KARACHI: Everyone and her aunt expect the stock market to rally on Monday, the first day after the dollar-starved country signed a $3 billion short-term loan agreement with the International Monetary Fund (IMF).

But how long the IMF-induced euphoria will last on the shares market is anybody’s guess.

After all, investment avenues in the money market and fixed income streams of the capital markets offer significantly higher — and less risky — returns than stocks, thanks to the record-high benchmark interest rate.

“Two of the biggest worries on the minds of stock investors were the risk of sovereign default and the possibility of debt restructuring. We’re back in the IMF system, which means investors can rest assured on these two counts,” said Shahid Ali Habib, CEO of Arif Habib Ltd, while speaking to Dawn on Saturday.

The KSE-100 index, which is the benchmark of representative stocks listed on the Pakistan Stock Exchange (PSX), has hovered within the 40,000-42,000-point band for the last many months because of unending uncertainty on economic and political fronts.

The government reached $3bn Stand-By Arrangement (SBA) for nine months with the IMF on June 30, the expiry date of the incomplete medium-term Extended Fund Facility of $7 billion.

The renewal of the relationship with the IMF has removed any doubts about the country’s ability to make loan repayments of $9bn, including $4bn sovereign rollovers, until December 2023.

Mr Habib believes the key interest rate, currently at 22 per cent, will start coming down in January-March of 2024 — which will fuel the investment flows from fixed-income segments to the stock market.

He expects the benchmark index to hit 47,000 points by December and 50,000 points by the end of the current fiscal year.

Only 10pc of roughly Rs1.5 trillion assets under management of mutual funds are currently invested in stock funds, which is in stark contrast to the traditional level of 25pc, he said.

A downward trend in the interest rate movement will redirect funds to the stock market, paving the way for a more than 20pc rally in 2023-24, he said.

Mr Habib said banking as well as dollar-linked energy and technology sectors are expected to lead the rally in the stock market in the next 12 months.

Under the watchful eyes of the IMF, the government will try to limit a further build-up in the circular debt by ensuring that tariffs are reset in a timely manner. In addition, energy companies also expect a drawdown in the outstanding stock of the circular debt, especially in the gas sector.

Speaking to Dawn, Pak-Kuwait Investment Company Ltd Head of Research Samiullah Tariq said the SBA will bring certainty to the stock market on the expected dollar inflows — something necessary to quell the talk of default.

“It’ll encourage both companies and investors to take investment decisions,” he added.

As for the price-to-earnings multiple, which measures a company’s current share price relative to its per-share earnings, the top 100 companies are cumulatively trading at 3.4, notably down from its five-year average of 5.5.

According to Mr Tariq, even a small re-rating in the multiple will yield an upside of 25-30pc. “The high interest rate is already incorporated in the current PE ratio,” he added.

Published in Dawn, July 2nd, 2023