PSX breaks records, market experts hold off on future predictions

The performance of Pakistan’s capital market has exceeded even the most optimistic expectations. While brokers and fund managers anticipated a rally in 2024, the unprecedented surge has already surpassed all predictions, promising returns beyond investors’ wildest imaginations. The key question now is how long this rally can sustain its momentum and what level the market is likely to reach by year’s end.

The KSE 100 index crossed a historic 104,500 level yesterday (December 3), closing at an unprecedented 104,611 points. It was a Sunday the same date last year, when markets were closed. On December 4, 2023, the index had closed at 62,493 level. This represents a staggering gain of 42,118 points in just one year, a phenomenal performance for a market in a country that narrowly escaped default last year and often dismissed as crisis-riddled.  

Little over two months back, in September 2024, the Pakistan Stock Exchange (PSX) was recognized by the Bloomberg as the world’s best-performing stock market of the year. Bloomberg, a leading US-based private media company known for providing real-time data and analysis across the word, attributed the PSX’s stellar performance to robust foreign investment and positive economic indicators that have significantly boosted investor confidence.

Some cautious observers have advised against over interpreting the market’s surge, noting the PSX’s narrow investor base and its perceived control by a small nexus of influential brokers and bankers. “The unprecedented rally in the PSX reflects deeper and more complex underlying factors beyond mere surface-level investor confidence”, remarked an analyst who requested anonymity.  

According to information gathered, as of October 2024, PSX reported 78,058 individual investor accounts and 2,379 corporate investor accounts. Additionally, the PSX hosts 1,866 foreign institutional investors, 833 domestic institutional investors, 220,000 retail investors, 400 brokerage houses, and 21 asset management companies. While this diversity is notable, it remains relatively limited in a country with a population of 236 million.

Market pundits, securities executives and brokerage house representatives have refrained from predicting a specific level for KSE-100 index by December 31, 2024. However, they almost unanimously anticipate the upward trend to persist, likely extending well into 2025.  “I don’t foresee any disruption to the current trajectory of the stock market unless a major internal or external shock jolts the entire system”, a broker commented privately.

Nadeem Naqvi, Managing Director of the PSX, attributed the recent market’s surge to growing investor confidence in Pakistan’s economic recovery and the groundwork laid for long-term growth.

“Stock markets are inherently forward-looking so certainly, the present market behavior signals optimism. Investors believe the economy is on the mend and poised for sustainable growth”, he stated.

“It is important to reflect on where we have come from. In fiscal year FY2022-23, Pakistan experienced its worst macro-economic performance in history – with record high inflation, steep rupee devaluation, critically low foreign exchange reserves and a near-default scenario. This was both triggered and deepened by high political uncertainty. Markets detest uncertainty, and the Pakistan market is no exception.

“For context, total market capitalization as a percentage of GDP was 30 per cent in 2017, dropping to 15 per cent in 2021, and plunging to 7.6 per cent in 2023, the lowest on record. By mid-November 2024, it had recovered to 11.5 per cent, though still 25 per cent below 2021 levels.

“In terms of valuation, even after this rally, the market’s price-to-earnings (P/E) ratios stands at around five times earnings, significantly below the 20-year historical average range of 7.x – 8.0x, representing around 30 per cent discount. Additionally, the average dividend yield of KSE-100 Index companies remains over 10 per cent.

“So, all in all, the current rally reflects a combination of catch up towards normalization of valuations, as well as greater confidence in economic stability and corporate earnings growth”.

“Going forward, however, one must also be cognizant of risk factors such as regional geopolitical developments in the Middle East, its potential impact on oil prices and economic activity there and consequently on Pakistan’s current account due to high imported oil and remittances dependency. These factors could also lead to higher inflationary pressures, delay future interest rate reductions by the State Bank of Pakistan, and extend economic stabilization timelines. Such developments might temper investor enthusiasm.

“But for now, as the famous Wall Street saying goes, ‘as long as the music plays, the party is likely to continue”, he concluded.

Efforts to solicit the perspective of the Securities and Exchange Commission of Pakistan (SECP), the capital market regulator, remained unsuccessful. Senior officials redirected all inquiries on the matter to the managing-director of the PSX.

Mohammad Sohail, CEO, Topline Securities, refrained from directly commenting on the potential KSE-100 Index level by the end of this month. Instead, in a social media post featuring a graph of index’s historical trajectory, he remarked: “While the milestone of the KSE-100 Index crossing 100,000 points is being celebrated, its crucial to reflect on the challenging period from 2017 to 2023.

“As evident in the graph, the benchmark index remains 25 per cent below its 2017 peak in dollar terms. To reclaim that peak, the index would need to reach approximately 140,000 points with a stable rupee, factoring in the significant currency devaluation over the years.”

Sohail expressed optimism about the market potential to return to its original growth trajectory, provided there is sustained political and economic stability.

Meanwhile Arif Habib Limited, in a recent report, projected the KSE-100 Index to reach 120,000 points by December 2025.