PSX sees exceptional performance amid Pakistan’s economic turnaround. What’s next?

The Pakistan Stock Exchange (PSX) has sustained a record-breaking rally, delivering an impressive return of 3.75 times on equity investment over the past two years.

The benchmark KSE-100 Index surged from around 40,000 points in mid-2023 to an all-time intra-day high of 151,261.67 points last week, underscoring strong investor confidence and a robust market performance in the wake of positive developments in the domestic economy.

With some adjustment, the KSE-100 Index closed at 149,493 points on Friday (August 22).

In terms of price-to-earnings (P/E) multiples, the market is currently trading at a 7 to 7.5 times earnings ratio compared to multiple of 3 in mid-2023. PSX’s historical P/E averaged at around 8. Therefore, the recent rise in P/E levels toward the long-term average also suggests that the market has likely reached its fair value at present.

In comparison, the P/E for the Indian stock market’s benchmark BSE Sensex stood at 22.8 at the time of writing.

IMF help and rupee stability

“The rally at PSX started with the International Monetary Fund (IMF) providing a lifeline of $3 billion in June 2023 that rescued the then likely defaulting domestic economy,” Arif Habib, a seasoned stockbroker and a well-known businessman explained while talking to Business Recorder.

In July 2024, he said the IMF reached a staff-level agreement with Pakistan for a new $7 billion Extended Fund Facility (EFF), a 37-month programme aimed at supporting economic reforms and stability. The programme played a critical role in stabilising Pakistan’s volatile economy, setting the stage for sustained investor confidence.

As a result, the KSE-100 continued its remarkable upward trajectory, approaching the unprecedented milestone of 150,000 points last week.

Between the two IMF programmes, the government decided to control the local currency in September 2023, taking all possible measures, including crackdown against currency smugglers to stabilise the rupee that had slumped to all-time low at Rs307/$.

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The start of the rupee’s return to stability helped boost market sentiments and supported the rally at the PSX to continue advancing towards the north, he further explained.

The benchmark index was supported by many other positive government decisions, including the end of the misuse of Afghan Transit Trade (ATT) and peaking out of inflation at a multi-decade high of 38% in May 2023.

The subsequent start of deceleration in the inflation reading introduced expectations for cuts in the central bank key interest (policy) rate, Arif Habib said.

The State Bank of Pakistan (SBP) significantly reduced its key policy rate in almost one year, cutting it half to 11% by May 2025 from all-time high of 22% in June 2024.

“The overcoming of the risk of default in the domestic economy in the wake of IMF programmes and the subsequent return of stability in the rupee, deceleration in inflation reading, reduction in interest rate all provided strong basis to the unprecedented journey to stock market rally from 40,000 points to over 150,000 points in two years,” Habib said.

At the same time, the upgrade of Pakistan’s credit rating by international rating agencies including Fitch, S&P and Moody’s, rise in SBP foreign exchange reserves, and availability of ample liquidity in the market also supported the index to hit a historical high level beyond 150,000 points.

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Topline Securities CEO Muhammad Sohail commented last week that parallels could be drawn between the current stock market rally and the 2001–2008 bull-run — when the KSE-100 soared from 1,000 points to 15,000 points in 7 years.

This time, from 40,000 in mid-2023 to 150,000 in 2025, the market has surged 3.75 times in two years — “driven by improving macro indicators, reforms, and investor confidence,” he said.

Sectoral performance

Meanwhile, Habib said the steep devaluation in the rupee benefited some sectors of the economy such as oil and gas and the power sector. This attracted investors attention towards the PSX and fueled the historical journey in the benchmark index.

Similarly, the peaking out of interest rate to a record high at 22% by June 2023 had supported soaring banks’ earnings outstandingly. “The growth in earnings agreed investors to take new positions in banking stocks and boosted the market furthermore,” Habib said.

Pakistani companies with market cap of over $2bn at PSX

“These remarkable economic developments have positively impacted several major sectors, including fertilisers, driving strong performance in sector-specific stocks and sustaining the upward momentum of the PSX index - as such sectors and stocks are having significant weightage in the index and the heavy weights kept moving the index up continuously,” he said.

The top four contributing sectors to the KSE-100’s rally were banks (36.3%), fertiliser (16.7%), oil and gas exploration and production companies/E&P (11.8%), and cement (9.9%).

“The macroeconomic stability and jump in profitability of stocks helped maintain the rising trend at PSX,” he said.

“The valuation of stocks should have been doubled in the wake of halving of the interest rate to 11% from June 2024 to May 2025,” he said, adding a substantial cut in interest rate played a pivotal role in record run at the PSX.

In addition, Pakistan’s historic strategic and diplomatic victories further boosted investor sentiment. Notably, the country’s firm response to Indian aggression in May 2025 and its successful diplomatic engagement with the US President Donald Trump - resulting in a reduction of tariffs on Pakistani exports to 19% compared to significantly higher tariffs on Indian goods - laid a new foundation for economic growth. These developments collectively supported the recent surge in the stock market and the sustained rise of the benchmark index.

The reduction in electricity price/tariff, efforts to control the circular debt, significant reduction in budget deficit, and an overall positive budget for 2025-26; all supported the economy to grow and helped advance growth in the index at the PSX through attracting fresh investment in beneficiary stocks.

These developments also encouraged investors to shift their capital from the US dollar and other global currencies into the stock market.

Additionally, many investors who had previously held positions in fixed-income assets redirected their investments toward equities on the PSX, seeking higher returns amid improved market conditions, he said.

PSX outlook

Arif Habib estimated that the KSE-100 has reached its fair value at around 150,000 points at present and a further upside in the index seems to remain limited.

“The movement in the index from here onwards depends on new happenings in the economy. Fluctuation and consolidation in the index are not ruled out in the absence of new triggers at present.

“The market may boost beyond the current level if some major developments take place like interest rate further going down to 9% from 11% at present, the power tariff reducing further to Rs26/unit from Rs33/unit at present and the government reducing tax rates,” Habib said.