Pakistan stocks deliver 50% return in nine months amid economic reforms

Pakistan’s stock market has delivered an impressive 50% return during the first nine months of the current fiscal year, fueled by favorable macroeconomic trends and strategic monetary policies. On June 30, 2024, the KSE-100 Index was at 78,445 points, surging to 117,806 points by the end of March 2025.

Local mutual funds and insurance companies emerged as major buyers, capitalizing on falling interest rates, while foreign investors were net sellers due to passive fund outflows.

An analyst at Topline Securities explained the drivers of this growth: “Improving macroeconomic indicators under the new IMF program, i.e. falling inflation, falling yields on fixed income, aggressive monetary easing of 900 basis points by the central bank to 12%, improved external accounts, stable currency, and political stability, drove the strong performance of the market.”

While progress is evident, challenges remain. Pakistan’s current account balance recorded a minor deficit of $12 million in February 2025. Although it improved compared to the previous month, the deficit persisted due to a high trade imbalance offsetting gains from increased remittances.

Over the first eight months of FY25, the current account surplus reached $691 million. Remittances provided critical support, averaging $3 billion per month, compared to $2.4 billion previously.

The Balance of Payments (BoP) remained negative in February due to the current account deficit and loan repayments. February marked the fourth negative monthly BoP figure for FY25, although the BoP balance remains positive overall for the eight-month period.

Total market capitalization rose to $71 billion but remained below the 2017 peak of $100 billion. Contributing factors included rupee devaluation, significant dividend payouts, and limited new listings.

According to National Clearing Company of Pakistan, foreign portfolio investment saw consistent withdrawals, with a net outflow of $242 million during the nine months ending March 27, 2025. The market cap to GDP ratio increased to 12%, up from 9% in 2023, but still below the 10-year average of 16%.

Best Performing Market

The KSE-100 Index ranked as the second-best performing market globally in 2024, both in U.S. dollar and local currency terms, trailing only Argentina. The Pakistan Stock Exchange (PSX) experienced seven IPOs in 2024, including two GEM Board offerings, raising PKR 8.4 billion ($30 million) — the highest since 2021. Barkat Frisian and Zarea Pakistan have been the two IPOs of CY25 so far.

KSE-100 Profitability

KSE-100 profitability declined by 3% in CY24, reaching PKR 1,438 billion. This contraction was driven by sector-specific earnings reductions, notably in exploration and production (E&Ps), textiles, chemicals, power, and oil marketing companies (OMCs). Conversely, robust earnings growth was observed in banks, cement, auto assemblers, fertilizers, pharmaceuticals, and food.

Revenue Contribution

In CY24, total tax collection reached PKR 10.47 trillion, a 27% increase from the previous year, with direct taxes growing 33% to PKR 5.16 trillion. During 1HFY25, direct tax collection rose 29% to PKR 2.78 trillion, with KSE-100 companies contributing PKR 687 billion, or 24.71% of the total, showing 10% growth.

For CY24, KSE-100 sectors added PKR 1.22 trillion in direct taxes, up 2.2%, accounting for 23.6% of total direct taxes. Auto assemblers led growth with 62%, followed by fertilizers (19%), banks (12%), investment banks (15%), textile composite (10%), and cement (9%).

However, refineries, chemicals, oil marketing companies, and exploration & production saw declines of 47%, 30%, 27%, and 18%, respectively. KSE-100 companies remain crucial for revenue collection, underscoring the capital market's role.

Outlook

Pakistan stocks are expected to remain positive going forward, continuing the robust sentiment witnessed following the Staff-Level Agreement (SLA) between Pakistan and the IMF and the signing of the new Resilience and Sustainability Facility (RSF).

Awais Ashraf at AKD Securities noted that the successful completion of the first review would pave the way for the KSE-100 to reach 165,215 by December 2025, driven primarily by the strong profitability of fertilizer companies, higher sustainable ROEs of banks, and improving cash flows of exploration and production (E&P) companies and oil marketing companies (OMCs) amid falling fixed income yields.

“We prefer sectors benefiting from monetary easing, structural reforms, and declining commodity prices,” he said.

Moreover, the results season is expected to commence next month, where certain scrips are anticipated to be in the spotlight amid expectations of better financial outcomes.

Authorities remain on track to achieve a primary surplus of 1.0% for FY25 and are committed to maintaining fiscal consolidation in FY26. While adhering to budgeted limits on current spending, priority is being given to enhancing social and development expenditures, utilizing savings generated from reductions in energy subsidies.

The implementation of the Agriculture Income Tax (AIT) is deemed crucial alongside fiscal devolution in FY26.

“We expect headline inflation for March to drop to a 59-year low of 0.79%—the lowest reading since December 1965. The recent monthly back-to-back low inflation readings are mainly a result of the high base effect coupled with a drop in food and housing indices,” said an analyst at Arif Habib Limited.

“Furthermore, if global commodity and energy prices stay stable and the PKR maintains its strength, it will further support the inflation outlook, helping to keep price pressures under control,” the analyst added.

The KSE-100 is currently trading at a price-to-earnings ratio (PER) of 6.4x for 2025 compared to its 10-year average of 8.0x, offering a dividend yield of around 8.2% versus its 10-year average of 6.5%.