ISLAMABAD: Pakistan Stock Exchange (PSX) is likely to experience limited gains as the overall market sentiment leans towards a corrective course in the upcoming week. Analysts believe that the recent surge in the index, driven by the Standby Agreement with the International Monetary Fund (IMF), which resulted in a gain of 3,615 points or 8.7%, may lead to profit-taking. During the last 10 trading sessions, the market capitalization witnessed a rise of Rs 503 billion, leading some optimists to speculate that the index may touch the 46,000-point level.
Saad Rafi, Head of Sales at AL Habib Capital Markets, stated that the equity market’s rhythm for the next week would be mixed to positive, with gains expected to be limited, and a significant rally of 1,000 points a day unlikely. The IMF agreement created euphoria in the market, resulting in a 4,000-point increase, but profit-taking ensued during the last two sessions of the previous week.
However, the extension of profit-taking is expected as the conditions outlined in the Standby Agreement indicate that the government needs to take further steps to increase tax revenues. This has raised concerns about the possibility of a “mini-budget” and its potential impact on reducing company profits, which may lead to further downward correction.
Saad highlighted that the State Bank of Pakistan is expected to keep the interest rate unchanged, but market rumors suggest a potential one percent increase to align with the IMF’s conditions. Sheheryar Butt, Portfolio Manager at Darson Securities, anticipates that the market will remain in corrective mode due to profit-taking triggered by a steady rise of 5,000 points in the last 12 sessions. The fear of rising interest rates, influenced by the IMF’s requirement for a tighter monetary policy stance, as well as an increase in petroleum product prices, is likely to restrict the market’s upward movement within the range of 44,600 to 45,500.
Investors are expected to adopt a cautious approach as they await the IMF’s verdict on raising the tax revenue base. Rumors circulating that the government may opt for a mini-budget to meet the mammoth revenue target of Rs 9,400 billion have further added to the cautious sentiment. Faisal Dedhi, Deputy Head of Sales at Foundation Securities, noted that share prices already surged following the IMF-Pakistan agreement, resulting in an index jump of over 4,000 points. The profit-taking observed was driven by individuals, institutions, and corporations.
Faisal expects the market to remain volatile due to the announcement of the monetary policy on July 31, 2023. He believes that given the inflation expectations for the remaining part of the fiscal year, the central bank should maintain the status quo. However, the new IMF agreement, which includes the condition of maintaining a tight monetary policy, may lead to a 100 basis points increase in the interest rate.
In terms of foreign exchange, Faisal predicts a stable rupee with no significant fluctuations. The arrival of funds to strengthen foreign exchange reserves is expected to improve the reserves by $4.2 billion, exceeding $14 billion in the next week, suggesting stability in the forex market in the short term.
Abdul Azeem, Head of Research at Spectrum Securities, believes that the market is poised to remain positive in the upcoming week as the government is likely to finalize circular debt numbers and develop plans to restructure the energy sector in accordance with IMF program obligations. This move is expected to attract investment in the energy chain, including power, gas, and oil sectors. However, the market may experience a downturn in anticipation of an interest rate hike by the State Bank of Pakistan to comply with IMF’s Standby Arrangement implementation requirements. Additionally, the market will be influenced by the IMF’s statement on the need for steadfast policy implementation and the expected raise in power tariffs, which will contribute to increased inflation.
Furthermore, the market may be negatively impacted by the rise in oil prices due to supply cuts by Saudi Arabia and Russia, as well as increasing international demand.
Pakistan Stock Exchange Likely to Witness Upward Trend
Shahab Farooq, Head of Research at Next Capital, is optimistic about the market heading upwards in the next week, citing the country’s gradual progress towards political and economic stability. Energy sector stocks, particularly those related to the resolution of circular debt, are expected to lead the market. Stocks expected to announce positive results for the end of June, including banks, are also likely to contribute to the positive sentiment.
According to a report by AKD Securities, the market is expected to remain positive due to the strengthening of foreign exchange reserves, improvements in the PKR/USD parity, and attractive valuations with a sub 3x P/E ratio. However, upcoming results may exert pressure on bullish sentiment due to the retrospective imposition of the super tax. Therefore, investors are advised to exercise caution in stock selection, focusing on companies with dollar-denominated revenue streams (Tech and E&P sectors) or those offering healthy dividend yields.
The report by Arif Habib suggests that the Pakistan Stock Exchange is expected to reach 56,000 points by June 30, 2024, driven by better economic activity and a resurgence in demand. It also predicts a return of 24% in FY24 for the KSE-100 index, citing the end of the balance of payments-led economic crisis and the expected return to historic mean multiples. The report highlights the clarity and assurance provided by the IMF program regarding the economic plan for the next nine months. It anticipates easing external sector pressures, with State Bank of Pakistan reserves projected to reach $10.6 billion by FY24. The report further predicts an average CPI of around 21% in FY24 and expects monetary easing to begin in the second half of the fiscal year.
In terms of specific sectors, the report suggests significant growth in deposits and elevated interest rates that will keep banking sector earnings upbeat. The resolution of circular debt in the gas sector is expected to keep energy and petroleum companies in the limelight. The fertilizer sector is projected to benefit from pricing power and a recovery in demand following floods. The cement sector is expected to experience a demand recovery in FY24, with declining coal prices, improved energy efficiency, and higher retention prices driving profitability. The power sector is anticipated to benefit from timely tariff resets, alleviating cash flow concerns while restricting circular debt. Lastly, the oil and gas marketing companies (OGMCs) are predicted to improve earnings due to higher margins and relatively better offtake in FY24.
