The KSE-100 index closed in the positive, up 253 points (+2.2 per cent WoW) despite experiencing bearing sentiments in the latter part of the week. Investor activity seemed buoyant with Av daily volumes increasing 45 per cent WoW to stand at 72mln shares. Although foreigners remained net buyers during the week, the contradictory sentiments in the market were caused by a foreign sell-off in the last two days of the week, owing to fresh concerns over the global debt crisis and gloomy economic outlook by the heads of IMF and WB. The Federal Reserve announced a new quantitative easing policy to stimulate the US economy. Dubbed ‘Operation Twist’, the policy includes twisting of the current portfolio of short-term bonds held by the Fed by trading them for longer-term maturities, thereby artificially stimulating long-term demand. Such a measure failed to attract investor interest as US stocks slipped near to 2-year lows with effects felt in Asian markets as well. Nevertheless, the KSE maintained sanctity and fared well in comparison to regional peers. This was owing to disciplined macroeconomic data released with the CPI coming at 11.7 per cent (after accounting for base year change), C/A deficit standing at $189m, and healthy foreign exchange reserves.
Stock Specific Activity
During the week, banking sector stocks outperformed other sectors owing to measures taken by the GoP to resolve the circullar debt issue through which the issuance of PIBs to banks was finalized. This would effectively make the GoP as an intermediatary between the banks and IPPs with the government taking on the responsibility of ensuring timely payment to the financial institutions; a move that was taken positively by investors. In addition to this, the lower CPI figures – although distorted due to the base year effect – and solid reserve levels have provided confidence to the MoF resulting in the decission to end the IMF stand-by support program temporarily.
Forward Looking Expectations
A decision to suspend the IMF agreement provided confidence to investors alike about the macroeconomic stability of Pakistan. Moreover, the relatively stable exchange rate (1.8 per cent decline YTD compared to much larger declines witnessed for regional countries) support the view of a possible discount rate cut and growing confidence in the capital markets of the country. However, analyst expectations of a 100bps cut in the policy rate may be pre-emptive. We expect a relatively less aggressive approach by the SBP, given previous experiences, culminating in a 50bps cut instead in the MPS to be announced on Oct 08, 2011. In the coming week, we expect foreign investors to play a vital role in driving market sentiments which, inturn, depends upon the prospects of easing in the global markets on the back of positive news flows regarding the EU debt crisis and the impact of Fed policy measures.
