A Rollercoaster Week: PSX's Wild Ride Amid Policy Rate cut and Budget Announcements
PakInvestor: Weekly Market Insights
This past week was a whirlwind in the Pakistani market! A policy rate reduction, the presentation of the federal budget, a resurgence in international oil prices, and the PSX's impressive turnaround on a bad budget.
The KSE 100 Index extended its losing streak from last week into the first three trading sessions of this week. By Wednesday, it had shed over 3,000 points, remaining in the red zone for eight consecutive trading sessions since the beginning of the month.
The market's weakness stemmed from expectations of higher taxation in the upcoming budget, particularly an increase in the capital gains tax. Additionally, the market had reached record highs by the end of May, prompting participants to adopt a selling stance. This 'sell' sentiment was so strong that even the reduction in the policy rate, announced on Monday evening, was insufficient to reverse the market's direction. Consequently, the KSE100 Index lost an additional 450 points in the two trading sessions following the policy rate reduction.
The federal budget, presented on Wednesday evening, aimed to extract more from the existing weak and shrinking tax base, and at creating hurdles for small businesses in the informal sector. The informal or small business sector has proven to be the bedrock of Pakistan's economy, providing a level of resilience that has sustained the nation through the worst of times.
Among other drastic measures, such as ending the 1% presumptive tax regime for exporters, the budget also proposed eliminating the holding period concept for securities purchases. It suggested imposing a 15% capital gains tax regardless of the holding period.
The day after the budget, the market rose by 3,400 points, or 4.7%. This rise was not a resounding endorsement of the budget proposals but rather an attempt to take advantage of the existing capital gains tax (CGT) regime, which is set to end on June 30, 2024. In the last two remaining trading sessions of the week following the budget, the market recouped all the losses it had sustained in June and reached another record high, crossing the 77,000 level intra-day.
Take a look at how the PSX ended the eventful week. Investors did take profit taking opportunities wherever they could considering strong market resurgence and extended weekend on account of Eid holidays. Hence the red that you see on the screen shot of the last day of trading. PSX Monitor
Foreign Corporates were net sellers this week of $ 3.57 million. This was there first attempt at selling at PSX after several months. But they were in line with the market trend. And on the last day of the week after the local investors pushed the market up in one day by 4.7% they turned net buyers and made a net amount of net buying of $2.25 million.
In local investors Mutual Funds changed stance on the market and were net buyers of a good amount of $11 million. This is in anticipation of trend of decline in interest rates.
Insurance companies activity was not material this week and they ended the week with a small amount of net sales.
Major Gainers and Losers this Week
Reduction in Policy Rate
At the start of the week on Monday evening in its scheduled MPC meeting the central bank of Pakistan reduced policy rate by 150 bps to 20.5% after keeping it at 22% for a year. This month the inflation data showed some cooling. This strengthened the central banks hands. Decline in international oil prices further boosted hopes of further reduction in inflation. The bank however rightly warned that the budget measures could be inflationary.
Things are precarious. The international oil prices have recouped losses of the last week. And for the policy rate to take a declining path structural issues with the public finances have to be tackled including the perennial circular debt issue. See Note
Capital Gain Tax
Going forward the concept of holding period abolished for capital gains relating to securities acquired on or after July 1, 2024 with separate rates prescribed for filers and non-filers.
The Federal Reserve left interest rates in unchanged at 5-1/4 to 5-1/2 percent, in yesterday meet and indicated that there will be one cut in 2024, with more cuts following the next year and beyond. See Note
Kohinoor Textile (PSX:KTML) reclassifies Rs 16 billion from general reserves to capital reserves. See Note
Maple Leaf (PSX:MLCF) classifies Rs 26 billion from some general reserves to capital reserves to avoid paying cash dividends. See Note
KIBOR coming down. 6 month bid now below 20%. See Rates
We posted this week; Nishat Mills (NML): Potential Accumulation Opportunity. Export oriented companies (ILP,KTML) declined this week at PSX as the budget proposals sought to end the 1% tax regime for exporter. NML however did not decline. Our stance persists. See Note
Workers' remittances are strong at $3,243 million in May 2024. This is higher than any month in the past two years and five months. See Note
See you next week.