Improved economy, reforms to keep Pakistan equities upbeat in 2026: report

Pakistan’s stock market is expected to maintain strong momentum into 2026, supported by improving economic conditions, structural reforms and rising domestic investment, even as foreigners continue to pull out funds, according to a new report by Foundation Securities.

Mutual funds and individual investors drove the largest inflows in 2025, contributing about $250 million and $238 million, respectively, the report said. Companies followed with $119 million in net buying. But foreign outflows persisted, reaching $320 million for the year to date, despite Pakistan’s inclusion in the MSCI Frontier Markets index. Banks and insurance firms also remained net sellers, offloading $146 million and $101 million.

The KSE-100 index has gained 44.3% so far in 2025, buoyed by steady compliance with the IMF program, improved capital flows and a relatively stable political climate.

Foundation Securities said the upbeat environment is likely to continue into 2026. Its investment thesis cites economic stabilization, reforms in the energy sector and cash-strapped state-owned enterprises, and an expected 8.5% total return combining earnings and dividends.

The brokerage set its December 2026 index target at 214,000 points, implying a 28.8% upside, incorporating projected 2.9% earnings growth, a 5.6% dividend yield, and a re-rating of trading multiples from 7.8x to 9.25x.

The market’s strong performance has been reinforced by rising liquidity. Average daily traded value reached $128 million in 2025, up 60% from a year earlier, driven in part by higher equity allocations from mutual funds following a decline in interest rates.

Though the mutual fund industry saw its assets under management drop PKR 223 billion by October 2025, allocations to equities rose. Equity AUMs increased PKR 166 billion in 2025, lifting equity exposure to 13% from 9% in 2024. Total industry AUMs expanded fourfold from PKR 1.1 trillion in 2021 to more than PKR 4.2 trillion in 2025.

Foundation Securities expects equity exposure to gradually return to its long-term average of about 25%, providing continued support for market inflows.

Still, the report warned of several risks that could undermine the upbeat outlook. These include escalating border tensions, delays in IMF program reviews, potential security deterioration, climate shocks such as floods or droughts, political instability and the possibility of U.S. tariffs on Pakistani exports.

Geopolitical tensions were identified as the most immediate threat, with the report noting recent border skirmishes and a “fluid” situation requiring close monitoring.

“Domestic liquidity has been the backbone of this rally, but investors should remain vigilant,” said Karachi-based analyst Junaid Rahim. “Any disruption to the IMF program or a geopolitical flare-up could quickly reverse sentiment, even with fundamentals improving.”

Range-bound global commodity prices have supported Pakistan’s current account and enabled higher machinery imports without widening the deficit. But any adverse shift could pressure the trade balance and weaken the rupee, the report cautioned.

Foundation Securities said Pakistan can make a case for “measured” economic growth, but stressed that discipline — especially in adhering to the IMF program — will be crucial to sustaining investor confidence into 2026.