New era of prosperity in sight

Pakistan has long awaited this moment of certainty, optimism, and stability. The broader KSE-100 index of the Pakistan Stock Exchange (PSX) has surged to historical levels, crossing 134,000, and remains an attractive proposition.

Just a few years ago, many had written Pakistan off, fearing imminent default, while even the most optimistic analysts couldn't foresee the remarkable transformation now unfolding. Negative voices once filled the airwaves, forecasting hyperinflation, currency crises, and social upheaval – yet today, the story has drastically changed. Amidst shifting geopolitical dynamics, Pakistan is finding its footing.

A decade ago, the Belt and Road Initiative (BRI) promised $50 billion in investments, including a significant portion for the China-Pakistan Economic Corridor (CPEC). While this vision seemed ambitious at the time, the country now stands poised to reap the benefits of this foresight.

The last decade saw its share of political upheavals, civil-military tensions and external conflicts. Today, however, Pakistan is forging stronger ties regionally and globally. Diplomatic relationships with Afghanistan, Iran and the Arab world have strengthened, while Pakistan's growing military capabilities and alignment with China signal a shifting power balance in the region.

New optimism awakens

The current government has proven itself adept at fostering diplomatic and economic stability. Ties with China have been cemented, and Pakistan's renewed bond with Iran, coupled with its strengthened relations with Saudi Arabia, Turkey, Azerbaijan, and Uzbekistan, all signal the dawn of a new era.

The United States, too, appears to be softening its stance, following Pakistan's nomination of the US president for the Nobel Peace Prize and the army chief's recent visit to Washington. These developments have restored investor confidence, and Pakistan now stands on the cusp of a golden opportunity for economic growth.

Interest rates have halved from 22% to 11% in recent months, while the currency has stabilised and foreign exchange reserves are climbing to multi-year highs. The country is now preparing to re-enter global capital markets with Panda bonds, while global bond prices have risen sharply, reflecting the reduced risk of default. As protectionist policies soften and industrial incentives increase, Pakistan is positioning itself as an attractive destination for foreign investment in mining, agriculture, IT, and tourism.

Road ahead for economy

Fiscal tightening has become a hallmark of Pakistan's recent economic strategy, with the government reducing its fiscal deficit and cutting debt levels over three consecutive years. These efforts are starting to bear fruit, though changes in the tax code have led to higher taxes on income from fixed income instruments, limiting returns to a meagre 7-8%. Despite this, investors are flocking to the KSE-100, with nearly $50 million pouring into equities, driven by the potential for strong returns in blue-chip companies.

Investors are advised to research the companies they wish to invest in by reading the financial reports, attending analyst briefings, assessing the management style carefully, and evaluating the tradability of stocks while considering their investment horizon. Identifying sectors of interest, such as banks, mining, acquisitions, chemicals, the revival of the auto sector, and electric two-wheelers, can be lucrative.

However, it is advisable to maintain a portfolio of 6-12 stocks that you are comfortable with, ensuring you can sleep well knowing that over the next 8-12 quarters, these stocks are likely to deliver positive returns for 6-10 quarters, cumulatively earning at least 5-7% above risk-free alternative investments.

With the KSE-100 index now returning to its mean valuation of 6.5-7x, accompanied by dividend yields between 7-10%, investors are poised to enjoy sustainable growth over the next two to three years. A high probability exists that the ongoing global trade uncertainties and de-globalisation will create instability, which could push down global oil prices and inflation. As a major beneficiary of falling oil prices, Pakistan stands to gain from reduced inflation, improved foreign reserves, and increased domestic consumption and industrial activity. The KSE-100 could see its P/E ratio return to double digits within three years, with the index potentially reaching 200,000 – once as unimaginable as 125,000 seemed two years ago.

Expectations from policymakers

Policymakers are expected to continue improvements on tax collection side to widen the tax net by signalling reduction in corporate and salary tax by 1% per year for the next 10 years, reducing industrial energy tariff for next 10 years contingent upon new exportable products and job creation, accelerate pending petrochemical, refinery, blue economy and NEV policy implementations and ensure agricultural productivity is enhanced and minerals in Balochistan and K-P are explored and value added with technology transfer to regain stronger geopolitical power. The end objective should be forex reserves worth 12 months of import in 10 years' worth $100 billion. No rest until then.

The writer is an independent economic analyst