Rate cut hopes could boost small-cap stocks, but risks remain

The capital market during the outgoing week recorded appreciable gains of 1,600 points, placing the index at an almost six month high level with aggressive buying from foreign and local fund houses on back of improvement in macroeconomic indicators and cut in government backed securities.

According to a leading trader, the benchmark KSE-100 shares index continued its upward journey which commenced from the preceding week, providing a return of 4.7 percent.

The bull-run staged in mainly because of decline in government owned securities-National Savings Scheme, cut by 90 to 200 basis approximately.

This decline in Pakistan Investment Bonds raised expectations of a rate cut in the near future. Moreover, indication of the improvement in macroeconomic numbers and positive nod from the International Monetary Fund (IMF) about Pakistan achieving all set targets for the first quarter of the new fiscal year, while progressing economically also boded well.

The Pakistan Stock Exchange (PSX) KSE-100 index closed up 4.7 percent or 1,601 points to close at 35,978 points level, touching a 6-month high (in 124 trading sessions).

Foreign buying clocked in at 4.5 million dollars compared to net selling of 3.1 million dollars last week. Buying was witnessed in fertiliser amounting to 6.7 million dollars and oil marketing companies at 3.2 million dollars.

On the OMC’s front, the Economic Coordination Committee (ECC) finally approved the long awaited increase in OMC margins by 17 paisa/litre in both HSD and petrol. This would allow the companies to charge the commission of Rs2.81/litre. The sector registered a gain of 7.32 percent on week on week basis on the back of the decision.

A few raised concerns that the central bank might delay cut in benchmark interest following the inflation rate for October, which clocked-in at 11.4 percent compared to 11.37 percent in September. The State Bank of Pakistan would soon announce the monetary policy for two months.

Based on NCCPL data, foreigners bought $4.46 million. On the local side, individual bought $6.23 million, while banks remained net sellers of $6.03 million.

An analyst from Arif Habib said the upswing in the market might be met with some profit-taking next week. The continuation of the sit-in in the federal capital might create some apprehensions, which could create some short-lived jitters in the market. “We expect the stabilising macro-economy to continue fuelling the bullish trend over the medium to long-term,” the analyst added.

An analyst from Habib Metro-Finance said they expected the market to stay positive in the near-term with macroeconomic indicators getting better in the upcoming months. “However, we suggest investors to build up their positions in fundamentally strong stocks with our continued liking in E&P’s, fertilisers and large-cap banks.”

It was being expected that the State Bank of Pakistan would reduce the policy rate by 50 basis points to 12.75 percent next week.

Sector-wise positive contributions came from fertiliser (374 points), commercial banks (357 points), E&Ps (211 points), OGMCs (115 points), and automobile assembler (91 points), while negative contributions were led by textile weaving (5 points).

Scrip-wise positive contributions were led by MCB (160 points), Engro (153 pints), HBL (125 pints), Dawood Hercules (79 points), and Engro Fertilizer (73 pints).