The Pakistan Stock Exchange continues to soar to new stratospheric heights and there is no end to this flight in sight. Starting with around 60,000 points a little less than a year ago, it has touched the highest ever level of over 114,000 points now.

The PSX has made impressive gains on the back of strong interest shown by local investors coupled with institutional support. The historic milestone marks a 60 per cent year-to-date gain, driven by a mix of 47 per cent capital gains and 13 per cent dividend yields. The rise has been fuelled by key sectors including banking, oil and gas exploration, and fertilisers. The expectation of increased investments by mutual funds in equities has also been an important factor.

Economists do not consider a booming stock market a reliable indicator of the health of the general economy, particularly in the case of developing countries like Pakistan where the overall investment in stock markets is rather low as a percentage of GDP in comparison to wealthier countries. So, while the national economy is in a moribund state, what is driving the boom in the PSX? What are the economic factors that are boosting investor sentiment?

Pakistan’s stock market upsurge has much to do with a visible improvement in the macro-economic indicators. One of these is strengthening control over inflation. Inflation, which jumped to 38% in early 2024, has declined sharply due to proactive measures by the State Bank of Pakistan (SBP) and government-led fiscal policies, now standing at single-digit levels. This has bolstered consumer spending and corporate revenues in sectors like banking, cement, and energy which are key players on the PSX. After falling to the single digit earlier this year, inflation is expected to came down  to 5.8  to 6.8 per cent in November and then further down to 5.6 to 6.6 per cent in December.

Another important factor is a sharp reduction in SBP policy rate. As inflation has dropped, the SBP cut interest rates from 22% to 13%, encouraging both consumer spending and business borrowing. A marked reduction in the policy rate, rupee stability and a larger and longer IMF programme have also helped bring down the cost of business, helping boost investor sentiment. The declining policy rates in particular have led to a shift in investment from fixed-income assets like bonds towards equities. Government efforts to turn fiscal and current account deficits into surpluses and an upgrade by key international rating agencies like Moody’s have also added to the positive sentiment.

Lately, a surge has been witnessed in foreign investment. Foreign capital inflows  this reached $87 million, the highest in over a decade. Driven by Pakistan’s relatively low market valuations and the appeal of emerging markets, international investors have poured funds into the PSX.

At the same time corporate earnings have shown a rising trend. Decreased inflation and borrowing costs are driving profitability for major sectors on the PSX, from energy and manufacturing to real estate. As corporate revenues increase, the demand for commercial properties and luxury living spaces is expected to grow, offering high-yield opportunities for investors in both equities and real estate. Further, the government’s structural reforms in taxation  have bolstered confidence among investors. Needless to say, these measures, which reflect a commitment to economic stability, make Pakistan an attractive destination for overseas investment.

According to the latest reports by foreign agencies, Pakistan’s residential real estate sector is projected to grow by 24% over the next five years, with rental yields in upscale developments reaching prime levels. Several rating firms have also highlighted the resilience of Pakistan’s commercial real estate, with Grade A office occupancy at 90%. As demand for rental properties grows, real estate investment becomes a source  for generating reliable passive income.

The economic transformation that we are witnessing has been possible due to the IMF bailout and especially the government’s untiring efforts to adhere to the terms laid down by the lender. Any deviation from the path could easily undo the progress that has been made thus far. As the PSX achieves new heights, Pakistan’s capital markets have become an increasingly attractive destination for foreign investment. The surge in stock prices appeals to both local and international investors seeking high returns in emerging markets. Pakistan’s position as a frontier market is being recognized globally, with institutional investors showing more interest in sectors like banking, technology, manufacturing, and infrastructure. The growing capital influx will play a significant role in strengthening Pakistan’s financial system, providing the country with the resources needed to fund new infrastructure and energy projects essential for sustainable growth.

At another level, the boom highlights Pakistan’s untapped economic potential and promises an era of innovation and development in key sectors such as technology, finance, and manufacturing. This growth will create opportunities for business expansion and job creation necessary for long-term  progress and prosperity.