ASSESSING THE PREDICTIVE POWER OF FUEL PRICE VOLATILITY ON SECTORAL STOCK RETURNS IN PAKISTAN

Abstract

Introduction: Fuel price volatility drives economic activity, putting pressure on energy consumers in Pakistan. Economic impact of fluctuations in fuel prices can be production costs and transportation costs, all of which can affect the economy and therefore the state of the stock market. However, little has been investigated regarding the predictive power of fuel price variations for sectoral stock returns in Pakistan. This paper investigates the relationship of fuel price volatility with stock returns of three major industries (transportation, manufacturing and energy) quoted on the Pakistan Stock Exchange (PSX). The study seeks to reveal how these predictive relationships can offer insightful guidance for investors, policymakers, and businesses alike.

Objective: The objective of this study is to evaluate how well gasoline price volatility predicts sectoral stock returns in Pakistan. Specifically, the study aims to determine how fuel price fluctuations impact the financial performance of companies in the transportation, manufacturing, and energy sectors. Additionally, it aims to determine which industries are most affected by fluctuations in fuel prices and whether or not stock performance in these industries can be accurately predicted by fuel price volatility. The findings will help investors in risk assessment, guide policymakers in economic decision-making, and support companies in developing strategies to mitigate fuel-related financial risks.

Material and Method: This study follows a quantitative research design and collects secondary data for the period 2015 – 2024. The monthly stock price records of certain firms in the Pakistan Stock Exchange (PSX) were collected along with bi-monthly government and financial database records of petrol and diesel fuel prices. The analytic strategies used included descriptive statistics, the correlational method, fusion regression modeling, and chunking regression analysis. To test the different impacts of fuel price changes, univariate and multivariate regression models were applied. Additionally, ANOVA tests were perform to assess the significance of sectoral stock return in response to fuel price changes. 

Results: The results show that price is highly responsive in both transportation and energy sectors, while in manufacturing sector, results are mixed. The correlation is especially strong for the shipping and logistics sub-sector of transportation, where stock returns are heavily influenced by changes in fuel prices, a crucial expense. The energy sector is another to show a strong connection to inflation, with oil and gas firms profiting from a lifting price of gasoline. But the manufacturing sector's response has been mixed; some industries like cement and fertilizers have been hit harder than consumer goods manufacturers. And regression analysis shows fuel price volatility account for only a small portion (1.7% — 6.2%) of cross-sectional variation in stock  returns by bearings where other macroeconomic factor still plays their critical role in stock's performance.

Conclusion: The findings conclude that fuel price volatility has a major effect on stock returns in Pakistan, particularly in the transportation and energy sectors. Investors must consider fuel price trends in their portfolio strategies to mitigate the related risks, while policymakers must consider action to stabilize fuel prices or encourage investments in alternate fuel sources. Companies, especially fuel- consuming businesses, must adopt strategies such as hedging against fuel price volatility or investments in fuel-efficient technology to mitigate the related financial risks. The omission of macroeconomic volatility hurts the current study even if it offers valuable insights. To improve predictive power, more industries and economic variables must be included in future studies.