Stocks Rebound After Two-Day Decline: Key Factors Behind the Recovery

December 28, 2024 Mahi Bukhari

The Pakistan Stock Exchange (PSX) saw a notable recovery on Friday after a two-day slide. The KSE-100 index surged by 928 points, reflecting a strong comeback that was driven by a combination of positive economic indicators, a resilient rupee, rising exports, and falling bond yields. This boost in the stock market, especially towards the end of the year, has fueled investor optimism.

Market Overview: PSX’s Positive Shift

The KSE-100 index ended Friday’s trading session with an impressive 928-point rise, or 0.8%, closing at 111,351.18 points. This marked a stark contrast to the two-day sell-off earlier in the week, showcasing the resilience of the market and its recovery in the face of external and internal factors that supported growth.

A Strong Earnings Outlook Drives Investor Confidence

Ahsan Mehanti, Managing Director of Arif Habib Corp, pointed out that the strong earnings outlook for companies was one of the key factors contributing to the market’s positive performance. The anticipation of favorable earnings, coupled with the recovery of the rupee, fueled the sentiment in the market, lifting investor confidence.

Impact of the Resilient Rupee and Export Growth

A significant aspect that supported the recovery was the strength of the Pakistani rupee, which had been showing resilience against major currencies. Additionally, there were reports of rising exports, which further bolstered investor sentiment. The combination of these factors signaled a robust economic environment that helped mitigate concerns and attracted investors to the market.

Lower Bond Yields and Subdued Inflation Provide Room for Growth

Government bond yields played a crucial role in the market’s recovery. As yields continued to decline amid low inflation, the overall cost of borrowing decreased, which had a positive impact on stock prices. The subdued inflation rates have also been a factor in the broader economic stability, which supported a positive market outlook.

Key Drivers of the PSX’s Recovery

Several specific developments contributed to the surge in the PSX on Friday:

Rising Exports and Positive Economic Indicators

The rise in exports was a major factor in the market’s recovery. Increased exports signal a strengthening of the country’s external sector, which improves the overall economic outlook. Alongside this, the market was also supported by a series of positive economic updates, including improved foreign exchange reserves and a substantial tax gap disclosure. These factors fueled investor confidence and spurred fresh buying after the previous period of heavy selling.

Falling Government Bond Yields

Government bond yields have been on a downward trajectory, which has been beneficial for the market. Lower bond yields provide investors with higher returns on their investments in stocks, and this shift in yields contributed to the overall market positivity.

Stock-Specific Performance: A Closer Look

TRG Pakistan Leads the Charge

TRG Pakistan once again emerged as a significant contributor to the market’s recovery. The company’s stock surged by 2.49%, and investor interest was piqued following news that Greentree Holdings, a substantial shareholder, was considering buying up to 35.145% of the company’s shares. This announcement drove considerable trading volume and further enhanced the stock’s bullish outlook.

Meezan Bank and Mari Petroleum’s Positive Impact

Meezan Bank, with its 3.99% increase, and Mari Petroleum, with a rise of 2.06%, were other key contributors to the KSE-100 index’s rise. These stocks played a crucial role in driving the market higher, demonstrating the strong performance of the banking and energy sectors.

Key Performers and Market Trends

By the end of the session, 67 stocks saw an increase, while 32 stocks experienced declines. The total traded volume amounted to 816 million shares, reflecting increased investor participation. The total value of the shares traded during the day was Rs32.9 billion ($118 million).

Trading Volume and Value Surge

The trading volume for the day surged to 816 million shares, significantly higher than Thursday’s trading volume of 628 million shares. This spike in activity highlighted the renewed interest from investors, especially following a period of negative sentiment in the market.

Sectoral Performance and Contributions

AHL’s research report highlighted the contribution of specific sectors to the market’s performance. The banking, energy, and telecom sectors saw significant gains. Meezan Bank, Mari Petroleum, PSO, Bank Alfalah, and TRG collectively added 416 points to the index, demonstrating the strength of these sectors in the current economic environment.

The Role of Foreign Investment

Foreign investment also played a role in the market’s recovery, although foreign investors were net sellers on the day, offloading shares worth Rs603 million. Despite this, the market’s strong performance suggested that domestic investors were increasingly confident in the market’s potential.

Challenges and Outlook

Despite the recovery, the market remains range-bound and lacks a clear direction. Analysts have pointed out that the market’s overall trend is still uncertain, and investors need to stay cautious as developments unfold.

Sector Performance: A Mixed Bag

While the overall market showed positive movement, some sectors continued to struggle.

The Struggles of the Industrial Sector

The industrial sector, particularly the Large-Scale Manufacturing (LSM) sector, continued to face challenges. In October, LSM showed a marginal growth of just 0.02%, with some sub-sectors, such as beverages, experiencing significant declines due to higher taxes and seasonal demand reductions. However, despite these challenges, 12 out of 22 LSM sectors posted positive growth, indicating that the sector remains resilient.

Agriculture and External Account Position

The agriculture sector’s performance is closely tied to seasonal rains, and the government is working to ensure adequate resources to achieve the wheat production target for Rabi 2024-25. On the external front, Pakistan’s current account position showed considerable improvement, with a surplus of $944 million recorded during the first five months of the fiscal year.

Investor Sentiment and Market Outlook

As the year draws to a close, investor sentiment remains optimistic, particularly in light of key economic updates and the recovery of certain sectors. The market is expected to continue its upward trend, bolstered by favorable economic conditions and a stable rupee. However, investors must remain cautious of potential volatility and challenges in the industrial sector.

FAQs

1. What caused the recovery in the PSX after the two-day decline?

The recovery was largely driven by a positive earnings outlook, a strong rupee, rising exports, and falling bond yields. These factors combined to boost investor confidence and led to the market’s recovery.

2. Which sectors performed well during the market rally?

The banking, energy, and telecom sectors saw strong gains, with companies like Meezan Bank, Mari Petroleum, and TRG Pakistan contributing significantly to the market’s rise.

3. How did foreign investment impact the market?

Despite foreign investors being net sellers during the day, the overall market sentiment remained positive, with domestic investors driving the recovery.

4. What role did government bond yields play in the market’s performance?

Falling government bond yields played a crucial role in the market’s recovery by reducing borrowing costs and providing investors with better returns on stocks.

5. What challenges does the market still face?

The market remains range-bound and lacks clear direction. The industrial sector, particularly large-scale manufacturing, continues to face challenges, and investors need to stay cautious.