Pakistan stock market has upside potential of 27%: report

Pakistan's stock market has an upside potential of 27% from current levels and could cross 120,000 points by December 2025 on the back of stable domestic currency, improvement in macroeconomic indicators and falling interest rates, according to a report by Arif Habib Limited, one of Pakistan's oldest brokerages.

According to the report, domestic liquidity is on the upswing, driven by fresh domestic inflows alongside conversions from fixed income.

Pakistan is increasingly attracting attention of foreign investors, particularly in its debt and equity markets. The momentum for mergers and acquisitions along with expected foreign direct investment is also boosting investor sentiment. Valuations are still compelling — even with a 50.8% return from January till date, the benchmark KSE-100 index remains undervalued across various valuation perspectives.

On price-to-earnings ratio basis, the KSE-100 index is trading at 5.3x — a 36.1% discount compared to last 10-year average of 8.3x.The KSE-100 Index is trading at market cap to GDP of 11.1%, a discount of 34.3% compared to last 10-year average.

Improving macros

Arif Habib maintained an optimistic outlook for fiscal year 2024-25 (FY25), supported by conducive domestic macro factors.

GDP growth is expected at 2.4% during FY25. Meanwhile, the current account deficit is expected to be manageable at 0.3% of GDP.

The brokerage expects FY25 and FY26 inflation to clock in at 7.5% and 9.9%, respectively.

The State Bank of Pakistan will continue to ease monetary policy, bringing the policy rate down to 12% by FY25's end.

Moreover, improved external flows will keep the Pakistani rupee stable.

According to the report, the current environment suggests that the PSX is on the brink of a fresh era, characterized by long-awaited re-rating and value realization, offering promising opportunities for investors. As the government seeks to reassure both local and international stakeholders, maintaining a stable political environment will be essential for fostering continued investment and economic growth, it noted.

Optimistic outlook

Going forward, the brokerage house remains optimistic that the incumbent government will remain committed to the International Monetary Fund and fulfill the benchmarks laid out under the External Financing Facility (EFF) program to ensure that Pakistan achieves sustainable economic growth. Adhering to these benchmarks is vital not only for restoring investor confidence but also for stabilizing the macroeconomic environment.

By meeting the stipulated requirements, the government can pave the way for structural reforms that enhance fiscal discipline, bolster external reserves, and create a more conducive environment for both domestic and foreign investments. Such measures will be instrumental in addressing the economic challenges and accelerating our path toward growth, the report added.

Key areas of focus should include improving tax collection mechanisms, rationalizing subsidies, and implementing transparent governance practices. By prioritizing these structural reforms, the government can effectively reduce fiscal deficits and create a stable economic framework that encourages investment.

Furthermore, enhancing the regulatory environment will be critical for attracting FDI. If the government effectively manages the current situation, it will enhance the economy and build a solid foundation for long-term prosperity in Pakistan.