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KSE100 – More Corrections ahead?

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October 15, 2020 (MNL): Having entertained its audience for the first two months of FY21, the KSE-100 index finally took a breather in the third month as the returns were way less than what we saw in July and August. However, to say that this came as a major disappointment would be a disappointment in itself. Accept it or not, this market correction was long-awaited, especially after all investors were given more than enough time to make a beneficial move for themselves.

The correction, that came in the form of political nuisance, was a blessing in disguise some say. A report by JS Global has shed immense light on the same, whilst also discussing the hurdles, perhaps more corrections, that investors might have to face in the upcoming weeks and even months. The same political nuisance that we talked about earlier will continue to haunt the investors, leaving its impact on the performance of the benchmark index for this month as well. When we say political nuisance, we are not just pointing at the arrest of Shahbaz Sharif and the protests that are likely to ensue, but the uncertainty pertaining to the outcomes of FATF and IMF reviews that are expected this month. But are these factors really that scary? JS Global disagrees.

‘Think of it this way – in recent days when there were relative peace and calm in the political arena, did the market give anyone a decent chance to build positions? In a relatively worse scenario, one should play the 38.5k-42.5k range, at least for now. If you are a trader, then it’s not a bad time to make some money; for an investor, assuming you have already taken positions, it would be best to stay firmly on the fence, but not forget to buy the dips, preferably below 40k levels. And if you are fortunate enough to buy again at ~38k, well what more can you ask for? All things said we do expect the market to maintain a positive, albeit choppy trend’, the report said.

However, merely assuming that the impact of, the outcome of the FATF review, will result in a jaw-dropping change in market fundamentals would be nothing less than absurdity. Before taking positions, it’s important to analyze whether the impact of that event will match up to the hype that is being created around it. Several times in the past, major economic developments have had little or no impact whatsoever on the sentiments of investors, whereas events as ludicrous as Donald Trump contracting COVID-19 has resulted in a global-wide impact on capital markets.

Nonetheless, the bit about FATF not having any role in market participation was obviously hypothetical. For Pakistan, FATF reviews are unquestionably major market drivers, despite there being little debates and discussions, even any glimpse of apprehension and guilt on the faces of those who have been promising to fulfill the conditions for um, eternity. Anyway, the possibility of exiting the grey list and obtaining a clean chit is too good to be true for now, but if that happens, the market will easily go over 2,500 points in a single session, as per JS.

Regarding the IMF, the report has provided a very lenient stance. While energy tariff hikes and tax collections continue to remain the major areas of conflict between the IMF and Pakistan, it is likely that a softer approach would be taken against the country around this time as well, owing to the understanding of the impact that COVID-19 has had over the emerging economies. All in all, the IMF’s meeting with the Govt might inch towards a possibility of further extension in deadlines, as stated in the report.

The market also stands highly exposed and vulnerable to the actions of the State Bank. In the recent monetary policy, the committee decided to go with the status quo in a bid to further boost the economy and protect it against the wrath of COVID-19. However, whether the same view will be held in the next meeting, is something that no one but the State Bank itself can answer. In a recent speech given at the CFA Society Pakistan event, the Governor of SBP, Mr. Reza Baqir more than once threw hints at an impending interest rate hike in the upcoming meeting. While some have called it a conjecture on the part of brokerage houses, the possibility of monetary tightening seems high after taking into consideration the latest CPI results.

It is also important to note that the yields on 3Y, 5Y and 10Y PIBS have gone up by 0.8%, 1.03% and 1.05% respectively in 1QFY21, which goes on to show that the policy rate has not been keeping up with the changes in the bond markets. Thus, in a situation like this, it would not be surprising if the State Bank opts for monetary tightening in its next monetary policy meeting.

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Posted on: 2020-10-15T15:00:00+05:00

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