Reasons behind dizzying PSX surge: experts weigh in

KARACHI: The KSE-100 Index crossed the 97,000 mark on Thursday and is expected to reach the five zeros mark in the upcoming week, which was earlier expected in December.

The stocks have rallied over 20 percent since September 1 with higher contributions from the mutual funds.

Experts and analysts said that a decline in fixed-income securities and higher fall in inflation were the major reasons behind the upward momentum of stocks. However, its price-to-earnings (PE) ratio remains low as compared to the past.

Shahid Ali Habib, CEO Arif Habib Ltd, said the primary driver behind the recent market gains appears to be the influx of liquidity from mutual funds, banks and insurance companies. “The reduction in interest rates is incentivising these investors to shift their assets from fixed-income securities to equities,” he said. “Additionally, the prevailing economic stability, a declining inflationary environment and a stable currency are further helping this trend.”

In the past two months alone, the market has seen approximately Rs41 billion in liquidity from mutual funds directed towards equities and this momentum is expected to continue for the foreseeable future, he said.

Foreign funds are net sellers but it’s because of major selling from passive funds. Active funds have bought the equities this year and absorbed $150 million selling of passive funds and net selling is just $20 to $25 million.

Mohammed Sohail, CEO Topline Securities, said, “Faster than expected fall in inflation coupled with economic stabilisation is helping stock market which is still trading at price earnings multiple of 5 compared to the historical average of 7.”

Muhammad Awais Ashraf, Director Research at AKD Securities, said Pakistan stock market has become increasingly attractive due to significant reductions in fixed-income yields and the anticipated decline in commodity prices following Donald Trump’s US presidential victory.

The KSE-100 index currently trades at a compelling price-to-earnings (P/E) ratio of 4.7x, well below the 10-year historical average of 7.2x. A potential reversion to the mean suggests an upside of at least 55 percent. Additionally, the market offers an impressive dividend yield of 10.5 percent.

Banks have also reduced their equity holdings to lock in capital gains and mitigate the adverse impact of tax regulations related to the advance-to-deposit ratio (ADR). Nonetheless, new inflows from banks have also been observed recently, supporting the market momentum.

Zafar Moti, former director at PSX, said the market has increased fast and common people do not understand the fundamentals. The market is standing at 4.5 to 5 PE multiples. “Top heavy indexes representing the energy sector and cement sector are the reasons for this upward movement. Foreign funds and local funds are behind these two sectors.”

He said that the monetary policy meeting is in December and you will hear the good news of another 150 to 200 basis points decrease. “Earlier, we expected that December closing will see five zeros in the index but that might be seen in the next week. The political drift is also expected to end soon.”

Muhammad Waqas Ghani, Deputy Head at JS Research, said the KSE-100 index is on unprecedented levels, driven by improved investor sentiment on the back of positive macroeconomic developments. “The ongoing decline in interest rates, due to the continuous downward trend in inflation, has fuelled investor interest in equities making the asset class appear as a more attractive relative option for higher returns,” he said.

A Topline Securities report said that fuelled by economic stability and fiscal consolidation, Pakistan Stock Market (PSX) is set to touch 127k by Dec 2025, suggesting return of 37 percent including dividend yield of 10 percent.

During 2025, key drivers for the market would be successful completion of IMF review and passing of FY26 budget in line with IMF guidelines, credit rating upgrade for Pakistan, subsequently opening the doors for the launch of Eurobonds and Sukuks, Pakistan relations with new USA government and successful privatisation of any bleeding SOE i.e. PIA, Discos alongside materialisation of Reko Diq deal.

As a result of falling returns on the fixed income instruments, the mutual funds have remained net buyers of US$138 million in the last 2 months in equity market. We expect this conversion from fixed income to equities to continue as 1 year Sukuk and T-bill is now yielding 10.99 percent and 13.1 percent, which is almost half of the yields seen one year ago.