The week ending on July 19, 2024, started with bullish momentum as the Pakistan Stock Exchange (PSX) rallied following the news that Pakistan and the International Monetary Fund (IMF) had reached a staff-level agreement on a US$7 billion Extended Fund Facility (EFF) program. This development was a significant morale booster for investors, generating a wave of optimism. However, despite the positive start, political tensions remained high, with the government considering a ban on opposition parties, which added an element of uncertainty to the market.
Market Performance Overview
The KSE-100 index, a benchmark of the top-performing companies on the PSX, exhibited a mixed performance throughout the week. Despite the initial bullish trend, the market faced volatility in the later sessions, ultimately closing with a modest gain of 173 points or 0.22% week-on-week (WoW), ending at 80,117 points on Friday.
Key Economic Indicators
One of the significant economic highlights of the week was the report on the Current Account Deficit (CAD) for FY24, which stood at US$681 million, representing a substantial decrease of 79% year-on-year (YoY). This reduction in CAD is a positive indicator for the country’s macroeconomic stability.
Additionally, issues surrounding Independent Power Producers (IPPs) agreements came to the forefront amid rising electricity prices, hefty capacity payments, and an uncontrolled circular debt. This prompted the government to order audits of several IPPs, reflecting a proactive approach to address the sector’s challenges.
Fuel and Energy Sector Developments
Fuel prices, particularly for Motor Spirit (MS) and High-Speed Diesel (HSD), saw an increase during the last fortnightly review. This adjustment in fuel prices is part of the broader economic management strategy but has implications for inflation and cost of living for the general populace.
Trade and Foreign Exchange
On the trade front, textile and food exports for FY24 were reported at US$16.7 billion and US$7.4 billion, showing an increase of 1% and 47% YoY, respectively. Conversely, petroleum imports dropped by 1% YoY to US$16.9 billion for the same period, indicating a slight improvement in the trade balance.
The average daily trading volume on the PSX rose by 5.6% WoW to 463.55 million shares, up from 438.83 million shares in the previous week. This uptick in trading volume signals increased market activity and investor participation.
Foreign exchange reserves held by the State Bank of Pakistan (SBP) increased by US$19 million on a weekly basis, reaching US$9.42 billion as of July 12, 2024. This increment in reserves provides a cushion for the country’s balance of payments and helps stabilize the currency.
Currency Market Dynamics
The Pakistani Rupee (PKR) appreciated slightly by 0.1% WoW, closing at 278.13 per US Dollar on Friday. This appreciation, albeit modest, is a positive sign of the currency’s stabilization efforts.
Major News Highlights
Several major news items influenced market sentiment during the week:
- Cement Dealers Strike: Cement dealers announced a strike in protest of high taxes, highlighting the ongoing challenges in the construction sector.
- Refinery Investments: Refineries withheld US$5 billion in investments over disputes regarding tax exemptions, showcasing the tension between the industry and government policies.
- Moody’s Report: Moody’s stated that the IMF deal would improve funding prospects for Pakistan, providing a positive outlook for the country’s economic stability.
- IMF Growth Projections: The IMF projected that Pakistan’s economy is likely to grow at 3.5% in FY25, offering a cautiously optimistic view of future economic performance.
- Consultation with UAE: The Government of Pakistan (GoP) planned to consult with the UAE regarding the Pak-Arab Refinery Company (PARCO), indicating ongoing efforts to attract foreign investment.
Sector Performance
Top Performing Sectors:
- Close-end Mutual Fund
- Automobile Parts & Accessories
- Property
- Vanaspati & Allied Industries
Worst Performing Sectors:
- Tobacco
- Jute
- Textile Weaving
- Power Generation & Distribution
Trading and Investment Activity
Insurance companies were the major net sellers during the week, offloading US$7.66 million worth of shares. On the other hand, foreign investors absorbed most of this selling pressure, with a net buy of US$9.33 million, indicating sustained interest from international market participants.
Top Performing and Lagging Stocks
Top Performing Stocks:
- AVN
- THALL
- JVDC
- SNGP
- EFUG
Lagging Stocks:
- PKGP
- PAKT
- GADT
- NBP
- INIL
Market Outlook
According to AKD Securities, the positive sentiment in the market is expected to persist, driven by attractive valuations, the IMF staff-level agreement, and continuous foreign inflows into equities. However, escalating political tensions could undermine investor confidence. Market participants will be closely monitoring upcoming corporate results, inflation figures, and the decisions of the next Monetary Policy Committee.
Detailed Analysis of Key Developments
IMF Agreement and Its Implications
The US$7 billion Extended Fund Facility (EFF) program agreed upon between Pakistan and the IMF is a critical development for the country’s economic stability. This program is designed to support Pakistan in overcoming its balance of payments crisis, stabilize its economy, and implement structural reforms. The agreement instilled confidence among investors, as it signaled a commitment to financial discipline and reform.
The EFF program is expected to focus on several key areas, including fiscal consolidation, monetary tightening, and structural reforms aimed at improving governance and reducing corruption. These measures are essential for creating a stable economic environment that can attract both domestic and foreign investment.
Political Tensions and Market Volatility
The political landscape in Pakistan remains tense, with the government contemplating a ban on opposition parties. Such measures could lead to increased political instability, which is often detrimental to investor confidence. Political uncertainty can lead to market volatility as investors become wary of potential disruptions to economic policies and reforms.
The government’s approach to managing political tensions will be crucial in maintaining market stability. Efforts to engage in dialogue and find common ground with opposition parties could help alleviate some of the uncertainties and support a more stable investment climate.
Trade and Export Performance
The performance of Pakistan’s trade sector is a mixed bag. On the positive side, textile and food exports have shown significant growth, reflecting the resilience of these sectors. The textile industry, in particular, continues to be a backbone of the country’s export economy, benefiting from competitive pricing and quality products.
However, the decline in petroleum imports, while slightly positive for the trade balance, also indicates challenges in the energy sector. Rising energy costs and the need for substantial investments in energy infrastructure remain critical issues that need addressing to ensure sustainable economic growth.
Foreign Exchange Reserves and Currency Stability
The increase in foreign exchange reserves by US$19 million is a positive development, providing a buffer for the country’s external payments. Maintaining and increasing these reserves is vital for currency stability and to meet international payment obligations.
The slight appreciation of the PKR against the US Dollar is encouraging, suggesting that the measures taken by the SBP are effective in stabilizing the currency. A stable currency is essential for maintaining investor confidence and ensuring the competitiveness of Pakistan’s exports.
Sectoral Performance Insights
The performance of various sectors provides insights into the broader economic trends:
- Close-end Mutual Fund and Automobile Parts & Accessories: These sectors have shown strong performance, indicating investor confidence in diversified investment vehicles and the automotive industry’s resilience.
- Property and Vanaspati & Allied Industries: The property sector’s performance reflects ongoing demand for real estate, while Vanaspati & Allied Industries’ growth indicates a robust food processing sector.
- Tobacco, Jute, Textile Weaving, and Power Generation & Distribution: The underperformance of these sectors highlights the challenges they face, including regulatory pressures, high costs, and structural issues.
Investment Activity and Market Sentiment
The significant net selling by insurance companies suggests a cautious approach, possibly driven by profit-taking or portfolio rebalancing. However, the net buying by foreign investors indicates sustained interest in Pakistani equities, driven by attractive valuations and positive economic outlooks.
Conclusion and Future Prospects
The Pakistan Stock Exchange’s performance in the week ending July 19, 2024, reflects a complex interplay of positive economic developments and ongoing political challenges. The IMF agreement is a significant positive, providing a foundation for economic stability and growth. However, political tensions and sector-specific challenges remain areas of concern.
Investors will need to navigate these uncertainties by focusing on sectors with strong growth prospects and staying attuned to macroeconomic indicators and policy developments. The outlook for the market remains cautiously optimistic, with opportunities for growth tempered by the need for careful risk management.