Manager's Comment:
The benchmark index delivered a weak performance during March 2026, declining by 19,319 points on a monthly basis. Market sentiment remained subdued amid rising regional tensions, which triggered a significant increase in crude and refined oil product prices and raised concerns over a higher import bill for the country. In addition, recent auctions of Treasury Bills and Pakistan Investment Bonds saw yields move higher, signaling market expectations of a potential policy rate increase in the upcoming monetary policy committee meeting. On a positive note, Pakistan reached a staff-level agreement with the International Monetary Fund on the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF), which is expected to unlock USD 1.2bn subject to board approval.
The country largely preserved the macro-stability gains achieved in 8MFY26. The current account remained negative during the corresponding period, recording a decline of mere USD 700mn, compared to USD 479mn in the same period last year; however, this was in-line with SBP estimates. Imports of goods increased by around 8% YoY to USD41.8bn (monthly run-rate: USD 3.4bn vs. USD 3.2bn in SPLY), primarily driven by higher imports in the food group (USD +0.8bn; +17% YoY) and the transport group (USD +1.2bn; +105% YoY) due to increased CKD imports. Exports during the same period remained subdued, declining marginally by 5% YoY to USD 20.7bn. Meanwhile, worker remittances rose by 10% YoY to USD 26.4bn, compared to USD 23.9bn last year, providing a key buffer to the external account. During March-26 SBP reserves clocked around USD 16.3bn, indicating that external figures in the month of March remained stable.
Inflation continued its moderation trend in March, with headline CPI settled at around 7.3% YoY, bringing the 9MFY25 average inflation to 5.6%, compared to 5.3% in the same period, largely due to high base effects and administrative controls. Core inflation also softened, averaging 7.5% in 9MFY25, down from 10.1% in the same period last year.
On the sectoral front, several key sectors recorded healthy growth in March 2026. OMC sales increased by 19% YoY, while cyclical sectors also showed strong momentum, with total cement dispatches rising by 10% YoY. Fertilizer sales are expected to increase by 85% YoY in March; however, cumulative sales for 1Q are likely to declined by around 6% YoY due to the unusually high sales recorded in December 2025.
During March 2026, yields increased across the yield curve, uncertainty surrounding the geopolitical environment and expectations of a pickup in monthly inflation further contributed to the upward movement in yields. At the shorter end, the 1- and 3-month PKRV increased by 0.86 bps and 0.94 bps, closing at 11.21% and 11.28%, respectively. Similarly, the 6- and 12-month PKRV rose by 1.08 bps and 1.28 bps, respectively.
Yields on longer-tenor instruments were also moved upward, primarily due to higher cut-off rates in PIB auction, which triggered adjustments in the secondary market. As a result, the 3-, 5-, and 10-year PKRV increased by 1.95 bps, 1.42 bps, and 1.18 bps, settling at 12.45%, 12.49% and 12.78%, respectively.
Looking ahead, money market funds are expected to deliver stable returns. Income funds may experience some volatility; however, they are likely to generate attractive accruals for investors with an investment horizon of 12 months or longer.
Going forward, uncertainty surrounding the ongoing war will likely prompt the State Bank of Pakistan (SBP) to adopt a cautious stance in the upcoming monetary policy, shifting its focus from growth support toward macroeconomic stability. The money market signals currently point toward expectations of a 100-150 basis point increase in the policy rate, driven by rising inflationary pressures and the possibility of further increases in petroleum prices. On the external front, higher global commodity prices may increase Pakistan's import bill and exert pressure on the balance of payments. At the same time, remittance inflows, particularly from the Middle East along with the scheduled repayment of USD 3.5bn to the UAE and USD 1.3bn repayment of the Eurobond could place pressure on SBP reserves over the medium term.
The benchmark index has already declined by around 19% from its all-time high, bringing the market's P/E multiple down to approximately 6.7x from its peak of 8.7x. This correction has created valuation room and may present an attractive entry point for long-term equity investors. However, the near-term outlook remains closely tied to developments in global energy markets and the evolving geopolitical situation. Furthermore, market sentiments will largely depend on geopolitical developments. In the event of an early resolution of the conflict, relatively low market leverage combined with renewed buying interest from domestic institutional investors could support a meaningful rebound in the equity market.
We recommend our investors to invest in our equity funds as per their risk appetite and return expectations. For instance, our Al-Ameen Islamic Asset Allocation Fund (AIAAF) offers an appropriate strategy for investors with low to moderate risk tolerance. We have been following an aggressive investment strategy in the Equity Sub-Fund considering its long time horizon and low liquidity/redemption pressures. The strategy has performed well and the Equity Sub-Fund has generated an absolute return of 2416.11% (KMI-30 Index: 1289.30% since inception). This translates to an average annualized return of 22.48% p.a. (KMI-30 Index: 17.99% p.a.) - thus outperforming the KMI-30 Index by a significant margin.
- Muhammad Imran, Chief Investment Officer, UBL Fund Managers
