Inside the market: The bull-run that took PSX index past 58,000 points

On 3rd July 2023, the Pakistan Stock Exchange (PSX) saw a rally of more than 2,481 points or a 5.99% increase in the index. This was the highest gain the market had seen in a single day in terms of points and the market had to be halted as it increased by more than 5% in less than half an hour. The optimism in the market was down to the fact that the much-awaited deal with the International Monetary Fund (IMF) was going to be struck.

Even as the macroeconomic conditions were improving, the individual stocks were not seeing a similar rebound in their performance as many of the scrips were trading well below their historic highs. Investors were timid in terms of the returns that the stock market was providing and with interest rates at record high levels of 22 percent, the sentiment on the trading floor was mostly negative. 

This meant that many of the investors were undervaluing the market and that, even though corporate results were stellar, the market was not accounting for these results in the prices prevailing in the market. As investors were not willing to step into the market, the corporate sector saw an opportunity and started to carry out buybacks which signaled to the market that even they themselves saw their stocks trading at below their actual intrinsic value.

Fast forward to the 22nd of November and the market, which closed at 43,899 on 3rd July, is trading at around 58,154. This is the first time it has breached the 58,000 points level as the market saw an increase of more than 800 points intraday. The index has risen by a staggering 32.5% percent in the last three and a half months which points towards the fact that the future outlook of the country has changed.

What could be the reason behind this?

For an analyst looking at the market, there are many different pieces of information that can impact the index in a single day let alone a month. When a period of 3 months has to be considered, it is vital to note that there are different developments on the macro level which seem to have triggered the recent PSX rally. 

One of the biggest factors ailing the market and the corporate sector is the fact that interest rates are too high. Since the end of June 2023, interest rates were raised to 22 percent and there were no signs that the rates would be cut in the near future. The recent T-bill auction has been carried out at 300 basis points lower than the previous rates and there are expectations that the next monetary policy will see a decrease in the interest rates. This is a glimmer of hope that a change is on the cards. 

Any such cut is attractive for the corporate sector and the capital markets. The corporate sector can benefit with a reduction in their finance costs which had been doubled from FY 2022 to FY 2023 and the profitability of the corporate sector will see an increase which is being priced in by the stock market. In addition to that, the investor will find the stock market more attractive as well as the valuations are still very low and bank deposits will be seeing a lower rate of return trickling some of these deposits into the stock market as well.

Another factor that can be seen as a positive for the stock market is the fact that Morgan Stanley Capital International (MSCI) added a record 56 Pakistani companies to its Frontier Market Index and Frontier Market Small Cap Indexes. This is a positive development for the index and gives support to the rising index.

The most recent development on this is the green light given by the IMF on the successful negotiations concluding between the interim government and the IMF for the first review which gives access to $700 million of funding. As economic indicators show an improvement, these triggers are being taken in conjunction with each other as investors flock towards the market.

Experts still feel that the market price to earning ratio is still hovering around 3 to 4 times which was 8 to 9 times in better times. With the expected cut in interest rates in the medium to long term, it can be expected that market prices will move towards the rates that justify the price to earning ratios seen in the past.