PSX: be fearful when others are greedy!

If you identify yourself as a dedicated member of the “Technical Analysts Club” in the stock market, understanding why the market behaves as it does may not be paramount. Instead, focusing on following the trend and momentum ensures you secure your fair share of wealth.

Remarkably, even investors aligned with the esteemed “Fundamental Camp” would likely concur that the current rally was overdue, with the timing being more pertinent than the rationale.

Now that the market has broken out of a decade-long channel, investors are understandably questioning the sustainability of the rally as they see profits in their accounts after such a long dry spell. Operating in the uncharted territory, the KSE-100 index prompts us to explore the recent drivers of the rally and whether it has the momentum to continue.

The current rally at the Pakistan Stock Exchange (PSX) is influenced by a confluence of factors, including falling inflation rates, the prospect of an IMF deal, and the news of prospective foreign investment such as from Saudi Arabia.

However, on the flip side, the slowdown in the economy, a steep contraction in large-scale manufacturing output, and rising unemployment will put a dampener on the overall sentiment across key cyclical sectors such as cement, discretionary consumer goods, and chemicals.

The recent decline in inflation has increased the prospect of a more dovish policy stance from the State Bank. Lower interest rates make borrowing cheaper, encouraging businesses to invest and expand, which can positively impact stock prices.

However, the falling interest rates mean a shrinking of net interest margins for banks, which have enjoyed the high interest rate environment so far, as depicted in their recent filings and stock performance. Highly leveraged sectors such as cement and steel will find improvement in their bottom lines as financial costs go down.

Moreover, the potential for an IMF deal has boosted investor confidence. Pakistan is actively engaged in discussions with the IMF to secure a new loan programme, aiming to garner crucial financial support and bolster economic stability.

A positive result from these negotiations could offer some relief, potentially stabilising the nation’s dollar reserves. It remains uncertain whether this IMF agreement will pave the way for accessing additional borrowing sources and instilling confidence in other lenders regarding long-term stability.

Nonetheless, it is important to note that the new programme is expected to introduce tougher conditions and front-loading measures initially.

Furthermore, reports of potential foreign investment from Saudi Arabia have contributed to the favourable trend in the stock market. Saudi Arabia has shown interest in investing in several key sectors of Pakistan’s economy, such as energy, infrastructure, and agriculture.

While this investment offers a welcome lift to Pakistan’s economic outlook, it also reflects a degree of trust in the country’s future growth.

However, following the recent postponement of the visit of Saudi Crown Prince Mohammed bin Salman, both local and foreign investors are adopting a cautious stance, monitoring closely any substantial progress on the numerous memoranda of understanding (MoUs) that have been signed thus far.

And finally, the typical efficiency of stock market analysts shines through once again! They excel at explaining why their longstanding predictions failed to materialise over the years, whether it’s regarding index targets or individual stocks.

But lo and behold! Now that the KSE-100 index has marched past 75k levels, the recently mushroomed, self-proclaimed stock gurus on social media and sell-side analysts are quick to conjure up new numbers to reassure the jittery investors that the party is far from over. Classic, isn’t it?

For novice individual investors, especially those who have recently ventured into the market to see what all the fuss is about, a cautious approach is crucial.

While it is tempting to follow the tips to get rich quickly or learn the secret technical chart strategy, retail investors should also consider fundamental and macroeconomic factors. Aligning investment decisions with the broader market context can help mitigate risks and make more informed and prudent choices.

The writer is a financial market enthusiast and is attached to Pakistan’s stocks, commodities and emerging technology

Published in The Express Tribune, May 20^th, 2024.

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