The KSE100 Index on Thursday closed for the first time above 100,000- points. This is a new high, and it has more than simply symbolic significance. It indicates that the investors’ confidence is in the Shehbaz government. Since the beginning of the year, the index has increased 60 percent, and 141 percent since last June. It has repeatedly set new records in this period, and is the most visible signpost for the direction the economy is taking. At the same time, not too much should be read into it, for large swathes of the economy remain outside the stock market. Still, the landmark cannot be ignored, considering how it was linked to the search for political stability. Is it entirely a coincidence that the market experienced a rare dip when the PTI protest began, but recovered handsomely when the gathering was broken up?
Actually, that was not the real underlying factor. The rise in the market must be seen in the context of inflation coming down, and the consequent cut in interest rates. As interest rates come down, returns on capital from bonds (mostly Treasury bills) become less attractive, while the returns on stocks become more attractive. Inflation has not yet bottomed out, with the Finance Ministry predicting declines in inflation in November and December, and the interest rate may thus be heading for further decline, going by the most recent Treasury bill auction. Indeed, industrialists feel that even without any further decline in inflation, interest rates should be cut further. It should be noted that mutual funds have been buying stocks quite heavily, which is why the market has been rising.
Perhaps the worst thing the government could do is to pay too much attention to the market. It may well be committed to prosperity and development, but it should remember that inflation benefits it by benefitting the voter, not boosting the market. The market should go up, because inflation is due to come down. There is shadow on the horizon, that of inflation in the USA. Interest rates there might go up, which would push up, or t least prop up rate here. Ultimately, it should be forgotten, the economies of the West set the trend for Pakistan’s, but barring any shocks, the market outlook is positive. That can only be good new for the government.
