PSX Drops Amid Middle East Tensions

“`html

Pakistan Stock Market Rattled by Geopolitical tensions; KSE-100 Index Dips

Karachi – the Pakistan Stock Exchange (PSX) concluded trading this week on a bearish trajectory. Escalating geopolitical instability, notably in the Middle East, has significantly eroded investor confidence, triggering widespread profit-taking across various sectors.

Despite an initial upswing following the State Bank of pakistan’s (SBP) Monetary policy Statement (MPS), which aligned with expectations by maintaining the policy rate steady at 11%, the KSE-100 index ultimately closed the week down by a substantial 2,120 points, reflecting a 1.7% decrease, settling at 120,023.

Geopolitical Risks overshadow Economic Stability

The shift in market sentiment occurred rapidly. According To Arif Habib Ltd, escalating regional conflicts overshadowed otherwise stable macroeconomic indicators and successful treasury auctions. The SBP conducted an unprecedented 22-day Treasury Bill auction, successfully raising Rs916 billion against a target of Rs900 billion.

Additionally, The SBP successfully raised Rs557 billion through a pakistan Investment Bond (PIB) auction, exceeding the initial target of Rs300 billion, with total participation reaching Rs1.2 trillion. Cut-off yields fluctuated between 11.39% and 12.70%, indicating diverse investor expectations concerning future interest rate trends.

The State Bank of Pakistan announced a current account deficit of $103 million for May, marking a significant improvement from the $235 million recorded during the same period last year. Foreign exchange reserves experienced a slight increase of $46 million, reaching $11.7 billion.However, the Pakistani Rupee depreciated marginally by Rs0.74 week-on-week, settling at 283.70 against the US dollar.

investor sentiment falters as geopolitical risks eclipse economic stability.

Sectoral Performance and Key Movers

Sectoral performance reflected a prevailing risk-averse attitude among investors. The power sector exerted the most downward pressure on the index, dragging it down by 652 points, followed by cement (475 points), fertilizer (193 points), pharmaceuticals (144 points), and oil and gas exploration (144 points).

Conversely, the banking sector provided some positive momentum, contributing 234 points, bolstered by gains in United Bank (107 points), Bank Al-Habib (90 points), and Habib Bank (72 points). Other sectors exhibiting positive contributions included oil and gas marketing (15 points), textiles (14 points), and insurance (9 points).

Significant negative scrip-wise movers included Packages Ltd (566 points), Lucky Cement (-242 points), Fauji Fertilizer (114 points), Mari Petroleum (91 points), and Pakistan Petroleum Ltd (88 points). On the upside, Oil and Gas Development Company and Systems Ltd each added 60 points.

Foreign and Local Investment Trends

Foreign investors demonstrated net buying activity amounting to $0.46 million, a reversal from the previous week’s net selling of $7.43 million. Foreign inflows were predominantly concentrated in the cement ($1.6 million) and exploration and production ($1.0 million) sectors. Domestically,mutual funds and insurance companies continued as net sellers,offloading $16 million and $2.9 million, respectively. Individuals absorbed the selling pressure, with net buying totaling $15.6 million.

Average daily trading volume decreased by 9.4% week-on-week to 821.9 million shares, while the traded value plummeted by 40.4% to $78.4 million. This decline signals weakening market participation amidst heightened uncertainty.

Broader Economic Indicators

Broader economic indicators presented a mixed picture. Large-scale manufacturing output experienced a 2.3% year-on-year increase in April, while the real effective exchange rate (REER) declined to 97.8-the lowest level since September 2023. Net foreign direct investment (FDI) in May reached $194 million, while repatriation of profits and dividends totaled $264 million. Pakistan’s trade deficit was recorded at $2.6 billion during the month.

Banking sector deposits and advances increased by 11.6% and 7.0% year-on-year, respectively, resulting in an advance-to-deposit ratio of 39.8% and an investment-to-deposit ratio of 105.7%.

Other significant developments included a 19% year-on-year surge in IT exports,reaching $3.5 billion during the first 11 months of FY25. Additionally, urea and DAP sales witnessed substantial increases of 5% and 135%, respectively, in May. The government also unveiled the National electric Vehicle Policy and a draft tariff policy for 2025-30.

Sector-wise, woollen (up 18.3%), jute (14.5%), modarabas (6.7%), close-end mutual funds (4.7%), and transport (2.0%) emerged as top performers.Conversely,power (-10.2%), engineering (-5.2%), investment companies (-5.1%), glass and ceramics (-3.5%),and tobacco (-3.5%) were among the hardest-hit sectors.

Market Outlook

Analysts at AHL suggest that market sentiment will remain heavily influenced by geopolitical developments, particularly in the Middle East. Any signs of de-escalation could perhaps trigger a market recovery. The KSE-100 currently trades at a forward price-to-earning ratio of 6.4x for 2025, which is notably below its 10-year average of 8.0x. It also offers a dividend yield of 8.4%, surpassing the 10-year average of 6.5%.

AKD Securities echoed a cautious short-term outlook, citing ongoing investor apprehension regarding the Iran-Israel conflict. However, they project a medium-term recovery, anticipating the KSE-100 to reach 165,215 points by December 2025. This forecast is underpinned by robust earnings in the fertilizer sector, sustained return on equity in banks, and improving cash flows in exploration and marketing companies, driven by easing interest rates.

Did You Know? The PSX is one of the oldest stock exchanges in South Asia, with roots dating back to 1947.

Key Market Data

Indicator	Value
KSE-100 Index Change	-2,120 points (-1.7%)
Current Account Deficit (May)	$103 million
Foreign Exchange Reserves	$11.7 billion
net Foreign Direct Investment (May)	$194 million

Understanding Stock Market Volatility

Stock market volatility is a natural phenomenon influenced by a myriad of factors, including economic indicators, geopolitical events, and investor sentiment. Understanding these drivers

What are the specific sectors within the PSX most vulnerable to the current geopolitical instability in the Middle East, and why?

PSX Drops Amid Middle East Tensions: Navigating Market Volatility

The Pakistan Stock Exchange (PSX) has seen significant drops in recent times, sparking concerns among investors and analysts alike. This volatility is, in no small part, linked to the escalating geopolitical tensions in the Middle East.The complex interplay between global events, international relations, and market performance demands a detailed examination of how these factors effect the PSX and the broader economic landscape. Key factors influencing the PSX include oil prices, investor sentiment, and currency fluctuations, all sensitive to developments in the region. Understanding these dynamics is crucial for making informed investment decisions and navigating the current market environment.

Geopolitical Risks and PSX Performance

The Middle East is a critical region for global oil production and supply chains. Any instability, such as armed conflicts, diplomatic standoffs, or threats to shipping lanes, can instantly impact oil prices. Higher oil prices,while potentially benefiting some oil-exporting countries,can create inflationary pressures and negatively affect the economies of oil-importing nations,including Pakistan. This price sensitivity, in turn, influences investor confidence in the PSX, often leading to sell-offs and reduced trading volumes.

Specific Events and Market Reactions

Several recent events have highlighted the sensitivity of the PSX to Middle East tensions:

• Heightened Military Activity: Increased military presence or conflicts in critical areas, such as the Strait of Hormuz, can disrupt oil supplies and trigger price spikes.
• Geopolitical Statements: Statements from key political figures, often signaling shifts in alliances or policy changes, can cause dramatic swings in the PSX.
• Economic sanctions: Sanctions,especially those impacting trade relations within the middle East,can directly affect local businesses and indirectly impact the PSX.

The market’s response to these events tends to be swift. As an example, a sudden announcement of increased tensions might lead to an immediate drop in share prices across various sectors, notably those perceived as being highly vulnerable to external shocks. Conversely, any positive developments or peace negotiations might generate a surge in investor confidence, leading to a short-term recovery.

Sector-Specific Impacts

The impact of Middle East tensions on the PSX is not uniform across all sectors. Several sectors are particularly susceptible to global market volatility. Understanding these sector-specific sensitivities is crucial for any investor looking to assess their risk exposure and make strategic investment decisions.

Key Sectors & Their Vulnerabilities

Certain sectors within the Pakistan Stock Exchange are particularly vulnerable:

Sector	Vulnerability	Impact
Energy (Oil & Gas)	Oil price fluctuations; supply chain disruptions	Significant price volatility; uncertainty in profitability
Banking	Increase loan defaults linked to economic slowdown, currency devaluation.	Decrease in investor confidence, lower returns, reduced lending.
manufacturing	Supply raw materials; currency exchange volatility	Cost increases that impact margins; disruption in output

Energy stocks frequently enough reflect the ups and downs in international oil prices, and shifts in these prices can considerably influence their profit margins and stock performance. Banks, too, feel the impact, often through increased loan defaults during times of economic stress. Currency fluctuations can also affect the manufacturing sector, increasing the costs of imported raw materials and equipment.

Practical Tips for Investors

Navigating the market volatility driven by Middle east tensions requires a strategic approach. Investors should stay informed, diversify their portfolios, and consider hedging strategies to manage risk effectively.

Strategies for Mitigating Risk

• Stay Informed: Closely monitor relevant news outlets, financial reports, and analysis from reputable sources.Stay aware of global events.
• Diversify: Diversify your investment portfolio across different asset classes and sectors to reduce risk exposure.
• Use Hedging: Explore derivative instruments like futures or options to hedge against potential market downturns.
• Long-Term Viewpoint: Adopt a long-term investment horizon wherever possible to weather short-term market fluctuations.

These strategies can help protect investors during periods of market volatility, but it is significant to remember that no strategy guarantees profits or protects from losses.