Up to 37% Return on Equity Likely: PSX’s Promising Future

November 17, 2024 Mahi Bukhari

Research Houses Project Bourse May Hit 120,000 Points by End of 2025

Overview

KARACHI: Riding on the waves of improving macroeconomic indicators under the International Monetary Fund (IMF) loan programme, research houses in Pakistan have projected substantial returns on investments from the Pakistan Stock Exchange (PSX). These projections forecast returns ranging between 27% and 37%, with the benchmark KSE-100 index potentially climbing to new record highs between 120,000 and 127,000 points by the end of December 2025.

Positive Outlook and Market Re-Rating

In its comprehensive report titled “Pakistan Strategy 2025: Conquering New Heights,” Arif Habib Limited stated, “We view that the stage is set for a potential market rerating with declining interest rates, a stable rupee, and improving macroeconomic indicators.”

This positive sentiment is further buoyed by domestic liquidity on the rise, driven by fresh inflows and conversions from fixed income. The report highlighted an increased interest from foreign investors, particularly in Pakistan’s debt and equity markets, alongside a momentum for mergers and acquisitions and anticipated foreign direct investment.

Topline Research echoed similar sentiments in its report, “Pakistan Strategy – Outlook 2025,” stating, “During 2025, key drivers for the market would be the successful completion of IMF reviews, passing of FY26 budget in line with IMF guidelines, credit ratings upgrade, launch of Eurobonds and Sukuk, improved relations with the new US government, and successful privatisation of state-owned enterprises such as PIA and power distribution companies.”

Historical Performance and IMF Influence

The PSX has emerged as one of the world’s best-performing markets multiple times, especially since the IMF awarded Pakistan a $3 billion loan programme in June 2023, followed by a new $7 billion Extended Fund Facility (EFF) approved in September 2024. These programmes have significantly contributed to stabilizing the economy, controlling the current account deficit, achieving a primary surplus, reducing inflation from a high of 38% in May 2023 to single digits, and bringing down the interest rate to 15% from a peak of 22% in June 2024.

Market Performance and Investment Returns

In 2024, the KSE-100 index delivered an impressive return of nearly 52%, climbing from 62,451 points in December 2023 to 94,764 points by November 2024. Despite this growth, Arif Habib Limited emphasized that the KSE-100 remains undervalued, trading at a price-to-earnings (PE) ratio of 5.3, which is a significant discount from its 10-year average of 8.3.

Furthermore, the market capitalization-to-GDP ratio stands at 11.1%, indicating a discount of 34.3% compared to the last decade’s average. Arif Habib Limited anticipates a GDP growth rate of 2.4% for FY25, with the current account deficit expected to be a manageable 0.3% of GDP.

Sector-Wise Performance and Future Projections

Commercial Banks

Commercial banks are projected to focus on volumetric growth to maintain profitability. The recent interest rate cuts are likely to reduce their earnings, but growth strategies are expected to counterbalance this impact.

Oil and Gas Exploration

Oil and gas exploration companies are expected to maintain steady earnings, with higher payouts and resolution of circular debt keeping the sector attractive for investors.

Fertilizer Sector

The fertilizer sector is poised for growth, with stable urea and higher DAP offtake alongside robust margins expected to propel earnings by 11.4%.

Cement Sector

The cement sector’s margins are projected to remain elevated due to a better power mix and lower coal prices, leading to a 32.1% growth in earnings.

Oil and Gas Marketing Companies

Oil and gas marketing companies are anticipated to witness a 39.1% growth in earnings, driven by reduced inventory losses and improved margins.

Textile Sector

The global recovery in demand is expected to drive the textile sector, though higher taxes may impact profitability.

Technology Sector

The technology sector is projected to grow by 39.3%, fueled by a stable demand environment, innovation, and increased adoption of digital solutions. The sector’s focus on sustainable growth is expected to boost technology service exports.

Automotive Sector

The auto sector is expected to see a recovery in demand due to economic stability and lower interest rates, with electric vehicles gaining prominence.

FAQs

1. What is the projected return on equity for investments in the PSX by the end of 2025?

Research houses project returns ranging between 27% and 37%, with the KSE-100 index expected to rise to between 120,000 and 127,000 points by the end of December 2025.

2. What factors are driving the positive outlook for the PSX?

Key factors include declining interest rates, a stable rupee, improving macroeconomic indicators, increased domestic liquidity, foreign investor interest, and anticipated foreign direct investment.

3. How has the IMF loan programme impacted the PSX?

The IMF loan programmes have stabilized Pakistan’s economy, controlled the current account deficit, achieved a primary surplus, reduced inflation, and lowered interest rates, all of which have positively impacted the PSX.

4. Which sectors are expected to perform well in the coming years?

Sectors expected to perform well include commercial banks, oil and gas exploration, fertilizer, cement, oil and gas marketing, textile, technology, and automotive sectors.

5. What is the projected growth for Pakistan’s GDP and inflation rates?

Pakistan’s GDP is anticipated to grow by 2.4% during FY25, with inflation rates estimated at 7.5% for FY25 and 9.9% for FY26.