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Friday December 06, 2024

PSX boost

Booming stock is often not reliable indicator of health of economy particularly in case of countries like Pakistan

By Editorial Board
November 29, 2024
Stockbrokers cutting cake during celebrating The Pakistan Stock Exchange (PSX) made history on Thursday November 28, 2024 as the benchmark KSE-100 index surged past the significant 100,000-point mark, reflecting investor optimism and a positive start to the trading session. — INP
Stockbrokers cutting cake during celebrating The Pakistan Stock Exchange (PSX) made history on Thursday November 28, 2024 as the benchmark KSE-100 index surged past the significant 100,000-point mark, reflecting investor optimism and a positive start to the trading session. — INP

On Thursday, the PSX hit a new record high, soaring past the 100,000-point mark. The historic milestone reflects a 60 per cent year-to-date gain, driven by a mix of 47 per cent capital gains and 13 per cent dividend yields. The rise has been fuelled by key sectors including banking, oil and gas exploration, and fertilisers. The expectation of increased investments by mutual funds in equities has also been a positive factor. Underlying this upward trend is the government’s agreement with the IMF and the former’s consistent adherence to the parameters set by the Fund’s programme thus far. A booming stock market is often not a reliable indicator of the health of the general economy, particularly in the case of developing countries like Pakistan where the overall investment in stock markets is rather low as a percentage of GDP in comparison to wealthier countries. That being said, Pakistan’s stock market boom coincides with a steadily improving economic landscape. After falling into the single digits earlier this year, inflation is expected to come down further to 5.8 per cent to 6.8 per cent for the month of November and then further down to 5.6 per cent to 6.6 per cent in December. A marked reduction in the policy rate, rupee stability and a larger and longer IMF programme have also helped bring down the cost of business, helping boost investor sentiment. The declining policy rates in particular have led to a shift in investment from fixed-income assets like bonds towards equities. Government efforts to turn fiscal and current account deficits into surpluses and an upgrade by key international ratings agencies like Moody’s have only added to the positive sentiment.

While it is fair to say that the key linchpin in all this appears to be the IMF bailout, one should not discount the efforts made by the country’s leadership to secure these funds and ensure Pakistan remains within the programme, particularly given the political costs for doing so. It is also notable that the government appears capable of delivering success on the economic front despite all the chaos and protests going on the political front. For their part, investors appear to have factored in the political noise and still remain quite optimistic about the economy. Amidst all this good news it can be hard to remember that the economy was on the verge of default a mere 17 months ago. While getting to this point highlights the resilience of the economy and the success of the steps taken to turn things around, it is also a reminder of just how quickly things can change, for better or worse.

Straying off the IMF path could easily undo the progress that has been made thus far and, for all that there is to celebrate about this progress, one must note that stock market growth and real economic growth are two different things. The PSX has always been a plucky performer. Despite the turbulence Pakistan has endured over the past 25 years, the country’s stock market has delivered a 20 per cent annual return during this period. Now, if only the real GDP figures could begin to deliver even a third of these annual gains, the country could celebrate without reservation. The fact is that Pakistan’s growth projections remain very low relative to its rate of population growth and the upswing in the stock market will likely only have a marginal impact on these prospects. The country still faces a tough road to prosperity, with a population facing dwindling job prospects, stagnant incomes and wondering how to pay for all the things they need to live. While the PSX’s latest milestone is a sign that the country is on the right path, it must stay on it for quite a while longer before victory can be declared.