Pak India Tension: Stocks Down, Bonds Up
ISLAMABAD: The tension between Indo Pak further escalated in the night/morning of May 06/07, wherein, as per media reports, neighboring country that carried out few air strikes in different parts of Pakistan and in response, Pakistan has also shot down 5 fighter jets of India, as per press release of Prime Minister’s Office (PMO).
Impact on Stock: Pakistan market lost 6% early morning today after these airstrikes, however, later in the day, most of the losses are recovered and closed -3.13%. Since 23 Apr to 06 May, Pakistan market has already lost 4.1% in 9 sessions amidst uncertainty over possible attack from India.
Due to this tension Pakistan stock are lackluster despite major positive developments in Pakistan including 1) Scheduling of IMF board meeting on 1st review of IMF program on May 09, 2) reduction in policy rate by 100bps, and 3) almost all-time low inflation reading of 0.3% in Apr 2025.
Based on our assessment of previous Indo Pak Conflicts, namely Pulwama/Balakot Issue in Feb 2019 and Uri Strikes in Sep 2016, the market had not reacted very negatively.Oil Stocks: PSO to make inventory gains
Surprisingly, yields on Pakistan Euro/Sukuk bonds in international market have improved (prices increased) by 18-61bps after falling on average 160bps across various tenors in last 8-9 days.
Pulwama/Balakot Issue: On Feb 14, 2019, Indian troops were attacked and 12 days later India responded through air strikes in Pakistan on Feb 26, 2024. Pakistan Market lost 2% on Feb 26 when airstrike took place and 3 days losses fell to 1.4%, recovering 0.6%.
Uri Strikes: India carried out airstrikes in Pakistan on Sep 29, 2016 in response to causalities reported during a militant attack on India Army at Uri on Sep 18, 2016. Market reacted positive after the strikes on Sep 29 and 1 day and 3 days gains were 0.6% and 2.1%, respectively.
Previously IMF programs continued “Business as Usual” during tense times: In the past we have seen continuation of IMF program despite tensions as these programs are based on macroeconomic targets. During Uri Strikes time, Pakistan also got approval of its 12th review under EFF facility on Sep 28, 2016.
Market Outlook: Going forward we believe, market performance will be dependent on Pakistan’s response to this aggression. Prime Minister Office press release also suggest that armed forces have been given authority to respond to this Indian aggression. Furthermore, approval of IMF program on May 09 will also be a trigger for market performance.
We maintain our base case Index Target of 127,000 for Dec 2025. However, with higher liquidity index can cross 150,000 mark assuming successful IMF reviews and political stability.
