Pakistan’s stock market has shattered records, soaring past the historic 150,000-point milestone. This breathtaking rally has left a trail of mixed emotions: seasoned investors are grappling with the age-old question of whether to take profits, while those on the sidelines are waiting for a dip that may never come in its entirety.
But what if this isn't
the peak, but the basecamp for a much higher ascent? A deep dive into the
fundamentals suggests that far from being overvalued, the Pakistan Stock
Exchange (PSX) presents a compelling, and perhaps even undervalued,
opportunity. This isn't just momentum; it's a story of mathematical
inevitability, economic discipline, and a massive pool of untapped capital.
The Engine Behind the
Rally: More Than Just Hype
The recent bull run,
which has added approximately 70,000 points since July 2023, wasn't born in a
vacuum. It was ignited by a crucial catalyst: the International
Monetary Fund (IMF) staff-level agreement and the subsequent inflow of
funds. This lifeline eased critical financial strains and the acute dollar
shortage, restoring a measure of confidence in the macroeconomic framework.
Leading this charge has
been the banking sector, the unlikely hero of this story.
Historically seen as vulnerable to sovereign default during Pakistan's economic
challenges, it has now contributed a staggering ~65% to the last 100,000-point
surge. This dramatic turnaround signals a profound shift in risk perception.
The Core Argument: A
Market Trading at a Deep Discount
The most persuasive case
for the PSX isn't found in headlines, but in cold, hard numbers. When compared
to its own history and global peers, the market appears significantly
undervalued.
|
Valuation Metric |
2017 (Index at
~53,000) |
Today (Index at
~150,000) |
The Implication |
|
Price-to-Earnings
(P/E) Ratio |
12.7 |
~4.0 (8.2 on a trailing basis) |
Despite the index
nearly tripling, the market is cheaper today. If the P/E
simply reverted to its 2017 level of 12, the index could theoretically
reach ~225,000 points. |
|
Corporate Earnings
(PKR) |
~500 Billion |
~1.5 Trillion |
Earnings have tripled,
fundamentally justifying a higher market. The index has not kept pace with
this explosive profit growth. |
|
Market Cap (USD) |
~$100 Billion |
~$64 Billion |
In dollar terms, the
market is trading at a 36% discount to its 2017 value,
despite significantly stronger revenue and earnings today. |
A Glaring Opportunity:
The Regional & Global Mismatch
The undervaluation
becomes even more stark when Pakistan is placed on the global stage. The
disparity is nothing short of dramatic.
|
Country/Region |
P/E Ratio |
Implied KSE-100
Index if PSX had a similar P/E |
|
Pakistan |
~4.0 (8.2) |
150,000 |
|
Bangladesh |
10.3 |
~190,000 |
|
Sri Lanka |
11.0 |
~200,000 |
|
India |
22.7 |
~416,000 |
|
United States |
27.0 |
~500,000 |
Consider Indonesia, with
a market capitalization of $953 billion versus Pakistan’s $64 billion, despite
not having a proportionally larger economy. This isn't just a gap; it's a
chasm, highlighting a massive potential for re-rating as Pakistan's risk profile
improves.
The Macroeconomic Pivot:
Pain Today, Gain Tomorrow
This improved outlook
isn't accidental. It's the direct result of fiscal discipline. The
government's tough decisions—implementing IMF-mandated reforms, raising utility
tariffs, and withdrawing subsidies—have been a bitter pill for the public to
swallow. However, this medicine is working. The achievement of a primary
surplus is a powerful signal to international investors that Pakistan
is serious about steering its economy toward stability, making it a more
attractive destination for capital.
The Tidal Wave of
Liquidity: Still on the Sidelines
Perhaps the most bullish
indicator is the vast ocean of domestic liquidity that has yet to flow into
equities.
- Money in Circulation: Has exploded from PKR 14 trillion in
2017 to over PKR 40 trillion today.
- Traditional Mindset: A vast portion of this capital remains
parked in traditional assets like real estate or sits in low-yield bank
accounts.
- The Awakening: The tide is turning. Last year,
over 77,000 new brokerage accounts were opened. While the
investor base has grown to ~350,000, the potential to reach 5-10 million
is immense.
This is a simple story of
supply and demand. A limited supply of quality stocks met with a growing wave
of money from new investors creates a powerful upward pressure on prices.
The Mutual Fund Paradox:
A Sleeping Giant
The behavior of
institutional investors reveals a market still in its cautious phase.
- Mutual Fund Assets under Management (AUM)
have grown to ~PKR 4 trillion.
- However, less than 10% (~PKR
450 billion) is allocated to equities.
- Over 50% remains in low-risk
money market funds, earning ~11-12%.
This is a paradox because
equities have delivered over 50% returns in the past two
years. The key to unlocking this giant? Falling interest rates. Historically,
when rates were low in 2017 (around 6%), equity allocation was as high as 66%.
As rates are expected to decline from the current 11%, a monumental shift from
money market funds into equities is not just likely—it's inevitable.
Investor Takeaway:
Strategy in a Rising Market
For investors navigating
this landscape, the guidance is clear:
- For Current Investors: Stay invested. Timing the market is a
fool's errand. The strongest gains are often concentrated in short,
explosive periods.
- For New Investors: Stop waiting for a perfect entry
point. Dollar-cost averaging into a diversified portfolio
or through mutual funds is a prudent strategy. You are still early.
- Golden Rule: Only invest funds you won’t need for
the next 2-3 years. Avoid leverage and borrowing to invest;
volatility is a given.
- Vehicle of Choice: For most retail investors,
well-diversified equity mutual funds are a safer, more
managed entry point than picking individual stocks.
Conclusion: The Journey
Has Just Begun
The breach of 150,000
points is not a finish line; it is a gateway. The confluence of rigorous fiscal
reform, stark undervaluation, and a looming tidal wave of domestic liquidity
creates a powerful narrative for Pakistan's market. While risks from political
instability or global shocks remain, the fundamental math is compelling.
This isn't just a rally;
it's a re-rating in its early innings. If the discipline
holds, the current peaks may soon be viewed as the foothills of a much larger
mountain.
Sources & Further
Reading:
- Pakistan Stock Exchange (PSX) - Market Data & Indices
- International Monetary Fund (IMF) - Pakistan and
the IMF
- State Bank of Pakistan (SBP) - Money
Supply Statistics
- MSCI - Country
Comparison Tools
