Stock markets brace for geopolitical challenges as India-Pakistan tensions mount

Stock markets across South Asia remain on edge as analysts assess the potential economic fallout from escalating tensions between India and Pakistan following last week's incident in Indian-controlled Kashmir. Concerns are mounting about the possibility of military conflict between the nuclear-armed neighbors.

India has announced plans to potentially conduct targeted military operations inside Pakistan, raising alarms among investors. Despite this, analysts believe the likelihood of direct conflict remains limited. “This was reflected in the financial markets of both countries, where no significant negative impact was observed in equities, bonds, or currencies,” an analyst from Spectrum Securities said.

The Pakistani stock market faced initial shocks due to the country's heavy dependence on water sourced from India. However, analysts noted that India’s threats to divert water through dams and canals would be difficult to implement. Such actions would likely provoke retaliation from Pakistan, making these projects strategically risky and financially unviable.

The escalating tensions with India are broadly negative for Pakistan, as the heightened risk premium could deter investors. If India retaliates with military strikes within Pakistan, the repercussions could backfire on India’s own booming economy, as Pakistan would respond in kind. Current hostilities and the combative rhetoric from both sides suggest an increase in cross-border terrorism is more likely than direct military conflict.

Ali Nawaz, CEO of Chase Securities, expressed optimism, forecasting market recovery in the coming week as India-Pakistan tensions ease. He also highlighted the announcement of a low inflation rate for April 2025, which raises hopes for a possible rate cut in the upcoming monetary policy.

An analyst from Arif Habib Ltd. stated that investor sentiment in the week ahead will largely hinge on geopolitical developments, particularly the evolving India-Pakistan situation. With corporate earnings season underway, key announcements are expected to drive stock-specific momentum.

An analyst from AKD Securities remarked that lower oil prices and strong performance among exporting peers, despite reciprocal tariffs, are supporting the economy. This strengthens expectations for a return to single-digit interest rates in CY25.

The KSE-100 index is anticipated to maintain an upward trajectory, with a target of 165,215 points by December 2025. This growth will be driven by robust earnings in the fertilizer sector, steady returns in banking, and improved cash flows for exploration and production (E&P) companies and oil marketing companies (OMCs), benefiting from falling interest rates and economic stability.

The KSE-100 index exhibited mixed trends during the week ending April 25, 2025. It initially extended its upward trend, buoyed by encouraging economic indicators. However, momentum softened later in the week as geopolitical concerns came to the forefront. The benchmark KSE-100 index closed the week at 115,469 points, reflecting a weekly decline of 1,846 points or 1.6%.

Foreign investor activity saw a shift this week, with net buying clocking in at $2.09 million compared to a net sell of $4.01 million the previous week.

Currency

The Pakistani rupee weakened against the US dollar during the week due to external payment pressures. Rupee declined by 0.09% during the week to PKR 280.97. In the open market dollar gained 45 paisa to trade at PKR 282.75.

According to official data, Pakistan's foreign exchange reserves held by the State Bank of Pakistan (SBP) fell by $367 million during the week ending April 18, bringing the total to $10.21 billion.

Gold Market

Gold prices have begun cooling off both in international and local markets. This easing is attributed to factors such as profit-taking after earlier gains, steady global demand, and the possibility of rising interest rates.

Additionally, fears of a global recession, driven by trade conflicts, have prompted some investors to shift away from gold in favor of alternative safer investments. In the local market, gold prices declined by 0.3%, reaching PKR 348,700 per tola.