Markets
Pakistan's equity benchmark outpaces Sensex. What gives?
Summary
- Experts attribute this to the most potent market driver: the hope for a brighter future.
The current bull market may have lulled Dalal Street into a self-congratulatory smugness, but an even stronger equity rally is underway in India's neighbourhood. And that too in the unlikeliest of places.
The Karachi Stock Index-100 (KSE 100), Pakistan’s benchmark stock market index, has surged to lifetime highs of 70,500, fuelled by growing optimism about the country's economic recovery and political stability.
The intensity of the rally has seen the KSE 100 outperform the Sensex across various timeframes—year-to-date, one-year, and three-year periods, and that too by a significant margin.
In fact, in 2023, Pakistan ranked among the top performing global indices, with gains exceeding 50%.
How has a country long viewed as the poster child of dysfunction managed to produce such an impressive bull run? Experts attribute this to the most potent market driver: the hope for a brighter future.
The International Monetary Fund (IMF) provided a critical $3 billion bailout to Islamabad in July 2023, helping the country stave off a default on its debt repayments.
This turbocharged investor sentiment, catapulting the KSE 100. In November 2023, the index breached its previous record high hit in May 2017.
The IMF approval came just a day after Saudi Arabia deposited $2 billion with Pakistan’s central bank. China and the United Arab Emirates (UAE), too, have extended assistance to the cash-strapped country.
The IMF funds have been disbursed in stages. Just last month, Pakistan and the IMF reached a staff-level agreement for the release of the final $1.1 billion tranche.
That said, Pakistan’s $350-billion economy remains in dire straits.
Its foreign debt exceeds $130 billion, while its foreign currency reserves are a scant $8 billion—barely enough to cover two months of imports.
Although inflation has declined, it remains high at 23%. Over the past two years, the Pakistani rupee has depreciated by over 50% against the US dollar, exacerbating the country’s macro woes.
In this context, the IMF’s bailout could be seen as merely rearranging deck chairs on the Titanic.
However, the recent formation of a coalition government led by Shahbaz Sharif, following two years of political turbulence after the dismissal of Imran Khan's regime, has fostered hopes of political stability.
These factors have sparked a relief rally, but can they fully explain the market's enthusiasm?
“The first thing to understand is that Pakistan’s stock market is very shallow. There are just 250,000 to 300,000 active accounts in the market, compared to our population of around 23 crore. This means even small events can have disproportionate impact on market movement," Khizar Kahloon, a Dubai-based Pakistani investor, told Mint over a telephone call.
Pakistan’s total market capitalization is $33 billion. To put that in perspective, India’s largest company, Reliance Industries Ltd (RIL), alone boasts a market valuation of $230 billion.
The Pakistani capital market also suffers from qualitative issues.
“High net-worth individuals, institutions and entities connected to the government and army control a major chunk of the market free float. These people, especially the last group, have inside information not available to common investors, and they often benefit from this aspect," Kahloon added.
While Pakistan has robust mutual fund offerings, the average investor still favours real estate as a safer investment choice, he said.
The sectors that dominate the Pakistani stock market include commercial banks, with major players like MCB Bank, United Bank Ltd, and Meezan Bank (the country’s largest Shariah-compliant bank) leading the pack.
Oil and gas, cement, auto, and textiles are some of the other major industries.
Earlier this year, Chase Securities published a note highlighting the country’s ‘Magnificent Seven’ stocks. Termed SHIMPLE, the grouping comprises Systems Ltd (Pakistan’s biggest tech firm), Hub Power Co., Interloop Textile, Mezan Bank, Pakistan Oilfields Ltd, Lucky Cement and Engro Fertilizers.
Analysts have set target levels around 85,000 for the KSE 100, suggesting that the consensus is optimistic about the continued strength of the rally. However, whether Pakistan’s economy and political system can sustain this momentum remains uncertain.
