Pakistan-India ties key to market trajectory; de-escalation may boost investor gains

Pakistan's stock market suffered heavy losses during the week ending May 9, 2025, as investor sentiment remained weak amid ongoing tensions between Pakistan and India. Market movement in the coming week is expected to hinge on geopolitical developments.

Jibran Sarfraz, an equity expert, said the market’s trajectory will largely depend on the state of Pakistan-India relations. Any move toward de-escalation could allow investors to benefit from recent positive developments, including a surprise interest rate cut by the State Bank of Pakistan and the approval of a $2.4 billion loan from the International Monetary Fund (IMF).

"War has never been a solution—neither in the past nor now. Both countries should hold talks and resolve the issue amicably," Sarfraz said. "A prolonged conflict would weaken both economies. With a heavy reliance on imported goods, rising freight charges, currency pressure, and a battered stock market, the best course of action is diplomatic resolution through bilateral talks."

Salman Ahmed, head of retail investors at Aba Ali Habib, noted that geopolitical tensions have dictated market behavior since early April. "Initially, concerns over U.S. import duties pressured share prices. Then, fears over conflict between Pakistan and India took center stage, shaking investor confidence and triggering heavy losses in the local stock market," he said.

Ahmed added that the benchmark KSE-100 index suffered day-on-day declines exceeding 8,400 points, while May 8 marked its largest-ever single-day drop of 6,482 points. Even the market largely ignored the central bank’s surprise 100-basis-point rate cut.

"Market sentiment remains fragile. Much depends on how Pakistan-India tensions evolve. De-escalation could restore normalcy. On Friday, hopes of negotiations and calm helped the index recover 3.5%," Ahmed said.

In the near term, market direction will likely be influenced by two key developments: an expected resolution of circular debt, with banks agreeing to provide loans worth PKR 1.275 trillion, and the approval of an IMF loan of $1 billion, alongside additional financing of $1.3 billion.

An analyst from AKD Securities believes the market may have overreacted to the ongoing geopolitical escalation, given both countries’ nuclear capabilities.

"Since attaining nuclear deterrence, full-scale war has become less likely. Historically, market performance following de-escalation has seen an average return of +3% in the short term and +5% over three months," the analyst said. "We anticipate a market rebound as tensions ease, coupled with the approval of IMF funding under the EFF and RSF programs."

A Spectrum Securities analyst warned of significant risks if tensions escalate into broader military conflict. "The Pakistani stock market is facing uncertainty and fear. Should the situation worsen, both nations may ramp up defense spending, leading to higher fiscal imbalances and foreign exchange drawdowns, which would negatively impact their sovereign ratings."

The KSE-100 index closed at 107,175 points, shedding 6,939 points, or 6.08%, for the week.

Currency and Commodities

The Pakistani rupee depreciated by 0.23% against the U.S. dollar, closing at PKR 281.71 amid external payment pressures and geopolitical uncertainty, despite a slight increase in foreign exchange reserves.

Gold prices surged 1.86% to PKR 350,900 per tola, driven by global uncertainties surrounding U.S.-China trade talks. Despite the U.S. Federal Reserve keeping interest rates unchanged, investors sought refuge in gold.