A Stock Investment Concept Proved to Be Great for Practicing

August 11, 2023 (MLN): The Article revalidates the concept that “Even Rising Interest Rate Could be Good for Equity Investment!”. The contention that “Even Rising Interest Rate Could be Good for Equity Investment!”, validated itself during the recent run-up of the PSX-100 index. 

The article appeared on Mettis Global in March 2023, wherein the existence of a positive relationship between the PSX-100 index and interest rates was established subject to favorable developments on the economic front.

Inferring a positive relationship between the two was based on the outcome of a parallel study conducted on the S&P 500 to examine its behavior to the rise & fall in the 10-year US Treasury Bill between 1946 to 1981. The study concluded as under:

Quote: 

Sooner or later stock investors become indifferent to the high interest rate. The moment they realize that it is to stay for an extended period of time, they return to buying shares of blue-chip companies even at uptick prices. Psychological adjustment of stock investors to a higher interest rates environment pushes the benchmark index up gradually resulting into the setting in a bull run.

Un-quote:

It was what we exactly experienced in the recent run-up of the PSX-100 index. At the beginning of July 2023, the PSX-100 index awakened from dormancy. With a sudden leap, it pierced the long-standing resistance of =42,000= level despite the status quo in the interest rates.

As the link between economic recovery and rising interest is still missing, therefore, the current run-up in the index should not be seen as a psychological adjustment of stock investors to the higher interest rates environment alone. In fact, it was due to the avoidance of certain defaults on its sovereign debt obligations by Pakistan. Again, in line with the assumption made in respect of the progressive move of the PSX-100 index to test a new peak.

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PSX-100 index will move progressively to test a new peak under the favorable developments in economic fundamentals even in higher interest rates.

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This time not because of real changes in economic fundamentals but because of the driving fear of economic collapse from within investors. 

The institutionalization of the economy and the dynamic of politics is a tell-tale of a progressive economy and a stable political environment. With the economy back on track and the politics at peace, the outcome is obvious.

So, stock investors keep an eye on the pulse of the two with resilience to respond smartly to steam out rewarding returns from favorable eco & politico landscapes. In the meantime let the market cool from sudden heating.

As wisdom suggests, a suddenly flared-up fire usually follows a quick cooling-off period. The hiatus may be filled with soft and hard assessments of the stock market and forecasting of the PSX-100 index in the near future.

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