What’s up with Pakistan’s stock market?

In the early minutes of trading on Friday, the KSE-100 – widely seen as the benchmark index – suffered a massive fall. Investors sold and trimmed their positions over rumours of higher taxes in the budget announcement on June 12. It recovered quickly, but the initial fall raised many questions.Before the recent bearish sentiment, the Pakistan Stock Exchange (PSX) had registered new highs. The KSE-100 Index had even topped 76,000 points as a combination of factors including a stable Pakistani Rupee, foreign exchange reserves, falling inflation, enhanced investor confidence and strong corporate earnings led the bull run.Positive financial growth has been witnessed in sectors such as banking, oil and gas, fertilisers and cement, resulting in the market’s boom.Other factors responsible for the market’s boost included the successful completion of the IMF’s Stand-By Arrangement and progress on the new programme.The technology sector also continued growing especially after the Covid-19 pandemic. It has shown consistent earning reports and positive future outlook. On the other hand, IMF’s trust and praise for Pakistan’s economic performance has further strengthened investor confidence. However, does this mean that the market will continue its upward march?I asked Nadir Khalid, co-founder at Alchemy Fellows, with more than a decade of experience trading in Pakistan stocks, and also in Australia and other markets.When discussing the future trajectory of PSX, he said: “The PSX needs to have very strong fundamentals to move up rather than just to rely on artificially created sentiments. For me, the index going up has no concrete backing.“The investors picking up index heavyweight stocks are actually causing the KSE-100 to make big rounds every other day.“In my opinion, this economic slowdown will be inauspicious for sectors across the board unless the government drafts some hardwired policies to grip the conditions here and get them to a stable spot. If we talk in reference to the current economic situation, I only see the banking and the technology sectors performing well as banks in this high interest rate time have strategically developed profit reaping strategies by charging a greater spread between deposits and loans. The technology sector enjoys greenback revenues and managing the entire input costs in local currency make it quite profitable.”Inflation, albeit a tad down, could be sticky.This is true, internationally and domestically as well. As such, the chances of a steep reduction in interest rate is not likely.Market analysts have also advised against complacency. They have advised to implement meaningful tax reforms, sustained fiscal policies and address structural weaknesses. Only this way will the PSX’s performance continue in a sustainable fashion.There is also an environment of uncertainty fuelled by the upcoming federal budget as there are rumours of higher taxes.It is also important to highlight that the PSX is not the best indicator to gauge a country’s economic health.The stock market represents a highly specific group of individuals and their collective mindset which is often guided by bias and over-representation of good/bad news.While the PSX has its own story, overall, Pakistanis face different issues with poverty, higher energy tariffs and inflation eating away at whatever incomes people generate.What will the PSX do to alleviate these concerns? You cannot eat the ticker symbols.For the PSX and Pakistanis in general, there is a massive need for reforms that get rid of the old, tried and tested methods of increasing taxation. The upcoming budget is an opportunity for the government to implement these structural changes.It will mark the Sharif-led government’s 100 days in power and give us a roadmap of what one could expect.So far, apart from implementing IMF-dictated steps, the government has been found lacking.The article does not necessarily reflect the opinion of Business Recorder or its owners