Weekly review: Market remains upbeat despite interest rate hike

KSE-100 index hits two and a half year high after climbing 2.3 per cent during week.

KARACHI: The stock market maintained its upward drive, defying the laws of economics, and climbed 2.3 per cent during the week the State Bank of Pakistan (SBP) increased the discount rate by 50 basis points. The central bank jacked up the rate to 14 per cent during the monetary policy announcement on Monday.

Investors did not react negatively as a rate hike was anticipated, but it was surprising to see the benchmark 100-share index at the Karachi Stock Exchange (KSE) climb 83 points (0.7 per cent) during trade on Tuesday.

The index continued the upward momentum despite widespread profit-taking and climbed up to 11,407 points – the highest level since July 2008. The KSE-100 index has strengthened 15.02 per cent since the start of this year to emerge as one of the best performing markets in the Asian region.

The trend is all the more surprising as it is becoming apparent that the International Monetary Fund (IMF) tranche due this month will be delayed to the first quarter of next year, since it has made clear that the tranche is conditional on implementation of the reformed general sales tax (RGST).

The RGST bill has been approved in the Senate but has hit a hurdle in the National Assembly as several major political parties have refused to agree on the implementation of the taxation mechanism.

Furthermore, large-scale manufacturing (LSM) data, a key indicator of economic activity, for the first quarter of the current fiscal year shows a decline of 1.5 per cent year-on-year, which does not bode well for the country’s overall economic scenario.

Nonetheless, the market was buoyed by several factors which provided reasons for investors to step in. Primary amongst them was renewed foreign buying, which stood at a healthy $23 million, up almost 100 per cent over the preceding week.

Foreign buying in several oil scrips was also one of the main market drivers during the week. Pakistan Oilfields, the Oil and Gas Development Company and Pakistan Petroleum Limited were all beneficiaries of the renewed interest.

The government also finally issued a notification regarding the turnover tax issue, restoring it to the pre-budget level of 0.5 per cent, as it had earlier announced. This led to significant activity in the stocks of oil marketing companies.

The reintroduction of the margin financing product returned to the limelight as rumours circulated that a former member of the exchange may be appointed chairman of the KSE board, instead of a Securities and Exchange Commission-appointed chairman, thus removing hurdles in implementation of the product.

Average daily volumes swelled 26.6 per cent to 150 million shares per day, after the relatively quiet preceding weeks on account of Eid holidays and anticipation of the monetary policy. Volumes seem to be returning to healthy levels as investor confidence builds up in the post-flood scenario.

Total market capitalisation of the KSE increased 2.3 per cent to stand at Rs3.1 trillion. Although foreigners were net buyers, local banks sold $9.8 million worth of stocks during the week.

What to expect?

With the monetary policy announcement behind it, the market will rely on foreign inflows and reintroduction of the leverage product to sustain itself amid the political wrangling of the RGST and the pressures created by the increased discount rate.

The index has had a good run in the past two months, but sustaining at this level seems to be difficult. It is likely that the market will head into a correction phase over the coming weeks and the actual position of the stock market will become clearer as we head into 2011.

Published in The Express Tribune, December 5^th, 2010.