Pakistan stocks to continue rallying on anticipated 6-year low inflation

The Pakistan equity market is expected to continue its winning streak, driven by inflation numbers likely to hit a six-year low.

Last week, the Pakistan Stock Exchange (PSX) reached a historic high, surpassing the milestone of 100,000 points.

The market did face a setback during the week due to opposition protests in the Federal Capital, which led to the government calling in the military to control potential incidents. This caused the index to experience its largest single-day decline of 3,505 points on Wednesday, impacting all sectors.

However, the overnight dispersal of protesters and the return of calm in the Federal Capital helped restore investor confidence.

The index received fresh buying interest, and the KSE-100 index saw its largest single-session improvement, easily crossing the 99,000 and 100,000 point levels.

By the end of the week, the market closed at 101,357 points, marking a weekly gain of 3,559 points or 3.64%.

Positive contributions to the index came from various sectors, including Commercial Banks (1,676 points), Technology & Communication (349 points), Oil & Gas Exploration Companies (284 points), Oil & Gas Marketing Companies (260 points), and Cement (234 points). Foreign selling continued this week, amounting to $15.1 million compared to a net sell of $33.0 million last week.

An analyst from Arif Habib Limited expects the market to maintain its positive momentum in the coming week, driven by expectations of further declines in inflation, projecting November inflation to fall to 4.7%. Attractive valuations of certain stocks are also likely to continue enticing investor interest.

An analyst from AKD Securities noted that the continuation of monetary easing due to a disinflationary environment and improving macroeconomic conditions would make equity investments more appealing.

The current market is trading at a price-to-earnings (P/E) ratio of 4.9x and a dividend yield (DY) of 10.2%. These factors, along with a declining external financing requirement under the IMF program, are expected to keep foreign investors interested.

The analyst recommended sectors benefiting from monetary easing and structural reforms but cautioned that modest economic recovery may limit the upside for cyclical stocks.

During the preceding week, a key development was the auction of treasury bills, with three-month tenors reaching their lowest levels since April 2022, and six-month and one-year tenors at their lowest since March 2022.

The auction raised PKR 616 billion, falling short of the target of PKR 800 billion, with total participation amounting to PKR 2,494 billion. The cut-off yields for three months decreased by 70 basis points to 12.99%, six months fell by 61 basis points to 12.89%, and one year declined by 85 basis points to 12.35%.

The one-year bill yield, compared to the policy rate of 15%, showed a differential of around 2.65%. When compared to October's inflation rate of 7.2%, the difference was 7.8%, and with November's expected inflation rate of around 6.5%, the gap is expected to widen further.

This raises hopes for another potential interest rate cut of at least 2 percent. The next monetary policy announcement is due on December 16.