The Pakistan Stock Exchange (PSX) continued its upward trajectory on Friday, as the benchmark KSE-100 Index surged past the 59,000 points level for the first time ever.
The index was boosted by improved economic indicators, the expected second tranche of the IMF loan, and the rising confidence of investors.
As per the PSX website, the KSE-100 Index recorded steady gains in the first hour of trading and touched 59,502.28 points, up 603 points from the previous close of 58,899.84 points.
At 11:10 am, the index was trading at 59,236.41 points, up 336.57 points or 0.57% compared to the previous session.
In a broader view, the KSE All Share Index also showed an upward trend and reached 39,647.95 points, after gaining 174.03 points or 0.44% compared to the previous close of 39,473.92 points.
The PSX has been performing well in recent months, as the country’s economy recovers from the impact of almost one and half year turmoil and political instability. The index has gained more than 16,000 points since the start of the year, making it one of the best performing markets in the region.
What could be the reason behind this?
According to a recent report by Profit, for an analyst looking at the market, there are many different pieces of information that can impact the index in a single day let alone a month. When a period of 3 months has to be considered, it is vital to note that there are different developments on the macro level which seem to have triggered the recent PSX rally.
One of the biggest factors ailing the market and the corporate sector is the fact that interest rates are too high. Since the end of June 2023, interest rates were raised to 22 percent and there were no signs that the rates would be cut in the near future. The recent T-bill auction has been carried out at 300 basis points lower than the previous rates and there are expectations that the next monetary policy will see a decrease in the interest rates. This is a glimmer of hope that a change is on the cards.
Any such cut is attractive for the corporate sector and the capital markets. The corporate sector can benefit with a reduction in their finance costs which had been doubled from FY 2022 to FY 2023 and the profitability of the corporate sector will see an increase which is being priced in by the stock market. In addition to that, the investor will find the stock market more attractive as well as the valuations are still very low and bank deposits will be seeing a lower rate of return trickling some of these deposits into the stock market as well.
Another factor that can be seen as a positive for the stock market is the fact that Morgan Stanley Capital International (MSCI) added a record 56 Pakistani companies to its Frontier Market Index and Frontier Market Small Cap Indexes. This is a positive development for the index and gives support to the rising index.
The most recent development on this is the green light given by the IMF on the successful negotiations concluding between the interim government and the IMF for the first review which gives access to $700 million of funding. As economic indicators show an improvement, these triggers are being taken in conjunction with each other as investors flock towards the market.
Experts still feel that the market price to earning ratio is still hovering around 3 to 4 times which was 8 to 9 times in better times. With the expected cut in interest rates in the medium to long term, it can be expected that market prices will move towards the rates that justify the price to earning ratios seen in the past.