Interest rates to dictate PSX return

No one quite starts the New Year like the stock market players at the PSX. Regardless of what has happened in the preceding month, the macroeconomic situation, looming default, or razor-thin international reserves – if it’s the first month of the year, you better be positive. Five of the last six Januarys have yielded a higher return than the entire year. January of 2023 seems to have started with a similar fervor. It may well all still be a sweet coincidence, or that some brokerage houses do not want to be too disrespectful so soon after releasing the “strategy” reports sounding bullish.

It has only been three trading sessions for February, but normal service seems to have resumed. Towards the end of January, some may have been excited about the dollar peg finally breaking and the IMF team arriving in Islamabad to finalize the review. But these two are the precise reasons why no one should be hoping for any bull rally, anytime soon.

The rupee’s much-needed adjustment to the dollar promises to bring inflation, and not your everyday inflation. This promises to be entrenched. And then the IMF people in Islamabad are here to get the authorities to do what they have refrained from doing so far – increase prices across various sectors. Energy prices – petroleum, gas, electricity – all are set to increase considerably. The second and third rounds of inflation due to adjustments in retail prices as imports at revised dollar rates kick in –will soon follow.

Inflation, already at a nearly 50-year high, is expected to stay on course. Core, non-core, rural, trimmed, wholesale – you name it. Whichever way the central bank looks at it – no amount of slack and demand destruction in the economy will cut the deal. The IMF likes positive real interest rates. That may still not happen – but interest rates are only going to go in one direction from here. That is up.

And no matter how cheap the earnings multiples are at the KSE-100 – the benchmark index mirrors the movement of discount rates. Miracles aside, expect plenty of days painted in red leading up to either side of the next monetary policy, possibly with a brief optimistic spell around the IMF announcement.