MACRO-ECONOMIC ANALYSIS ON KSE-100 INDEX WITH SCNERIO OF PSX: A LITRATURE REVIEW OF THE LAST DECADE

Abstract

This exploratory research conducts a macroeconomic analysis on Karachi Stock Exchange, KSE-100 index, using the data of the last decade, covering time period from January 2005 to December 2016. As part of our literature review, we could only find such studies on past data, hence, the research gap in the study, i.e. to conduct a macroeconomic analysis on KSE-100 index in a refined manner using the recent data of the last decade. In the field of Equity Analysis, two types of analysis are often used, i.e. Fundamental & Technical Analysis. The latter uses the past trends of the stock prices to extrapolate the future movements while applying different tools and techniques. Fundamental analysis, on the other hand, relies on the fundamental factors affecting the performance of the stocks. Fundamental factors, in turn, can be taken from three domains, which are company factors, industry factors, & macroeconomic factors. This research attempts to analyze macroeconomic factors to determine their impact on stock performance, using KSE-100 index as the barometer.  The research performs multiple regression using KSE-100 as the dependent variable and five macroeconomic indicators as independent variables (predictors), i.e., interest rate, exchange rate, inflation rate, foreign direct investment (FDI) and government expenditures. The five predictors were chosen because of their significant (direct/indirect) impact on the performance of companies and their stocks which is also evident from the literature review. The source of secondary data for this research were mainly two websites, i.e. Pakistan Stock Exchange website and State Bank of Pakistan website. After checking for the validity of all the assumptions of multiple regression analysis, the regression results showed that FDI and interest rates have negative and significant relationship with KSE-100; Inflation, on the other hand, has insignificant impact on KSE-100 INDEX. Apart from this, exchange rate and government expenditures have strong positive and significant relationship with KSE-100 INDEX. The results also showed that interest rates and exchange rates have major contribution in the variation of KSE-100 index. The results of the data can be of immense use in future for investment analysts and academicians alike in analyzing stock performance in Pakistan.