The benchmark KSE-100 Index suffered its most significant decline in months, plunging below the 72,000 level with a decrease of over 2,000 points in the early minutes of trading on Friday. This sharp drop was driven by investor concerns and the widespread offloading of shares due to rumours of high taxes being imposed on the capital markets in the upcoming budget.
The index had already been under pressure throughout the week, losing ground in every session. However, Friday’s trading saw an aggressive ‘dump approach’ triggered by fears of higher taxes and anti-growth proposals expected in the upcoming budget announcement on June 12.
Despite a slight recovery with the index clawing back above 72,000, it remained down over 1,100 points. Market analysts have attributed this drastic fall to concerns surrounding the upcoming budget for the fiscal year 2024-2025.
Sana Tawfik, the head of research at Arif Habib Limited, stated, “A proposed increase in the Capital Gains Tax (CGT) and dividend tax in the upcoming budget is driving this trend.” Tawfik also pointed to discussions about the imposition of a General Sales Tax (GST) or an increase in the Petroleum Development Levy (PDL) on petroleum products as additional factors contributing to the market’s decline.
Despite the current downturn, Tawfik expressed a more optimistic outlook regarding the monetary policy. “We expect the policy rate to decline by 200 basis points. A global reversal of the policy rate has been initiated, with the European Central Bank (ECB) and the Bank of Canada announcing rate cuts. This will support the State Bank of Pakistan’s (SBP) decision.”
The selling pressure was felt across key sectors, including automobile assemblers, cement, chemicals, commercial banks, oil and gas exploration companies, oil marketing companies (OMCs), and refineries. Index-heavy stocks such as Habib Bank Limited (HBL), Meezan Bank Limited (MEBL), Pakistan Petroleum Limited (PPL), Oil and Gas Development Company (OGDC), Pakistan State Oil (PSO), Sui Northern Gas Pipelines Limited (SNGPL), and Sui Southern Gas Company (SSGC) all traded in the red.
The pervasive negative sentiment among investors can be linked to the uncertainty and speculation surrounding the upcoming budget. The potential increases in taxes, particularly CGT and dividend tax, are seen as measures that could dampen market activity and investor confidence.
In addition, talks about the imposition of GST or increasing PDL on petroleum products are fueling concerns about the broader economic impact. These measures could lead to higher costs for businesses and consumers alike, further straining the economic environment.
While the current market conditions are challenging, the anticipated decline in the policy rate could provide some relief. A lower policy rate generally encourages borrowing and investment, which can stimulate economic activity and potentially reverse some of the negative trends seen in the market.
The global trend of rate cuts by major central banks such as the ECB and the Bank of Canada adds to the optimism that the SBP will follow suit, providing a much-needed boost to the market.
