Pakistan stocks poised for year-end rally led by banking sector

Pakistan stock market is poised for a recovery before the year's end, driven by strong banking sector performance, as the government imposed a lower-than-expected tax rate.

Saad Hanif, Head of Research at Ismail Iqbal Securities, noted that the banking sector is expected to lead the market next week, as rumors of higher taxation on banking earnings from securities investments have dissipated.

Earlier, there were concerns that the tax rate would be raised to 50% - 60%, as banks had nearly reached the ADR limit by the end of November, with an average ADR of 49.7%.

Hanif stated that the tax on banks has now been increased to 44% from 39%, with the ADR condition abolished, and the sector must also pay a 10% super tax.

The KSE-100 index experienced a volatile week, closing with a gain of 1.7%, or 1,838 points, at 111,351 points. The week started positively, followed by two corrective sessions, and ended on a high note on Friday.

Sector-wise, commercial banks contributed 781 points, fertilizer 456 points, OMCs 337 points, Technology & Communication 228 points, and Oil & Gas Exploration 54 points.

Foreign selling continued this week, amounting to $6.8 million, compared to a net sell of $11.6 million last week.

Average trading volumes decreased by 31% to 796 million shares, while the average value traded fell by 25% to $154 million.

Analysts said the inflation numbers, expected to be announced on Wednesday, are anticipated to range between 4% to 4.5%. Trade numbers are also expected, with exports likely to show growth, boosting market sentiment.

Salman Ahmed, Head of Sales at Aba Ali Habib, predicted market stability next week, despite potential technical glitches in a few sessions.

He noted that mutual funds engaged in significant selling ahead of the year-end, particularly in shares with over 10% price appreciation.

The settlement of future contracts also led to trimming, with carryover charges ranging between 20% to 22%.

Ahmed expressed optimism that the market would recover once these issues are settled, as economic indicators remain favorable. Inflation has been contained, the current account shows a surplus, and the rupee and foreign exchange reserves are stable, with further interest rate cuts expected.

An analyst from Spectrum Securities highlighted that the market is set to close the year with an impressive 80% increase. The focus will shift to new allocations based on key themes for the near term and next year.

The market has undergone significant re-rating, particularly in the last few months, following accelerated monetary easing by the SBP. Opportunities in sectors beyond the usual heavyweights of oil, gas, banks, and fertilizers are expected to outperform the market.

Near-term risks may arise from political developments, as PTI campaigns for the release of its leader Imran Khan from jail. Additionally, security concerns persist following Pakistan military airstrikes in Afghanistan this week.

Support levels are at the 30-day moving average near 105,000 points, followed by 100,000 points, while resistance levels are at 113,000 points and 117,000 points.

An analyst from Arif Habib predicted that the stock market would maintain its positive momentum, supported by fresh liquidity driven by the "January effect."

Attractive valuations of scrips are likely to bolster investor confidence, further supporting the market's upward trend.Shahryar Butt, Portfolio Manager at Darson Securities, stated that the market is expected to range between 107,000 and 114,000 points, with potential swings next week due to continued rollover pressure.

While economic indicators remain positive, border tensions with Afghanistan, where the situation is somewhat worrisome, could exert some pressure on the market.

Shahryar added that after a year, liquidity from mutual funds is likely to be redeployed. Combined with expected fresh inflows in the coming year, the index is poised to rise, supported by a low-interest-rate environment.