ISLAMABAD: The domestic currency of Pakistan against the US dollar is predicted to strengthen further across Pakistan in the upcoming week, boosting investor sentiment. Market observers eagerly await the monetary policy announcement regarding interest rates, with consensus suggesting a 100 basis point increase. However, concerns arise that an interest rate hike exceeding 200 basis points may lead to a fresh decline in equity values.
During the outgoing week, Pakistan’s stock market index experienced a positive trend, rising by 701 points or 1.5% to close at 46,013 points. The week started with positive developments related to the Special Investment Facilitation Council (SIFC), as the Army Chief met top business leaders to address issues such as the smuggling of dollars, petrol, urea, and other goods from border areas.
Key sectors, including banking, power, oil marketing companies (OMCs), and exploration and production (E&P) companies, played a significant role in contributing to the stock market’s rise. However, market activity remained subdued throughout the week as investors adopted a cautious stance, awaiting further clarity on SIFC initiatives, reform efforts, and potential policy rate adjustments.
Foreigner buying continued, with net purchases amounting to $0.6 million, although this was lower compared to the previous week’s net buy of $3.3 million. Average trading volumes declined by 31%, reaching 146 million shares, and the average value traded decreased by 36% to $17 million.
Market analysts attributed the stock market’s bullish trend to the sharp recovery of the Pakistani rupee and efforts to crack down on foreign exchange money exchanges to prevent smuggling and reduce inflation.
Ali Nawaz CEO of Chase Securities said that the outgoing week began with positive developments on the SIFC (Special Investment Facilitation Council) front, as the Army Chief convened a meeting with the country’s top business leaders. During the meeting, he expressed a strong commitment to putting an end to the smuggling of dollars, petrol, urea, and other goods from border areas.
He added that notably, the banking sector, power industry, oil marketing companies (OMCs), and exploration and production (E&P) companies played a significant role in contributing 360 points to this rise. Midweek, a T-Bill auction took place, resulting in a noteworthy uptick in yields, ranging from 122 to 250 basis points. Throughout the week, market activities remained relatively subdued, with investors adopting a cautious stance as they awaited further clarity on SIFC initiatives, reform efforts, and potential policy rate adjustments.
Uncertainty surrounds the State Bank of Pakistan’s (SBP) upcoming policy announcement which has contributed to bullish sentiments.
The crack-down on smuggling and efforts to curb the dollars influx have supported the rupee’s recovery. The caretaker finance minister indicated ongoing talks with the International Monetary Fund (IMF) and expectations of receiving an installment by December, bolstering foreign exchange reserves. Discussions are also underway with other donor agencies, with a target of securing funding of $6 billion for the current fiscal year.
Ahsan Mehanti from Arif Habib Corp. said that the stocks carry bullish trend on ongoing sharp rupee recovery and crack down on FX money exchanges to prevent smuggling and ease off inflation. “Uncertainty remains over the SBP policy announcement next week. -Speculations ahead of Saudi Crown Prince visit this weekend to deliberate likely $25 billion commitments under SIFC initiatives from Gulf Countries to played a catalyst role in bullish sentiments, Ahsan said.
Market experts anticipate that next week’s monetary policy announcement could result in an interest rate increase of up to 200 basis points. Heavy participation in short-term treasury bills suggests that buyers remain uncertain about the interest rate outlook.
Saad Rafi, head of Equity Sales at Al-Habib Capital said that next week the State Bank of Pakistan might increase interest rate where market expectation mostly has been that rate might go up by 200 bps. Heavy participation in three months showed that people are still inclined towards short tenor treasury bills indicating that buyers are still uncertain about the interest rate outlook. He said that crack-down has been a good step and helped the rupee to recover. The caretaker finance minister hinted that the talks with the IMF are going and expects to get installment by December, to help boost reserves. The FM also discussed the funding requirement would be $6 billion for the current fiscal year and talks have been under way with other donor agencies and hopeful to get within the timeline.
The currency market experienced significant changes, with the rupee appreciating by almost 22 rupees against the US dollar. A positive trend in the domestic currency often coincides with a decline in share prices. Therefore, market participants are optimistic about a positive trend, driven by the rupee’s recovery.
Shahryar Butt, head of portfolio investment at Darson said so far the stock market showed healthy performance in September and gained 868 points. Coming week would be an eventful one where recovery in domestic currency by almost 22 rupees against dollar sent positive signals.
Whenever there has been gain in the value of dollar share prices have slumped. “So we are helpful that the market would witness a positive trend on the back of reverse gear heralded in greenbacks”, Shahryar said.
Key announcements expected in the upcoming week include remittances figures, which may reveal changes due to variations between the interbank and market exchange rates, encouraging overseas remittances through parallel channels. Additionally, the monetary policy announcement will be closely watched, with market expectations factoring in a 100 basis point interest rate increase. Any rate hike exceeding 200 basis points could lead to a bearish trend in the stock market.
Market experts remain positive about the stock market’s performance in September, with hopes for further rupee recovery. However, concerns about inflation due to potential petroleum price hikes and possible protests by lawyers against the government may negatively impact the market.
Abdul Azeem, head of research from Spectrum Securities said that KSE100 index is expected to remain positive next week as the stock market almost incorporated the 150bps interest rate hike impact. Moreover, low possibility of further PKR appreciation against the USD, reducing gap between open market and interbank market rates, positive developments regarding the circular debt management plan and increasing COAS support to the economy expected to support the market sentiments, he added. “However, anticipation of higher inflation due to likely hikes in petroleum prices and potential protests against the government by lawyers could negatively impact the market”, Abdul said.
Faisal Mamsa, CEO of Tresmark said that crackdown and measures to curb smuggling worked wonders for the market and as a result Rupee strengthened by Rs 4 in interbank & Rs 26 in open market (against $). By seeing how administrative measures have transpired over last week, members of the MPC will be tempted to keep the policy rate unchanged. If they had thought of weaponizing interest rates to combat inflation, they would have hiked rates earlier and if, after taking these administrative measures’, Faisal said, they see some unwinding of speculative positions/asset buildup, & slow down of capital flight/dollarisation, they may want to wait longer. This could rattle the money markets which have factored in a 150-200 bps rate hike. While it would be welcome for the equity markets which have seen challenging conditions lately.
Exports and remittances have gone down which might deplete foreign exchange reserves, Saad Rafi from Al-Habib Capital said. He said the currency might appreciate further but not with the big margin, on the back of government expectation of funding of $6 billion during the remaining part of the fiscal year. Business community has been hopeful of improving the business environment but quick resolution in circular debt issues.
Pakistan’s Financial Market Outlook:
The KSE100 index is expected to remain positive.
The market has already incorporated the impact of a 150 basis points interest rate hike.
Expectations include lower appreciation of the Pakistani Rupee against the US dollar.
Ongoing administrative measures and capital flight control will influence the monetary policy committee’s decision.
The equity market is expected to benefit from a potential delay in interest rate hikes.
Challenges in the foreign exchange market may lead to Rupee consolidation.
Speculative positions and asset buildup may slow down.
A significant rate hike above 200 basis points could impact money markets but benefit equity markets.
Factors such as reduced remittances and exports could deplete foreign exchange reserves.
Improvement in the business environment and resolution of circular debt issues are anticipated.
