PSX beats property, dollar

KARACHI:

Pakistan's equity market delivered one of its strongest performances in recent history during 2025, decisively outperforming most competing asset classes and reinforcing the Pakistan Stock Exchange's (PSX) growing appeal among domestic investors.

Market participants attribute the benchmark KSE-100 index's robust performance to a combination of macroeconomic stabilisation and improving investor sentiment. Inflation moderated sharply during 2025, allowing the State Bank to cut its policy rate in phases from elevated levels, thereby improving the relative attractiveness of risk assets.

At the same time, foreign exchange reserves strengthened, the current account remained largely contained, and fears of disorderly currency depreciation receded. These developments collectively reduced systemic risk and encouraged investors to reallocate capital to equities. "Gold and the stock market posted excellent gains in 2025," wrote Topline Securities in its analysis of asset class returns in Pakistan for 2025, which shows that the KSE-100 index generated a return of around 48% during the year, inclusive of dividends, ranking as the second-best performing asset class after gold, which surged 73%.

The strong showing of equities is particularly notable given the sharp rallies already recorded in 2023 and 2024, which underscores the durability of the PSX's upward momentum.

Domestic liquidity remained the backbone of the stock market's rally. With real returns on bank deposits and fixed-income instruments gradually compressing as interest rates declined, local investors increasingly turned to stocks in search of superior returns.

According to Topline Securities, equity market participation broadened during the year, with blue-chip stocks in the banking, energy, fertiliser, cement, and select exploration and technology sectors leading gains. Dividend-paying stocks were particularly attractive, as investors sought both income and capital appreciation in a lower-rate environment.

In contrast, other popular investment avenues delivered comparatively modest returns. Real estate, traditionally viewed as a preferred store of value in Pakistan, underperformed financial assets in 2025.

Topline Securities data indicate that average residential plot prices in DHA Karachi and DHA Lahore rose by around 15%, while commercial plot prices increased by 18%, based on average prices between November 2024 and November 2025. While these gains were positive, they fell well short of returns generated by equities and gold, reflecting subdued transaction activity, higher holding costs, and liquidity constraints in the property market.

Fixed-income investments also offered moderate but less compelling returns during the year. Pakistan Investment Bonds (PIBs) with a three-year maturity delivered returns of about 14%, including coupon income and capital gains. Short-term treasury bills yielded around 12%, assuming reinvestment every three months, while one-year T-bills also generated returns close to 12%.

National savings instruments, such as Special Savings Certificates, posted similar gains, whereas bank savings deposits averaged returns of around 9%, according to SBP data cited by Topline. Money market funds managed by local asset management companies gave average returns of 11% in 2025.

Currency-related investments were also relatively subdued. The US dollar, which has historically been a favoured hedge for local investors, generated a return of only about 3-4% during 2025. The inter-bank exchange rate moved from around Rs278 to Rs280 per dollar over the year, while gains in the open market were similarly limited.

Analysts note that improved external account management and tighter oversight of the foreign exchange market curtailed speculative activity and reduced volatility. Meanwhile, cryptocurrency assets, which are not officially permitted in Pakistan, recorded a negative return of around 4%, making them one of the weakest-performing asset classes during the year.

Topline's findings highlight a clear shift in investor behaviour in 2025, with capital gravitating towards assets offering transparency, liquidity, and relatively predictable returns. The strong performance of equities, in particular, reflects growing confidence that Pakistan has moved beyond the acute phase of macroeconomic instability. Despite the sharp rally, analysts argue that valuations remain reasonable, with the market trading at a significant discount to regional peers and broadly in line with long-term historical averages.

Looking ahead to 2026, brokerage houses expect the PSX to remain a preferred asset class, although returns are likely to moderate following two consecutive years of outsized gains. Arif Habib Limited, in its Pakistan Strategy 2026 report, projects the KSE-100 index to reach 208,000 points by December 2026, implying an upside of around 21-22% from current levels. The outlook is underpinned by expectations of modest corporate earnings growth, broadly stable interest rates, and continued domestic liquidity support.

Analysts also point to potential catalysts in 2026, including progress on privatisation, most notably power distribution companies, continued efforts to resolve circular debt in the energy sector, and a pipeline of new equity listings across sectors such as energy, insurance, REITs, and technology. These developments are expected to deepen the market, improve sector-specific diversification, and attract incremental investor participation.

However, risks remain on the horizon. Global geopolitical tensions, commodity price volatility, and any slippage in reform momentum could weigh on sentiment. As such, market participants caution that while equities are likely to retain their relative appeal, gains in 2026 are expected to be more measured and driven by fundamentals rather than rapid multiple expansion.

Stocks hit new record on UAE investment hopes

PSX eclipsed another record on Monday as it surged nearly 1,500 points to a new all-time high close to 173,900, powered by investor enthusiasm over reports of fresh UAE investment.

In its review, Topline remarked that bulls staged a commanding advance, propelling the market to a new high as investor confidence was reinforced by reports of a UAE entity's prospective acquisition of a strategic stake in the Fauji Group.

"The anticipated investment has raised expectations that $1 billion in liabilities could be settled, while hopes have also been strengthened that the remaining $2 billion loan may be rolled over, significantly easing near-term financial pressures," it said.