Fueled by economic stability and fiscal consolidation, Pakistan Stock Market (PSX) is set to touch 127k by Dec 2025, suggesting a return of 37%, including a dividend yield of 10%. We expect a re-rating in PE primarily to improve macro indicators and falling bond yields, flushing more liquidity in equities, thus helping the current low PE to march towards its historic forward PE of 7x during the current IMF program. We expect the market forward 2026 PE to reach 5.75x from the current level of 4.6x by Dec 2025.
§ During 2025, key drivers for the market would be (1) successful completion of the IMF review and passing of the FY26 budget in line with IMF guidelines, (2) a credit rating upgrade for Pakistan, subsequently opening the doors for the launch of Eurobonds and Sukuks, (3) Pakistan relations with new USA government and (4) successful privatization of any bleeding SOE i.e. PIAA, DISCOs alongside materialization of Reko Diq deal.
§ As a result of falling returns on fixed-income instruments, mutual funds have remained net buyers of US$138mn in the last two months in the equity market. We expect this conversion from fixed-income to equities to continue as one-year Sukuk and T-bills are now yielding 10.99% and 13.1%, respectively, which is almost half of the yields seen one year ago.
§ On the Economy’s side, external indicators are gradually improving due to contained import growth and strong momentum in inward foreign worker remittance. As a result, we expect FX liquid reserves to cross the US$13bn mark by June 2025, covering ~2.8-3x of monthly imports.
§ We expect inflation to average around 7-8% during FY25 after posting 23.4% in FY24. Inflation is receding sharply, owing to lower food prices and negative fuel cost adjustments. As a result, we expect the policy rate to clock in at 11-12% by Dec 2025 from the current level of 15% and a peak of 22% in Jun 2024.
§ We expect modest GDP growth of 2.5-3.0% in FY25, accompanied by muted agriculture growth of 1.0%. Agriculture growth may remain lower due to an expected decline of 8% in major crops due to the poor outlook for wheat and cotton crops. Meanwhile, the services segment is expected to deliver 4.1% growth, followed by industrial segment growth of 2.3% in FY25.
§ Top Sectors: We believe, amidst falling interest rates, receding inflation, and stable currency, the consumers, both discretionary and staple, and Pharma stocks will witness expansion in both margins and volumes. Alongside this, due to improved recovery ratios in E&Ps after the gas price hikes, we anticipate E&Ps valuation to revert to their mean of 7-8x gradually from the current level of 4-5x (OGDC and PPL mainly). Furthermore, companies trading at a higher valuation gap or discount to their SoTP value are expected to converge to their historic valuations/multiples.
§ Top Picks: Based on the above theme, we like OGDC, PPL, MEBL, FFC, LUCK, HBL, SYS, PSO, SAZEW, AIRLINK, and NML from our universe. While in Alpha stocks, we prefer COLG, PKGS, SEARL, AGP, MUREB, and AICL.
Courtesy – Topline Research
