KSE: Leading indicator to another rate cut

Yesterday was the best Monday in a long time for stock investors in the country. The best in four years to be precise, as the KSE 100-index climbed to 15,429 points, its highest level in four years. Investors at the local bourses may have felt starved for good news over recent years as the GoP remained strait jacketed in crises. The showdown between the higher judiciary and the government led concerns in the early days of the government which saw the benchmark drop from its historic highs to the depths of bear country. Subsequently, the GoPs relations with its US counterparts went south, coalition partners dropped in and out of the Federal Cabinet and the fallout from military operations in the countrys restive tribal areas manifested in the form of terrorism in urban areas. But more recently, the reasons to smile and to buy appear to have increased. Firstly, the restoration of ties with the US yielded tangible rewards in the form of the disbursement of $1.1 billion from the long overdue Coalition Support Fund. Then the latest round of corporate earnings results reported to the KSE has shown a broad based revival among the listed firms. The political uncertainty that consistently ranks high in the concerns voiced by market observers, has also quelled considerably as political parties across the spectrum appear in agreement over the upcoming general elections. But the biggest impetus for the stock market has come from the State Bank of Pakistan. The recent cut of 150 basis points, announced in the Monetary Policy Announcement of August 10, 2012 was the real kicker that gave wings to the stock indices. Investors flocked behind the SBP announcement like kids following the Pied Piper. In August, the KSE 100 index jumped six percent, compared to the previous month. This is the highest monthly gain recorded by the benchmark index in over a decade. Just as the KSE 100-index has topped its own four-year high, the discount rate has dropped to a level seen most recently back in January 1, 2008. Whats more, given that inflation, as measured by the CPI has lodged in single digit at least for now, there is a strong likelihood that the central bank may coax economic growth through another reduction in the policy rate. Should that materialise, enthusiastic investors may take the benchmark into unchartered territory following the next MPS announcement scheduled in October.