By Essa Malik, Fund Manager
For nearly two years, the market has endured headwinds: elevated interest rates, stubborn inflation, a weakening rupee, and political turbulence.
Pakistan’s economy is quietly setting the stage for what could be one of the most powerful rallies in the history of the Pakistan Stock Exchange (PSX). Behind the day-to-day noise of politics, headlines, and uncertainty, a silent but strong shift is taking place. If past market cycles are any guide, investors who recognize the opportunity early stand to benefit the most.
I don’t make this claim lightly. As a fund manager deeply involved in the daily movement of this market, I closely study data, sentiment, and policy developments. What I see now is an alignment of factors that’s difficult to ignore.
For nearly two years, the market has endured headwinds: elevated interest rates, stubborn inflation, a weakening rupee, and political turbulence. These challenges held back investment, kept businesses under pressure, and dampened risk appetite. But economic tides rarely stand still. They can turn more quickly than most anticipate — and the turn may already be underway.
The State Bank of Pakistan’s monetary tightening cycle appears to be nearing its end. After raising rates sharply to curb inflation and stabilize the currency, the central bank is edging closer to cutting rates. With price pressures easing and external imbalances improving, monetary easing looks not just possible — but unavoidable.
This matters enormously. Historically, falling rates unleash liquidity. Cheaper credit stimulates business activity, consumer demand rises, and investment flows back into equities. At the same time, stocks become far more attractive relative to fixed-income instruments. When money moves off the sidelines, equity markets are often the first beneficiaries.
Yet the story is bigger than just interest rates. Pakistan has endured a painful but necessary stabilization phase. The IMF program, though politically unpopular, has restored a degree of fiscal and monetary discipline. Reforms have begun, hard choices have been made, and the nightmare scenario of sovereign default has been avoided. The panic of 2022–23 has given way to a cautious optimism, supported by renewed IMF backing and commitments from friendly nations such as Saudi Arabia, the UAE, and China.
On the corporate side, resilience has been even more impressive. Despite the tough environment, many listed companies — especially in banking, energy, fertilizers, technology, and export-driven industries — have delivered exceptional profits. Through operational efficiency, careful capital management, and cost discipline, they’ve managed to grow stronger in adversity.
And yet, the market has not rewarded them fully. Valuations remain depressed, with the PSX trading at some of the lowest price-to-earnings ratios in the region. In effect, strong dividend-paying companies are available at “bargain-basement” prices. Such deep undervaluation cannot last forever. Once foreign capital begins flowing back in, price adjustments are likely to be swift and steep.
It’s important to remember that markets anticipate rather than wait for certainty. By the time the average investor realizes conditions are improving, much of the rally is already behind them. Waiting for perfect clarity has historically meant missing the best entry points.
Yes, the KSE-100 Index has already touched record highs in rupee terms. But in U.S. dollar terms, the market still trades well below its 2017 peak — largely because of currency depreciation. This gap represents untapped potential. With earnings growth, currency stability, and renewed foreign inflows, the market is well-positioned to recover lost ground — and surpass it.
Another overlooked driver is replacement cost. Inflation, currency shifts, and supply chain dynamics have made building new capacity far more expensive. That makes existing businesses with established assets even more valuable. Many companies today trade at valuations below what it would cost to replicate their operations — a clear disconnect that markets eventually correct.
The political environment also adds weight to the argument. While risks are always present, recent developments suggest growing stability and clearer direction. A functioning government, stronger external relationships, and institutional dialogue have the potential to restore investor confidence. Pakistan doesn’t require flawless conditions, just steady progress and predictability.
Put together, the case for a PSX breakout is compelling. Monetary easing, fiscal stabilization, resilient corporate earnings, and improving political clarity — each is a catalyst on its own. Together, they create the conditions for what could be a once-in-a-generation bull run.
Of course, volatility won’t vanish. But history shows that the biggest gains often come to those willing to invest before certainty sets in. Confidence brings liquidity, and liquidity drives markets higher. If that cycle repeats, and the signs suggest it will, the PSX could not only reclaim its previous dollar highs but break new records.
Every market cycle reaches a tipping point where hesitation gives way to conviction. Pakistan may be standing at that very threshold. The golden years of the PSX are not a distant dream — they may be right around the corner.
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