Optimism over MSCI inclusion lifts stocks outlook

Stocks fell for the second week in a row, as investors weighed the impact of a widening current account deficit, a weakening currency and rising energy prices on the economy. However, some analysts expect the market to rebound next week on optimism over the country’s weight increase in the MSCI Frontier Markets 100 Index.

"Anticipated for the upcoming week is a positive market stance, driven by changes in the MSCI-FM 100 index," said brokerage Arif Habib Ltd in a market note.

"Pakistan's weight within the index has seen a minor uptick, likely serving as a catalyst for market momentum. Furthermore, specific sectors and stocks are positioned to capture investor interest, fuelled by expectations of robust financial performance."

The KSE 100 Index declined 1.1 percent to 47,671 points in the week ended Aug. 26. The index has lost 2.4 percent this month Average daily trading volume dropped 11 percent to 206 million shares, while average daily value traded fell 12 percent to $28 million.

The local bourse experienced a mixed trend during the week, due to various developments on the political and economic front.

The government raised over Rs2.1trn through the auction of T-bills. Moreover, last week SBP’s reserves decreased by $125 million, reaching $7.9 billion. In addition, rupee depreciated during the week against dollar, closing at 301. The rupee fell 1.7 percent during the week.

Foreigner buying continued during this week, clocking in at $1.7 million compared to a net buy of $2.4 million last week. Major buying was witnessed in technology and communication ($0.8 million) and commercial banks ($0.6 million). On the local front, selling was reported by individuals ($8.2 million) followed by banks and DFIs ($8.2 million).

Sector-wise, negative contributions came from fertilizer (92 points), food & personal care products (80 points), cement (79 points), technology & communication (71 points), and pharmaceuticals (41 points).

The sectors that mainly contributed positively were commercial banks (19 points), and oil & gas exploration (15 points).

Nabeel Haroon at Topline Securities said the decline can be attributed to the current account number for the month of July 2023 that came in last Friday - posting a deficit of $809 million after 4 consecutive months of surplus.

“News of further increases in electricity prices and continuous decline in the rupee value against the dollar weighed down on investor sentiment as they feared that it would result in an increase in inflation which may result in further increase in policy rate going forward.”

Muhammad Waqas Ghani at JS Research said the week commenced with a pessimistic tone, and “the unfavorable momentum continued as investors aimed to lock in profits due to uncertain developments on both the political and economic fronts”.

“Growing gap between open market and interbank rates, now close to 5.4 percent, highlights the significance of fluctuations in these rates, following IMF's recommendation of maintaining a max difference of 1.25 percent.

Given Pakistan's status as a net importer, the movement of PKR/USD holds a significant influence on its CPI basket,” he added.

In other news, an initial discussion on energy sector issues took place with the caretaker finance minister leading the meeting. During the week, Pakistan also engaged in virtual talks with the IMF regarding cumulative losses in the energy sector. The primary focus was on addressing the issue of reducing circular debt during the ongoing fiscal year. IMF has urged the govt to formulate a strategy for eliminating energy sector circular debt.