Why the future of the Pakistan Stock Exchange could be gloomy

Pakistan’s stock market exhibited a brisk recuperation with a prompt response of colossal monetary easing by the central bank to withstand the ramifications of the virus-triggered economic sag. Despite plunging below 28,000 points in March, the Pakistan Stock Exchange’s (PSX) benchmark index soared past 42,000 points in September. This swift recouping helped PSX earn the title of Asia’s best performing market. However, future market prospects now look murky.

Inflation has remained a core issue for the incumbent economic team. Exorbitant food prices have a direct impact on the purchasing power of the common citizen. This is evident from the Sensitive Price Index (SPI), which has stood elevated during most of PTI’s two-year tenure. Although the pandemic caused a nosedive in aggregate demand, the Consumer Price Index (CPI) did not plummet below 8.2% in 2020. Inflation is on the rise again due to supply chain disruptions. In consonance with the data, the CPI stood at 9% in September after falling from 9.3% (July) to 8.2% in August.

Inflation is anticipated to leap further in the wake of a rise in energy prices, while food inflation is expected to hover in the double digits region. This would make it non-viable for the State Bank of Pakistan (SBP) to sustain a low policy rate and cause a reversal of the chunk of monetary relief. This reversal, however, will not go down well with the industrial sector as it will not only increase the cost of borrowing but would also provoke an incentive to save rather spend among the masses. Thus there is a fear of economic stagnation.

In addition to this, the resumption of the IMF programme would also require the central bank to revise the discount rate until the real return becomes positive. A surge in benchmark interest rate effectuates repercussions on the stock market as investors switch from equities to fixed-income securities. The primary dealers have started to bid aggressively in short-tenor T-bills of 3-months, highlighting that they forecast rate reversals soon (probably November).

Besides, the political temperature has been increasingly aggravated since the re-emergence of the former prime minister, Nawaz Sharif, in the political scene. He intends to take the government, military and some of the judiciary head-on. As a result, the cases against opposition leaders might beef up, and we may see a few of them getting arrested. This may not go down well with the stock market, which seldom embarks on a spiralling course during the zenith of political unrest.

The investors in the PSX have their eyes fixed on Pakistan’s destiny in the Financial Action Task Force’s (FATF) October caucus. Pakistan has been kept on the grey list since June 2018, with FATF demanding a review of compliances in 27 conditions till September last year. Pakistan was granted an extension till February 2020 by FATF last October, with the country compliant on five of these laid conditions. Later, the FATF allowed a further extension after finding Pakistan compliant on 14 points.

In a bid to avoid demotion to the FATF’s blacklist, the government turned up with several legislations to make anti-money laundering and anti-terror financing laws a part of the constitution. Despite a ruckus in the parliament by the opposition, the laws were passed lately with a surprising majority in a joint session. This has ignited hope that Pakistan may likely exit the grey list and not be down-graded to the list of countries that suffer from restricted access to the international financial system. Chinese ambassador has also shown optimism in this regard. The removal of Pakistan from the grey list will yield positive dividends in the PSX, but the curiosity will surge until then.

Hence, in a nutshell, the PSX may witness bullish and bearish market swings in the coming weeks due to the anticipation of the policy rate increase, an exacerbated political atmosphere, and tensions over Pakistan’s fate in the FATF meeting.