In my last blog, when I was discussing reasons of recent market rally there was one important point that I should have included which is related to FX Reserves.
It should be remembered that FX Reserves are generally good for economy and are positively related to Stock Market (Please note that this relationship might not be like that in developed economies but in emerging economies this relationship is generally true) because it is from FX reserves that the country could pay for it’s imports, pay back it’s foreign debt etc. Remember in 2008 when our FX Reserves were at their lowest our country was near to default and it was the same time when we entered in IMF Program. Off course, we all know that it was also the time when Stock Market started to go down which eventually end up with the bizarre incident when Government decided to impose a Floor. So, the point is that healthy FX reserves are good for emerging economies and this factor also have a strong positive effect on Stock Market.
It should be remembered that FX Reserves are generally good for economy and are positively related to Stock Market (Please note that this relationship might not be like that in developed economies but in emerging economies this relationship is generally true) because it is from FX reserves that the country could pay for it’s imports, pay back it’s foreign debt etc. Remember in 2008 when our FX Reserves were at their lowest our country was near to default and it was the same time when we entered in IMF Program. Off course, we all know that it was also the time when Stock Market started to go down which eventually end up with the bizarre incident when Government decided to impose a Floor. So, the point is that healthy FX reserves are good for emerging economies and this factor also have a strong positive effect on Stock Market.
Currently Pakistan FX Reserves are at their all time high of 17 billion. Given the fact that our imports are roughly 34 billion we have an import cover of around 6 months. This economic indicator is certainly positive. The most important aspect of FX Reserves is related to the stability of Currency, the more the FX reserves the more stable (and so less risky for foreign investors) the currency will be, and we do know very well Pak currency is relatively stable. Off course it will depreciate, but more importantly it will depreciate with stability and certainity. Most in analyst community believes that Rupee will depreciate between 5-8% per year as I mentioned in my earlier post.
However many analysts are not excited with this news because they believe that these FX reserves are accumulated from borrowed money (from IMF) which we eventually need to pay back. It would have been more positive if we could achieve these reserves with earned money (exports, remittances, foreign investment, etc). Remember we have already received around 7.4 billion and we will receive remaining 3.6 billion with in a next few months from IMF.
MARKET OUTLOOK:
I hope investors would be doing good with their investments. Today market closed at 10,703. Investors with diversified portfolio should be doing good. Small-moderate correction may take place though. However as an Investor we should focus on medium-long term trend and as an Financial Analyst this is exactly what I do. Short term market fluctuations is very hard to predict and no one can be absolutely sure about it.
Thanks and Good Luck with your investments. You can post a comment if you have any question or you can send me an email at tahiradeel001@yahoo.com.
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