Up to 37% return on equity likely
17 November 2024
Published in: The Express Tribune
Taking cue from improving macroeconomic indicators under the IMF loan programme, Pakistan’s research houses have projected that the Pakistan Stock Exchange (PSX) will offer returns on investment in the range of 27-37% with the benchmark KSE-100 index rising to a new record high between 120,000 and 127,000 points by the end of December 2025.
In its comprehensive report titled “Pakistan Strategy 2025: Conquering new Heights”, Arif Habib Limited said, “We view that the stage is set for a potential market rerating with declining interest rates, a stable rupee and improving macroeconomic indicators.
“Domestic liquidity is on the upswing, driven by fresh inflows alongside conversions from fixed income. Pakistan is increasingly attracting the attention of foreign investors, particularly in its debt and equity markets. The momentum for mergers and acquisitions along with expected foreign direct investment is also boosting investor sentiment.”
In a separate report titled “Pakistan Strategy – Outlook 2025”, Topline Research said, “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 ratings upgrade, subsequently opening the doors for launch of Eurobonds and Sukuk, Pakistan’s relations with the new US government and successful privatisation of bleeding state-owned enterprises (SOEs), ie, PIA and power distribution companies alongside materialisation of the Reko Diq deal.”
To recall, the PSX emerged as the world’s best-performing market many times since the International Monetary Fund (IMF) awarded Pakistan a small loan programme of $3 billion for nine months in June 2023.
Later in September 2024, it approved a new $7 billion Extended Fund Facility (EFF) for 37 months. This week, an IMF team concluded its visit to Pakistan on a successful note.
The loan programmes helped the country control the current account deficit and improve the balance of payments, supported the achievement of primary surplus after two decades, reduced inflation into single digits from a multi-decade high of 38% in May 2023, brought down interest rate to 15% from a record high of 22% in June 2024 and kept the rupee-dollar exchange rate stable for about one year in the range of Rs277-279/$.
Accordingly, the benchmark KSE-100 index gave a return on investment of almost 52% in the current calendar year, as the index soared to 94,764 points on Friday from 62,451 in December 2023. The index had been hovering in the 40,000-41,000 band in June 2023.
Despite the significant growth, Arif Habib Limited said the KSE-100 was undervalued according to various valuation perspectives. On a price-to-earnings (PE) ratio basis, the index is trading at a multiple of 5.3, a 36.1% discount over the last 10-year average of 8.3 multiples.
Moreover, the index is trading at a market capitalisation-to-GDP ratio of 11.1%, suggesting a discount of 34.3% compared to the last 10-year average.
It anticipated Pakistan’s GDP to grow 2.4% during FY25 while the current account deficit was expected to remain manageable at 0.3% of GDP.
It estimated FY25 and FY26 inflation at 7.5% and 9.9%, respectively and foresaw the continuation of monetary policy easing, bringing the policy rate down to 12% by the end of June 2025.
On the other hand, Topline Research said as a result of falling returns on fixed-income instruments, mutual funds were net buyers of $138 million in the equity market over the last two months.
“We expect this conversion from fixed income to equities to continue as one-year Sukuk and T-bills now give yields of 10.99% and 13.1%, respectively, which are almost half of the yields seen a year ago.”
Based on improvements in external indicators like strong inflows of workers’ remittances, it projected foreign exchange reserves to surpass the $13 billion mark by the end of June 2025, covering three months of imports.
Sector-wise performance
Commercial banks are expected to focus on volumetric growth to ensure profitability, as a notable cut of 7% in interest rate in recent times may reduce their earnings, according to AHL Research.
Oil and gas exploration companies’ earnings are to remain broadly unchanged, with higher payouts and circular debt resolution keeping the sector in the limelight.
The fertiliser sector’s stable urea and higher DAP offtake alongside margins will propel the growth in their earnings to 11.4%. The cement sector’s margins will remain elevated due to a better power mix and low coal prices, leading to a 32.1% growth in earnings.
Oil and gas marketing companies are expected to witness a 39.1% earnings growth amid reduction in inventory losses, alongside improved margins for oil marketing companies.
The textile sector’s global recovery will drive demand, however, higher taxes will hurt its profitability.
The technology sector’s earnings are projected to grow by 39.3%, driven by a stable demand environment, innovation and increasing adoption of digital solutions. Focus towards sustainable and long-term growth will boost technology services’ exports.
Auto demand is expected to recover following economic stability and lower interest rates, with electric vehicles gaining prominence.
