Pakistan’s stock market surged significantly during FY24, closing at a record high of 78,455 points, up from 41,453 points in FY23.

• The fiscal year began with the government securing a Stand-by Arrangement (SBA) facility of USD 3bn from the IMF.
• Following IMF support, Pakistan was able to unlock inflows from bilateral along with some rollovers, increasing the country’s forex reserves to USD 8.2bn by Jul’23.
• The IMF deal also led to an upgrade in Pakistan’s sovereign rating by Fitch from CCC- to CCC.
• Moreover, a Special Investment Facilitation Council (SIFC) was set up to attract foreign direct investment in different sectors of the economy.
• Additionally, administrative measures aimed at curbing illegal foreign currency activities and a manageable current account helped keep PKR stable against the USD which enhanced investor confidence.
• In Aug’23, Pakistan’s weight in the MSCI FM index increased from ~0.6% to ~2.7%.
• In addition, the much-anticipated gas tariff hike was approved in Nov’23 by the federal cabinet, which was a major prerequisite for the IMF’s first review scheduled for Nov’23.
• Elections took place in Feb’24, leading to the formation of a coalition government by major political parties. Consequently, Shahbaz Sharif assumed office as the Prime Minister of Pakistan.
• Asian Development Bank (ADB) announced a USD 1.2bn loan agreement with Pakistan.
• The reports of the government planning to release PKR 1,250bn to the energy chain to reduce circular debt further fuelled the rally at the index. However, the funds were not released.
• In Feb’24, OGRA announced a revision in gas prices for the second time in FY24, fulfilling a key prerequisite for the next IMF tranche.
• Moreover, the government’s commitment to speed up the privatization process also contributed to the positive momentum.
• Furthermore, despite a steep 22% interest rate throughout the year, the country’s CPI finally cooled down, with headline inflation reaching 11.8% in May 2024. This led to a surge in the real interest rate by approximately 10%, prompting a 1.5% interest rate cut in June 2024, bringing it down to 20.5%.

Economic developments

• Pakistan’s real GDP grew by 2.38% in FY24.
• The agriculture sector climbed up by 6.25% YoY (the highest in 19 years) and was the key driver of economic growth in FY24.
• The industrial sector grew by 1.21% YoY in FY24, with manufacturing up by 2.42% YoY and construction by 5.86% YoY.
• The services sector also experienced a moderate growth of 1.21% YoY.
• In May, Pakistan posted a current account deficit of USD 270mn which turned the 11MFY24’s CAD to USD 464mn.
• During 11MFY24, total exports stood at USD 35.7bn, marking a substantial 9% YoY growth. On the other hand, total imports amounted to USD 57.6bn, flat YoY.
• In 11MFY24, remittances from overseas Pakistanis experienced an increase of 8% YoY, amounting to USD 27.1bn, as compared to USD 25.1bn in 11MFY23.
• During 11MFY24, net FDI inflows settled at 15% YoY to USD 1.7bn compared to an inflow of USD 1.5bn in 11MFY23.
• SBP reserves were recorded augmented by USD 4.4bn, arriving at USD 8.9bn as of 21^st Jun’24.
• The PKR appreciated by 2.8% from the end of June’23 to June’24
• Pakistan’s fiscal balance in FY24 posted a deficit of PKR 8.3trn.
• In terms of the GDP percentage, the deficit settled at 7.9% in FY24.
• Total expenditure clocked into PKR 15.2trn in FY24 (14.3% of GDP).
• Annual CPI averaged 24.52% during 11MFY24 against 29.2% recorded in the same period last year. The decline in inflation was mainly due to the high base effect and a decline in the food index.
• Due to inflation moving to a downward trajectory, real interest rates widening, current account deficit narrowing, PKR stabilizing, and fiscal consolidation, the SBP decided to reduce the policy rate to 20.5% in Jun’24.

Outlook & Recommendation

Following a policy rate cut and the unveiling of the federal budget FY25, market participants will closely monitor developments regarding the IMF’s Extended Fund Facility (EFF) program, which is anticipated to boost the market’s momentum. Additionally, it is expected that after successfully securing the IMF program, Pakistan will be able to unlock foreign inflows from other multilateral and bilateral partners boosting the country’s foreign exchange reserves and alleviating pressure on the external front. Pakistan is expected to enter into an acceleration phase, with GDP projected to be above 3% in FY25. Additionally, after a period of elevated CPI levels, inflation is now on a downward trend and is forecasted to reach ~10% -10.5% in FY25, compared to ~24% in the SPLY, amid high base effect and controlled food inflation. However, the risk of an unexpected devaluation of PKR against the greenback and a rise in international oil prices could not be ruled out. KSE-100 witnessed a profitability growth of 29% YoY in 9MFY24. Going forward, in FY25, we expect earnings growth momentum to continue which should support the index.

The KSE-100 is currently trading at a PER of 4.5x (2025) compared to its 5-year average of 6.1x offering a dividend yield of ~10.3% compared to its 5-year average of ~7.3%. Our preferred stocks are OGDC, PPL, INDU, UBL, MEBL, LUCK, MLCF, FCCL, DGKC FFC, HUBC, ILP, NML and PSO.

Courtesy- AHL Research