More rallies in store for the PSX?

Pakistan’s equity market ripped higher in 2024, carrying the KSE-100 index to its record peak as the economic fundamentals stabilised and the State Bank started cutting interest rates. The benchmark index climbed to 116,169 points on Dec 17 (before settling down to 110,246 points on Friday) from 64,661 points on Jan 1.

This compares with the previous peak of around 52,000 points achieved in 2017. The stocks have gained much more rapidly after the announcement of the budget on June 12, when the index stood at 72,797 points, in the hope of anticipated approval of the new International Monetary Fund (IMF) funding programme of $7 billion.

But Pakistan’s stock market wasn’t the only one rising during the outgoing year.

Argentina’s stock market has surged 22-fold since July 2022 and Turkiye has also seen more than a four-fold increase in its equities compared to Pakistan’s two-fold rise, according to data collated by Ahmed Jamal Pirzada, a leading economist and Bristol professor.

“This appears spectacular. However, look closely, and much of this simply reflects these markets recovering the value they lost due to sharp exchange rate depreciation and subsequent inflation seen in these countries in the last two years,” he explained, giving a context to the ‘spectacular’ PSX performance, which earned it the distinction of being one of the best-performing markets during the year.

Despite the bull run, the market is still depressed in dollar and rupee terms compared to its peak in 2017

Inflation in Argentina and Turkiye remained above 100 per cent and 50pc, respectively during much of this period, he pointed out. Inflation in Pakistan also remained above 20pc between June 2022 and March 2024.

There are also other reasons contributing to the rebound in Pakistan’s stock market, he noted.

“The back-to-back crises, starting with the crisis in 2017-18, meant that the stock market remained depressed for much longer. The price-to-book ratio had fallen from an average of around 1.7 between 2008 and 2017 to only 0.7 by the second quarter of 2023. A similar trend is also seen for the price-to-earnings ratio, which fell from the average of around 10 between 2008 to 2017 to less than five in 2023.”

The macroeconomic stability due to improvement in the global economic environment and stringent macroeconomic policies at home has allowed the stock market to recover, Mr Pirzada, who is also part of the Islamabad-based independent Economic Advisory Group (EAG) said that as impressive as the recovery may look, the stock market has still not recovered to its 2017 peak when looked at in dollar terms. “Moreover, both the price-to-book and the price-to-earnings ratios still have a long way to go. As of today, the price-to-book and the price-to-earnings ratios stand at 1.2 and 6.7, respectively. These are comparable to levels last seen in 2021,” he argued.

In mid-November, the Karachi-based brokerage Arif Habib predicted that Pakistan’s stocks are expected to advance to 120,000 points by the end of next year as the nation’s economy shows improvement under a loan programme with the IMF and the currency stabilises. Another brokerage firm, Topline Securities, forecast the benchmark index to increase to 127,000 points by December 2025.

“The stage is set for a potential market re-rating with declining interest rates, a stable rupee, and improving macroeconomic indicators,” Arif Habib Ltd commented in a report. Pakistan’s economy has stabilised with inflation easing from record levels, allowing the central bank to cut the interest rate for five straight meetings to 13pc, the lowest in more than two years.

Aftab Ahmed Chaudhry, the managing director of LSE Capital and LSE Ventures with more than two and half decades of working in the equity markets, shares Mr Pirzada’s perspective on the country’s stock market surge. “The outgoing year has been an outlier year for the stock market. I have witnessed some bull runs happening in the market. Our valuations at that point in time rose to $100bn and we were included in the MCFI index.

“So you know things did happen despite there having been no consistent growth in the economy. In Pervez Musharraf’s time, it was the feel-good factor, and under Asif Ali Zardari, it was capital gains tax exemption that had stimulated the market,” he noted.

This time around, a few things happened together: initially, the stabilisation of the economy, hopes of the IMF programme and anticipation of a reduction in interest rates sustained and helped the market sentiment. “But after June, we saw the market gain aggressive momentum as interest rates started to fall steeply, and inflation plunged dramatically.

“The IMF also approved a new, longer, and larger funding programme. Also, the government introduced taxes on real estate in the budget to document the economy, leaving the market the only avenue for investment,” Mr Chaudhry elaborated. He does not agree with many who believe Pakistani shares have become excessively expensive.

“Our price-to-earnings value is still around 6; so on the whole our stocks are still cheaper in terms of dollars and earning multiples because the bulk of the increase in the stock market is coming from adjustments in prices, not innovation or economic dynamism,” he said.

How the market will perform next year is a concern shared by most small investors who have seen their savings lost in the previous bull runs.

A senior fund manager says, “Assets bounced back this year after staying depressed for a long time. The fact that the stocks were being traded at very unrealistic values has been the underlying factor for the surge we have seen in the share values. The correction was to happen.

“Now the momentum has broken and the start of 2025 appears to be a bit shaky due to both internal and external political and economic factors like the Trump team’s open support for Imran Khan and normalisation of returns on investment due to falling earnings of banks and other sectors.”

Mr Chaudhry believes the market is still attractive and might be headed for sustained growth. “We see the interest rates falling to a single digit and fiscal consolidation to continue under the IMF. This means the fundamentals are improving. So we don’t see much pressure.”

Nevertheless, he warns that factors like political volatility, the market heating up due to heavier investment inflows and more and more money chasing the same few stocks, and Trump’s return to the White House could prove to be major challenges for sustaining the upward market momentum next year.

Where do we go from here? “A low price-to-book and price-to-earnings ratio today compared to the 2008 — 2017 average may suggest that there is still room for the stock market,” said Mr Pirzada. “These ratios have proved useful in the literature for predicting stock prices over the medium to long run. However, the macroeconomic stability continues to stand on weak foundations.

“According to State Bank data, external debt servicing (broadly defined) over the next 12 months remains high at $30bn. Additionally, at 15 percentage points, the spreads for 5-year credit default swaps remain the third highest in the world. It is

not surprising to see that foreign investors continue to show limited interest in investing in Pakistan’s stock market.“

The performance of the Pakistani equity market has been lacklustre for the last five years as it could not exceed its 2017 peak despite a run-up in equity markets globally.

Stepping back, the Bristol economist added, a bigger concern is how poorly Pakistan’s stock market continues to perform even in good times. “For context, the price-to-book ratio for the US stock market (S&P 500) and the Indian stock market (BSE 100) was already much higher at close to 3 back in 2017. This increased further to 5.2 and 3.6 for the two countries, respectively.

“A similar story emerges from looking at the price-to-earnings ratio. A higher number generally reflects market optimism about future growth prospects. Why do markets remain pessimistic about Pakistan’s growth prospects even in supposedly good times is worth considering,” he concluded.

Published in Dawn, The Business and Finance Weekly, December 30th, 2024