It is an unusual sight and hence the excitement. “The rupee is rising against the mighty dollar,” said a person who has been stashing away the greenback for the last two years, hoping to make a fortune.

From its 52-week low, the rupee had recovered Rs10.27 towards the end of last week. In November, the local currency is up 1.31 per cent against the dollar. It has set analysts and economists to figure out the benefits to the economy, industry and capital markets. But whether the rupee appreciation is sustainable, no one can say anything with conviction.

JS Global’s equity strategist Hussain Haider was of the view that people had naturally become anchored to a depreciating rupee of late. Hence, the recent appreciation was initially met with a sense of denial, with cynics expecting it to fall back to previous levels. However, people have now started to embrace the reality of the appreciation and the big question now is about its sustainability.

The analyst observed that the prevailing trend was likely to continue for another couple of months where levels close to Rs150 could also be seen by the end of March 2021. “As developments on the vaccine follow through, we may see the rupee bid farewell to calendar year 2021 around a level of Rs155-159.”

‘The impact of the rising rupee on the stock market is going to be net positive’

In that sense, the JS Global strategist believed that Covid-19 had proven to be a blessing in disguise for at least the rupee as the recent appreciation (leading to foreign exchange reserves build-up through receipt of dollars from various channels) would not have been possible in the absence of the pandemic. Last Thursday, the country’s foreign exchange reserves stood slightly short of the $20bn mark.

The impact of the rising rupee on the stock market is “net positive,” says Mr Haider. He reckoned that it would boost investor confidence along with the fact that it was largely positive for Pakistan’s imports-dependent economy. Moreover, the stable outlook should attract foreign portfolio inflows.

In terms of sector allocation/stock picking, the focus should continue to remain on growth stories as well as undervalued blue chips. “It would be naïve to believe that investors would be analysing and making investment decisions looking at just the time-bound appreciating rupee,” he said. Although broadly positive for the various sectors on the Pakistan Stock Exchange (PSX), those with export-based earnings may lose some ground. Cyclicals — mainly cements, steel and automobiles — should fare better.

But there are equity strategists who reckon that the impact of the rupee’s rise for the share market was negative. Earnings of a great number of sectors are either directly or indirectly dependent on the value of the dollar. On the other hand, although not directly linked with inflation, the long-term decline could result in the drop in interest rate, with a healthy effect on corporate profitability and their stock prices.

Samiullah Tariq, head of research and development at Pakistan Kuwait Investment Company, expects sectors like autos, steel, consumer durables and cement for which imported raw materials are used but sales are recorded in rupees would benefit from the appreciation. It is another matter how consumer spending spikes in buying cheaper foreign, non-essential goods. “On the other hand, the textile sector, the country’s largest export contributor, incurs the manufacturing cost in rupees and exports goods to foreign countries. It receives foreign currency, which is converted to the rupee at the prevailing parity. As the parity declines, so will its realisation of lower export proceeds,” he says. Also, since sectors such as exploration and production and power also book their revenues in dollars, the strength of the rupee will translate into a cut in their profits.

Most market men point out that these are extraordinary times. The ravages brought about by the first and second waves of Covid-19 have diluted the impact on price movements of stocks. Many fear that in case of a breakout of the pandemic seen in most unfortunate countries around the world, the best of the benefits may be lost, for what could prevent investors from pulling out of equities and storing cash? With a bit of uncertainty also added by the heated political atmosphere in the country, investors in equities — both individuals and institutions — are not prepared to take long-term positions, lest the stocks, currently available at attractive levels, sink further.

Foreign portfolio investors have all but kept the Pakistani equities off their radar. When the rupee started to depreciate after the induction of the incumbent government, market stalwarts expected foreign funds to swoop in for value buying. That was not to be.

From the start of 2020 to Nov 13, foreign investors have been major spoilers of the market with a net sale of equities worth a whopping $439 million. Individuals and insurance companies have absorbed much of the foreign sell-off by net purchases of $178m and $199m, respectively.

“Foreigners have been net sellers since 2016,” said a fund manager. He argued that there are more pressing issues on the minds of foreign fund managers. “It has to be seen if the surplus (in the current account) continues come March 2021 when principal and interest on foreign loans would become due,” the fund manager said. But it has also to be acknowledged that the rising rupee will translate in reduced aggregate foreign debt payments and their servicing costs.

Besides, he argued, there are other issues: foreigners expect a corporate growth rate of 7-8pc to make a company stock attractive. Corporate profit growth is tied to the country’s GDP growth which, some credible sources project, could end the financial year in the negative.

Published in Dawn, The Business and Finance Weekly, November 16th, 2020