Stocks outshine dollar, bonds in 2023 on IMF boost

KARACHI: Pakistan’s stocks outperformed other major asset classes, including bonds and dollar, in 2023, as investors cheered a $3 billion bailout package from the International Monetary Fund (IMF) that helped the country avoid a sovereign debt default and supported economic reforms.

"After lagging for the last few years, Pakistan equities outperformed major asset classes in 2023,” said brokerage Topline Securities said in report on Saturday.

“The benchmark KSE 100 Index provided a gain of 53 percent (January 01, 2023 till December 22, 2023) with 4 trading sessions left in 2023. This gain is inclusive of dividends received during this period.”

Political and economic structural risks characterised 2022 and a large portion of 2023, requiring much higher risk premiums for Pakistan in general and equities in particular.

Nonetheless, Pakistan's prospects have improved due to a wide range of economic reforms as well as quiet political noise. The optimism surrounding Pakistan's economic recovery based on structural reforms and decreasing inflation has begun to be priced into equity markets.

“Low valuation, IMF deal, and stable currency especially in last six months helped in strong recovery in share prices at PSX [Pakistan Stock Exchange],” said Mohammed Sohail, the CEO at Topline Securities.

Pakistan has now started a cyclical recovery, but the recent extraordinary market rally is only the start. The excess risk premium imposed by the past two years' unstable political environment and default risk has only been marginally absorbed by equities thus far.

US dollars have become a popular investment option for Pakistanis living in the country in recent years amid significant depreciation in the rupee. The US dollar yielded a 25 percent return in the interbank market in 2023, rising from 226 to 283 against the rupee, and a 21 percent return in the open market, up from 236 to 285 versus the local unit.

“If this amount is invested in a 1 year-term deposit at the beginning of the year the gain would have increased to 29 percent at interbank dollar and 25 percent at open market (assuming a return of 4 percent on USD deposits),” said the Topline.

Because of the declining value of the rupee, holders of Naya Pakistan Certificates that were denominated in US currency under the Roshan Digital Account received a 33 percent return in 2023.

Gold that provided an above-average return in the last few years to local investors posted decent gains. “In 2023 it gained from Rs157,836/10 grams to Rs186,900/10 grams providing a profit of 18 percent,” the report said.

In the international market, it also increased from $1,826/ounce on December 30, 2022 to $2,065/ounce on December 22, 2023.

“Another widely discussed investment avenue has been government T-Bills. Amid tightening monetary policy, the government has to raise interest rate rates to record high,” it said. “As a result, investors in T-Bill made a 23 percent gain in 2023. The report assumed investment in 3-month T-Bills (which was actively traded) being reinvested every 3 months.”

Many investors moved to fixed-income low-risk avenues in 2023 due to high rates. Within the fixed-income market, the average bank saving rate remained at 17 percent in 2023 while the National Savings three-year Special Saving Certificate provided a gain of 13 percent. Local asset management companies’ money market funds generated an average return of 20 percent in 2023. “Though many investors remained out of the property market, as per Zeeman.com, real estate (houses, residential and commercial plots) in Karachi went up 6-29 percent in 2023.”