ISLAMABAD: The Pakistan Stock Exchange is likely to witness some profit-taking activity during the upcoming week, but as the fundamentals have been strengthened and the general view of the investors have been, the interest rate has been peaked with the statement of the Governor State Bank of Pakistan that rate would turn positive soon, help driving the mood of the investors into positive arena.
Several key scrips have scored well and with cheaper valuations, investors are still betting on healthy fundamental stocks, having healthy positive margins like steel, auto, cement and some of the shares belonging to gas and oil sectors.
During the week, the market crossed 49,000 points, a level last seen in Jun ’17, and gained almost 2000 points or 4.2 percent on a week-on-week basis. The market maintained its bullish trend on the back of robust results that exceeded participants’ expectations. Along with this, a record-setting remarkable 27th consecutive session of strengthening of the PKR against the USD boosted investors’ confidence. The domestic currency gained around 8.3% or Rs 5.07 to a dollar.
Furthermore, Pakistan was granted the GSP+ extension for four years. Also, the auto sales number for Aug ’23 increased to 7600 units, up 49% on a month-on-month basis. Moreover, remittances for the month of Sep ’23 increased by 5% MoM to settle at USD 2.21 billion.
Ali Nawaz, CEO, Chase Securities said that the KSE-100 Index concluded at an impressive 49,493 points, marking its highest level in six years.
The market exhibited a bullish trend, driven by the anticipation that interest rates have reached their peak. Additionally, there is optimism regarding an upcoming reduction in fuel prices, slated for next week, which is poised to curb inflation. “The buoyancy in corporate results further fueled positive sentiment. Looking ahead, the market is poised to sustain its bullish momentum”, said Ali.
The ongoing corporate result season, combined with active buybacks and the government’s commitment to privatization and reforms, is set to bolster investor confidence, he said.
Saad Rafi, Head of Equities at Al Habib Capital, said that the index has gained almost 10 percent from its recent low mainly because both interest rates and inflation numbers have peaked. Moreover, he said that with a strong recovery witnessed in the domestic currency, it appears that petroleum product prices will go down. Even hoping for the best that the trend will continue where petroleum product prices see a downward spiral by the end of this month.
He pointed out that the market gain was mostly because of the expectation that interest rates were likely to scale down. Saad explained that one of the reasons for the market appreciation has been the improvement in liquidity where high net worth individuals diverted their funds in the equity market after crackdown in exchange and bullion markets.
“The market has already given 23 percent return and is the best performing market in the region, where valuations are still cheaper and index to see new highs as we have met all compliances of IMF and a positive nod from IMF to consolidate gains”, he added.
Shehryar Butt, Portfolio Manager at Darson Securities said that in the last 10 days stock market has performed well and gained almost 3500 points with healthy volumes which indicated that the confidence of investors has been restored and they are in an upbeat mood.
Continuous recovery in Rupee has strengthened the overall gains as signs of some improvement were witnessed in some of the key industrial sectors.
He said that cement sales has shown improvement; moreover, on a month-on-month basis auto sales also recorded appreciation with numbers trickling down that petroleum product sales would gain in the running month also sent positive signals. “The crackdown and reforms promised by the government to put the economy back on track also gave much-needed impetus to market men”, said Shahrayar.
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However, the word of caution for the upcoming week as hefty gains in the market might yield some profit hunting and the index might see some correction. The financial results arriving are healthy one but most eyes looking for the monetary announcement with continuous rupee gain there is a likelihood that the policy rate might see a rate cut.
But at the end of the day investors are worried about the sudden eruption of war between Hamas and Israel which increased the crude oil price by over five percent in just a day. Fear of conflict spreading to other regions in the world might force investors to move backward. “We anticipate the market to continue to ride the wave of positive momentum in the upcoming week, amid expectations of gas price adjustments to address the circular debt issues”, said Tahir Abbas, head of research at Arif Habib Ltd.
Along with this, results of certain scrips are expected to further fuel the positive sentiment of the market, he said. Abdul Azeem head of research at Spectrum Securities said that the KSE100 index is poised to remain positive next week, the continued appreciation in Rupee and expectation of a healthy result announcement to fuel the positive rally in the market.
“Moreover, the anticipation of fuel price dive by Rs 36/liter which slows down the inflation pace and reduces the increase in interest rates “, Abdul said. However, increases in gas and international oil prices can have a negative impact on the market.
“The uncanny predictability of USD/PKR going down by the standard one Rupee every day also belies market based exchange rate. Stating that the fair value of the Rupee is 400 or 200 is a disservice”, said Faisal Mamsa, CEO Tresmark. When the Rupee depreciated from 180 to 285, it didn’t lead to any significant increase in exports. While there was some reduction in imports, it disproportionately burdened the common people with increased inflation, wealth erosion, and decreased purchasing power.
Fair Value & REER
Having said that, new models to project fair value are available, including PPP, BEER, REER, etc. In Rupee’s case, REER would be approximately around 100 if parity was at 285. But REER in isolation would be ineffectual as many countries including China (134), India (116) and Bangladesh (112) have much higher REER rates. Other factors like interest rates, balance of payments, reserves & macroeconomic models start to weigh in.
The Goldilocks zone
Analysts and traders are of the opinion that if USD PKR goes below 275, it will evoke panic in the industry as exporters will find it hard to export and will provide an unreasonable subsidy to importers, and that is why they expect Rupee to slow down it ascend in the coming days, Faisal said.
The Rupee may trade around its July highs of 272/$ before consolidating around the 275 level. Considering our low level of reserves, a highly stubborn inflation and a manageable yet persistent CAD, Rupee would do well to trade in the Goldilocks zone of 275-285, and the government should pause its strength for a longer approach.
