some downward correction. “Next week, the market will be driven totally by news happening as the State Bank to announce monetary policy on Monday where the expectation of 100 to 200 bps cut if this materializes the index to see a gain of around 1500 points”, he said. However, if interest goes up or even maintains the status quo, the index to see fresh pruning as the already gain in the index in the recent rally was mostly built in on grounds that SBP cut interest rate, Shehryar said.
Another important happening investors will look after will be the IMF and government talks. He said that if the IMF showed satisfaction and did not place any new harsh conditions, the government would face difficulties in fulfilling the market to see some downward correction.
He further said that the inflation numbers are also important, though they will come down as the government reduced the petrol price by Rs 40 per litre and other commodities also went down. But much would depend on the announcement on Oct.31, as international prices are moving both ways, where mostly crude oil prices recorded appreciation in most of the issues due to the Middle East conflict. He said there is a general belief that if petroleum product prices will see more decline, inflation will cool down, helping the central bank to cut interest rates.
Ali Nawaz, CEO of Chase Securities, said that the next week is full of events as the monetary policy statement will be announced on Monday, and Tbill and PIB auction will be held on Wednesday and Thursday. It will be followed by the IMF team arriving for review. The market is expected to consolidate at current levels and follow corporate announcements closely.
Abdul Azeem, head of research at Spectrum Securities, said that the KSE100 is poised to remain range-bound next week as an IMF review is due next week. However, unforeseen demand by the IMF resulting in a delay in review can have a negative impact on the market, he said. Moreover, the end of the results season, depreciation of PKR against USD, and increase in international oil prices can have a negative impact on the market.
“We expect the market to retain the positive momentum in the coming week”, said Tahir Abbas, head of research at Arif Habib Ltd. A status quo in monetary policy is poised to bolster investor confidence. Moreover, with the upcoming visit of the IMF team next week, the market will be closely monitoring developments in that regard.
Forex Market
“We know that the government has communicated that it doesn’t want interest rates to rise as it clearly impacts the borrowing costs and consequently the fiscal deficit to widen”, said Faisal Mamsa, CEO of Tresmark.
This is why the markets are opting to go long in bonds, with a view that interest rates have peaked.
The crucial IMF review will start from Nov 2. Historically speaking, the IMF winds up its review within 10 days. Most analysts believe the IMF’s focus will be on energy reforms, privatization, tighter monetary policy & economic reforms to circumvent the emerging geopolitical risks.
“We believe the Rupee will strengthen again once the IMF tranche is approved, but till then, it will be anchored at the 280 level”, Faisal said. With the current Middle East conflict, exporters are reluctant to sell it forward.
Some additional factors around the local currency are: – Forex Reserves declined by approximately $260 million- Friday REER on JP Morgan Index for rupee is at 102 – IFC committed approximately $1.5 bn in short & long term investments – Forward premiums declined further, indicating liquidity squeeze with Repatriation of profits and dividend reached to a 17-month high at $164 million.
