Drivers of the recent PSX rally?

One can never ever predict the markets – maybe one should not even try – but in the short run, at least Pakistan's financial markets are responding to the government's recent performance figures, which have inculcated a positive feeling about the economy and their own growth prospects among leading companies in Pakistan. Government budget FY22 has reduced capital gains tax from 15% to 12.5% which should please the market even more.


May 2021 saw Pakistani stock exchange PSX trade ever-higher trading volumes every day. Pakistanis rejoiced over the ongoing bullish trend, with Asad Umar tweeting on May 26 that “New daily traded volume record set on the Pakistan Stock Exchange.

Today’s volume exceeded the previous record by 39 percent,” The minister stated that the record was an indication of the market’s “reacting to signs of sustained recovery.” With “The successful containment of the COVID third wave…though risk still remains…also adding to positive sentiment.”

May 2021 saw an all-time high average volume per day, with 774 million shares. It is up 277 percent compared to May 2020, when the average traded volume was 206 million shares, and up 119 percent MoM compared to April 2021.

Since then, there has been a debate on whether the soaring PSX is an indicator of economic growth or just market speculation. Experts have termed May 2021 in Pakistan as “a month of all-time high volumes.”

Furthermore, along with volume, values have also increased, with the KSE-100 index gaining 8.1 percent during May, the highest increase in months.

Read More: SBP to hold rate as economy battles inflation and COVID

Economy numbers shining

Market participants are happy with the government’s management of the third wave of the pandemic, as Pakistan has surfed safely through.

Macro indicators are all showing increases; GDP growth rate increased to 3.94 percent and is expected to be over 4 percent on the whole year; stock market analysts from Arif Habib securities and AKD securities think it could end the full year higher. Aqeel Kareem Dhedhi, AKD Securities, estimates it could hit 4.6 percent for the full fiscal year.

Increased capital inflows are coming into the country both from remittances and from the Roshan digital accounts. Remittances have hit $24 billion in the ten months of FY21, and investment in government bonds under Roshan Digital Accounts have also increased; currently, they have attracted around $1b since they started in September 2020, and it is estimated that these could be $2 billion by December 2021.

According to the SBP, Pakistan’s foreign liquid position is at $23.29 billion as of May 28, 2021, the highest level since 2015-16 when it stood at 23,099 billion.

Furthermore, the current account is now in a stable position; through the first ten months of FY21, the current account was in surplus of $800mn, a turnaround from the $4.7bn deficit during the same period last year, and the Rupee has appreciated from a low point close to 168 is now trading around 154.

Read More: Mission Possible – Transforming to BLUE Economy

Growth budget

Market players are getting excited with Shaukat Tarin coming in as finance minister and his comments that he will be focused on creating economic growth as a target. This has seen a jump in stocks in those sectors, which are expected to benefit and those that the government is helping through its construction package.

This can be seen in the Engineering and Cement sector, which has seen 18.1 percent and 12.3 percent growth month-on-month. Other construction-related sectors are also doing extremely well.

The recent Federal Board of Revenue (FBR) indication of the third consecutive month of exceeding the revenue collection target has been viewed positively by the market. It strengthens Finance Minister Shaukat Tarin’s hands to not take an aggressive stance on taxation of corporates and elsewhere.

The FBR surpassed its collection target by 8 percent to hit Rs386 billion in May, the third highest collection in the second half of the current fiscal year (FY21), and as compared to the collection of Rs229 billion in May 2020, revenue collection saw a growth of 69 percent.

PSX rally
Source: PSX & AKD Research

Speaking to GVS, AKD securities economist Mr. Hamza Kamal said that the government is likely not to take any strict revenue measures, and this expectation of non-intervention in the sectors has led to a positive attitude of the market reflected in the KSE-100.

Oil Marketing Companies also gained momentum (14.3 percent MoM) on the back of the potential release of the first tranche by the government by beginning to mid-June to clear the circular debt.

The Ministry of Finance paid the first installment of Rs90 billion to 20 independent power producers (IPPs), this was divided equally in cash, five-year Sukuk, and ten years PIBs.

Read More: Breaking Out of the Textile Economy – Pakistan’s Industrial Policy for the Next Decade

AKD securities expect the KSE-100 index to continue climbing as the markets are flush with liquidity in the market, and their research generally shows support for a continued bullish run in the Cement, Steel, and Construction sectors of the economy.

Stable monetary policy

Another factor that is helping the bullish trend is the State Bank’s decision to hold interest rates at 7 percent during their recent Monetary Policy Committee meeting. This means companies are keen on taking out loans for more investment in their businesses, making the stock market generally happy. Market participants expect that even if there is an uptick in interest rates, it would be very minimal, as assured by the SBP’s recent MPC statement.

Thumbs up from Ratings agencies

On May 27, Fitch gave Pakistan a B- rating with Stable Outlook. According to Fitch, Pakistan has seen a decline in external vulnerabilities facilitated by sticking to its now market-determined exchange rate regime, which allowed shock absorption during the pandemic.

The credit rating agency estimates that Pakistan’s current account deficit would narrow to 0.5 percent. This is a significant improvement over FY20 and FY19, where Pakistan’s current account deficit was 2.4 and 4.8 percent of GDP, respectively.

Similarly, another rating agency Moody’s, in its latest report, also saw Pakistan having a positive outlook citing its robust long-term GDP growth potential and large-scale manufacturing of the economy would allow it to grow at 4 percent.

Hamza Kamal was very positive on the continued upward movement on the stock markets, saying that given “expectations are that inflation would be decreasing in the near future, along with an upward trend in the economic activity in the country and high liquidity, the economy will grow in the long term, and thus we expect the same of the market.”

Read More: Pakistan’s economy to make a comeback in 2021 by 1.5 percent growth: Moody’s report

One can never ever predict the markets – maybe one should not even try – but in the short run, at least Pakistan’s financial markets are responding to the government’s recent performance figures, which have inculcated a positive feeling about the economy and their own growth prospects among the leading companies in Pakistan.

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