Stock market gains momentum on economic confidence, rate cut bets

Robust remittance inflows, stable foreign reserves, and declining inflation have reinforced confidence in the country’s economic recovery.

The Pakistan Stock Exchange’s (PSX) benchmark KSE-100 Index climbed 1,525.14 points, or 1.33%, to reach an intraday high of 115,826.94 during early trading, building on last week’s record-breaking performance.

The market remains buoyed by anticipation of the Monetary Policy Committee (MPC) announcement scheduled for later today, with expectations of a rate cut ranging from 200 to 500 basis points. Businesses are advocating for an aggressive cut to stimulate growth, while analysts predict a more measured adjustment.

November’s inflation rate fell to 4.9%, creating a positive real interest rate of 10% and substantial room for monetary easing. Investors are further encouraged by the government’s revision of National Savings Schemes (NSS) profit rates, which saw a 250 basis point cut in Savings Account returns. This move is expected to redirect funds from savings instruments into equities, bolstering market activity.

Foreign inflows also remain strong. Remittances rose by 29% year-on-year to $2.9 billion in November, contributing to stable foreign reserves of $16.6 billion as of December 6, 2024. Reserves held by the SBP increased to $12.051 billion, the highest since March 2022.

Meanwhile, the Current Account Deficit (CAD) narrowed significantly by 79% year-on-year to $217 million during the first two months of FY2025, supported by strong remittance inflows and stable export earnings.

Exports are projected to reach $33 billion by the end of FY2025, while remittances are forecasted to climb to $33.5 billion, driven by government incentives and easing global inflation. Economic recovery is also evident in automobile sales, which surged 52% year-on-year in November, reflecting robust consumer demand.

The banking sector continues to show improvement, with the advance-to-deposit ratio (ADR) rising to 47.8% in November, up from 44.3% in October, as banks strive to meet the mandatory 50% threshold.

Last week’s Treasury Bill (T-bill) auction raised Rs1.256 trillion against a target of Rs1.2 trillion, further boosting liquidity. Yield cuts of up to 100 basis points on T-bills have strengthened expectations of monetary easing, signaling improved conditions for businesses and investors alike.

Economic activity is gathering pace, underpinned by strong investor sentiment and consumer demand. Passenger car sales increased 50% in the first five months of FY2025, while the Asian Development Bank (ADB) approved $530 million in loans to modernise Pakistan’s power distribution network and expand social protection programs.

The PSX’s performance last week, which saw the KSE-100 Index break the 114,000-point barrier for the first time, reflects easing political uncertainties and robust economic fundamentals. These factors continue to support the market’s upward trajectory.

With the SBP’s policy rate announcement expected later today, analysts anticipate the market will maintain its bullish momentum.

A significant rate cut, alongside strong macroeconomic stability and enhanced liquidity, is likely to further propel investor confidence and sustain the PSX’s positive trajectory in the coming weeks.