The Karachi Stock Exchange (KSE) presses on with its 15-month bull run – roaring past 90,000 points this week, despite deeply overbought levels – because of the simple fact that the headwinds that kept it bogged down since 2018 turned into strong tailwinds mid-2023 onwards.
Inflation, which has averaged 8.45pc since 1957, reached an all-time high of 37.97pc in May 2023. Consequently SBP (State Bank of Pakistan) was forced to raise the benchmark interest rate to a record high of 22pc in June 2023.
The rupee fell 103.3pc between May 2021 and August 2023, from around 152 to 306 against the dollar, and triggered an unprecedented crisis of confidence in the local currency.
Yet despite widespread concerns that a hyper contractionary monetary policy might have only limited impact on cost-push inflation, SBP’s hawkish stance was vindicated as prices began falling, reaching single figures (9.6pc) in August 2024 and clocked in at 6.9pc in September 2024.
Currency market volatility, which peaked in October 2023, has also been cut by half with indications of subtle periodic interventions to keep the rupee from appreciating too much too fast.
And now the state bank is set to deliver another fat cut at the next MPC (Monetary Policy Committee) on 4 November 2024. Currently at 17.5pc, market consensus expects another 200 basis points cut – despite calls for much deeper cuts considering the real interest rate level of 10.6pc – which will further buoy the stock market that has already posted a remarkable return of 42.4pc in the current calendar year, 9.7pc on a month-on-month basis.
Yet caution is advised.
Fundamentally the market has further room to rise, despite extremely overbought technical levels, since its price-to-earnings (P/E) multiple ratio stands at 4.4x, much lower than the 6x five-year average.
Yet even as the market took recent political developments, specifically the passage of the 26th constitutional amendment, as net positive, possible agitation by lawyer bodies, bar councils and the main opposition party could provide unrelenting bulls the ideal opportunity for some overdue profit taking.
