Lack of economic agenda tests PSX

Challenges short-term business confidence, despite promising medium-to-long-term outlook

KARACHI:

The Pakistan Stock Exchange (PSX) has experienced a tumultuous ride, mirroring the frenzy leading up to the upcoming general elections. The once-positive election fervour has morphed into election anxiety, temporarily shattering short-term business confidence, despite the prevailing promising medium-to-long-term outlook.

The KSE 100 Index, a benchmark for PSX, witnessed a remarkable 27% surge since the announcement of the election date in the first week of November 2023. Scaling unprecedented heights, it peaked at over 67,000 in mid-December 2023.

Scheduled for the next week on February 8, 2024, the parliamentary polls initially ignited a rally fuelled by optimism surrounding early signs of economic recovery and the anticipated substantial rise in low-priced stocks across the board. However, as the year 2023 drew to a close, investors chose to sell stocks to secure profits. Unfortunately, this trend failed to be accompanied by renewed buying, leading to an almost 8% decline from the all-time high. The index hit a one-month low at 61,842 points on January 30, 2024.

 

In a conversation with The Express Tribune, Muhammad Awais Ashraf, Director of Research at Akseer Securities, pointed out that election uncertainty is unsettling investor sentiments, temporarily impacting business confidence and contributing to the downturn of the PSX index.

He highlighted the crucial role of the electorate, urging the nation to vote for the formation of a robust political government at both the central and provincial levels. He stressed that a strong government, secured through winning a majority of seats, is essential to implementing the necessary economic reforms. Conversely, a weaker coalition government or a hung parliament he said would be inadequate for steering the economy, entering into a new IMF loan programme, and addressing the promising future. A weak government, he argued, could exacerbate pre-election uncertainty.

Director of Research at Chase Securities, Yousuf M Farooq shared an optimistic outlook, stating that the end of political uncertainty would spur renewed buying. He highlighted the continued rise in sale revenue and net profit of listed companies.

Political uncertainty escalated following the sentencing of former Prime Minister and Pakistan Tehreek-e-Insaaf founding Chairman Imran Khan to a 10-year jail term in a cypher case, leading to extended sales at PSX.

 

Farooq clarified that political uncertainty is just one of the contributing factors to the recent correction in the bourse. Other factors include extended foreign selling over the past few days and the State Bank of Pakistan maintaining a record-high policy rate of 22% for the next six weeks.

Fitch Ratings, a globally renowned credit rating agency, reported last week that most frontier market nations, including Pakistan, are set to hold general elections in 2024. The agency observed a slowdown in reform momentum leading up to elections, with Asia-Pacific’s GDP growth (including Pakistan) expected to outperform other regions amid a global economic slowdown.

Several local research houses anticipated a 25-30% growth in the benchmark index in late November and early December 2023. They projected the PSX to reach somewhere in the range of 75,000-81,000 points by the end of the current calendar year 2024, up from the levels of around 60,000 points.

Read Bulls take charge over election timing clarity

Despite the recent return of sharp volatility, these research houses maintained their projections for the year, anticipating that the rally would resume and reach the projected levels post-elections.

PSX AND ELECTION HISTORY

Arif Habib Limited, Head of Research, Tahir Abbas reiterated the necessity of political stability for economic growth and its reflections in the PSX.

Reflecting on the historical context, Abbas stated that elections impact the capital market based on the provided pre-election situation, economic roadmap, and policies given by new governments.

Comparing the past four general elections in the country since 2002, Abbas noted that the PSX declined before and after the 2018 elections, while it grew before and after the prior three elections.

In the three months before the last polls held in 2018, the PSX declined by 9%, dropping by another 8.8% in the three months after PTI came into power through the elections. The market witnessed a significant 21% decline in the one year post the 2018 election, marked by political polarisation and protests impacting the market in both pre and post-election periods.

Contrastingly, the benchmark KSE 100 Index increased by 15% in the three months before the 2013 elections, surging by 16% in the three months after the election when the Pakistan Muslim League-Nawaz formed the government. The market experienced a notable 41.5% surge in the one year post the 2013 elections.

Before the 2008 election, the PSX went up by 8% in the three months leading to the election but declined by 1% in the three months post the election when the Pakistan People’s Party formed the government. In the one-year period post the elections, the market slumped by 59.3%, influenced by the historical financial crisis of 2008.

Read more Political, security fears drive PSX down

In 2002, the market saw an 18% increase in the three months before the election, followed by another 32% surge in the three months post the elections. It spiked by 97% in the one-year period post the elections.

Abbas expressed confidence in the market’s upward trajectory post the 2024 elections. He believed that the next government, regardless of its composition, would provide a solid economic roadmap. Additionally, stocks are still available at attractive prices.

In December 2023, the benchmark index hit a record high at over 67,000 points, though majority share prices were still below their historical peak prices, presenting attractive buying opportunities, he said.

To recap, the market surged by almost 15% net since November 8, 2023, three months ahead of the February 8 election.

POPULAR SLOGANS VS INFLATION

Topline Research provided a detailed commentary on the 2024 election, highlighting that major parties are not adequately addressing key economic challenges. Instead, they focus more on popular measures to gain public confidence amid record-high inflation.

Investors are keenly interested in whether the new government will secure a majority or if it will form a weak coalition government. According to Topline Research, if one party secures 50% plus seats, it would boost investors’ confidence, leading to positive market reactions and signalling positively to the International Monetary Fund and other lenders.

Conversely, a coalition government with the support of smaller parties is predicted to remain fragile and may struggle to implement much-needed economic reforms.

The recovery of the Pakistan Stock market is expected to continue in 2024. Projections indicate that the benchmark KSE-100 total return index will reach 75,000 by December 2024. Key drivers for equities in 2024 include a smooth transfer of power to the new government after elections, a new long-term funding programme from the IMF, and an expected fall in interest rates.

Published in The Express Tribune, February 2^nd, 2024.

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