The unprecedented surge in Pakistan’s capital market likely reflects deeper, more complex underlying factors beyond surface-level investor optimism.

The country’s benchmark KSE-100 index clocked at 94,763 when the market closed last Friday, up from 76,742 on November 15, 2023, an impressive gain of 18,021 points in one year. This historic surge occurred despite Pakistan’s low GDP growth rate of just 2.5 per cent in FY24 and expectations of hardly 1pc higher 3.5pc growth rate in FY25 if things go as planned, the country’s close brush with default last year, persistently low saving and investment rates, minimal productivity in agriculture and industry, lagging economic and social indicators, and heavy reliance on bilateral and multiple donors for financial stability.

Bankers, brokers, mutual funds managers, and securities firms like to portray an optimistic picture, viewing the positive market sentiment as an early signal of a high GDP growth trajectory ahead. Economists and analysts, however, remain either unimpressed because of the narrow investor base in Pakistan, or cautious about sharing their views publicly. Meanwhile, the government, often eagerly, frames the capital market rally as a validation of its policy decisions.

Objectively, this surge can be attributed to a unique blend of speculative factors, investor sentiment, and macroeconomic developments. Key drivers include the State Bank’s monetary easing by reducing the policy rate, making equities relatively more attractive than other investments and expectations of higher corporate earnings due to lower borrowing costs.

Analysts stress the dire need for political stability and policy consistency to maintain investor interest in a potentially healing economy

Currency stability, which keeps imported input costs down, has also improved profit outlooks, while International Monetary Fund (IMF)-guided reforms have bolstered fiscal management and improved Pakistan’s perception, strengthening its negotiating position with business partners. Additionally, changes in property market regulations are channelling more resources into the capital market, and local liquidity injections are fueling market momentum despite underlying economic challenges.

Nadeem Naqvi, Managing Director, Pakistan Stock Exchange (PSX), credited the market’s recent upward journey to growing investor confidence in economic recovery and the groundwork for sustained growth.

“The KSE 100 index has surged over 66pc year-to-date, with market capitalisation exceeding $43 billion — a multi-year high — and average daily value traded surpassing $100 million. Just last year, Pakistan faced its worst economic crisis, marked by record inflation, rupee devaluation, dwindling reserves and near-default on foreign loans, all exacerbated by severe political instability,” Mr Naqvi noted.

Mr Naqvi ascribed market rally to two key liquidity sources: domestic mutual funds and individual investors. “With interest rates falling sharply, funds previously parked in high-yield government securities and bank deposits are flowing into the stock market. Additionally, the Federal Board of Revenue’s move to reduce valuation gaps in real estate made that sector less appealing, further boosting stock market activity.”

He cautioned, “Going forward, it’s important to remain mindful of potential risks. For now, however, as the famous Wall Street saying goes, as long as the music plays, the party is likely to continue.”

A sceptical market observer dismissed the PSX as a “closed club for the wealthy” controlled by a powerful nexus of a handful of bankers and brokers. “This small group has consistently amassed wealth over decades, often at the expense of retail investors, securing gains regardless of market trend,” he asserted.

Arif Habib, founder and chairman of Arif Habib Group of Companies and a prominent stock market figure, expressed confidence about the market’s surge but stressed the need to sustain it, “Key positive developments, such as the resumption of the IMF programme and government-led reforms, have attracted significant investors inflows and strengthened market sentiment.

“Robust corporate earnings across major sectors like banking, energy, cement and fertiliser have further propelled gains. Additionally, currency stability and easing inflationary pressures have boosted investor confidence and outlook. Moving forward, continued political stability and policy consistency will be crucial for maintaining this momentum.”

An analyst cautioned that the current capital market performance might prove volatile, especially in an environment where broader economic fundamentals remain weak and the risk of prolonged political unrest looms.

Muhammad Sohail, CEO, Topline Securities, believes that the capital market trend reflects the resurgence of confidence in Pakistan as an investment-friendly nation. “This shift is especially evident following the IMF loan approval and Pakistan’s efforts to comply with IMF conditions. All major economic indicators signal that Pakistan is on the path toward economic recovery,” he remarked.

Asad Ali Shah, a chartered accountant and a former managing partner at a leading consultancy firm, expressed little surprise at the capital market’s performance. “With interest rates declining and a sluggish property market, stocks offer much better returns due to their higher dividend yield,” he observed.

Nasim Beg, a Fellow of the Institute of Chartered Accountants of Pakistan and a seasoned analyst, viewed capital market behaviour as logical. “High interest rates had previously shifted investment away from equities toward interest-bearing options, with new capital flowing into income markets.

“Additionally, many corporates faced a decline in consumer demand due to high inflation and financing costs. With these pressures easing, the market is responding in anticipation.”

However, Mr Beg cautioned, “Pakistan’s economic challenges will require years to fully address, so it is premature to suggest that the economy is on a clear path of recovery.”

Published in Dawn, The Business and Finance Weekly, November 18th, 2024