2023 emerged as the year of turnaround for the Pakistan Stock Exchange (PSX) as the KSE-100 hit new peaks and emerged as the best-performing asset class in the country, delivering a return of nearly 55% in the 12-month period (in rupee terms).

The KSE-100 Index signed off 2023 at 62,451.04, an increase of 22,031 points or nearly 55% in calendar year 2023.

However, the PSX story was a tale of two halves and can be simply divided into two phases i.e. before and after the International Monetary Fund (IMF) programme.

The South Asian nation commenced 2023 engulfed in a myriad of challenges, including rising risk of debt default, unprecedented inflation figures, record-high yields on government bills, and political instability.

All these factors created a challenging market environment, especially for investors, who preferred remaining on the sidelines during the first few months of the year, while keeping a close watch on resumption of the IMF programme.

This is evident from the fact that the KSE-100 Index remained largely stagnant climbing from the 40,420 level on December 30, 2022, to 41,452.69 on June 27, 2023, reflecting a marginal increase of just 2.5%.

However, tides shifted on June 30, during the Eid ul Azha holidays, after Pakistan managed to clinch a last-minute agreement with the IMF, as the two parties reached an agreement on policies to be supported by a $3-billion, nine-month Stand-By Arrangement (SBA).

The new IMF arrangement, seen as a massive positive for the government and the economy reeling from crisis, not only extended Pakistan’s commitment with the lender well into the second half of fiscal year 2023-24, but also was an upgrade from the earlier expectation that the country would receive $1.1 billion after the ninth review.

“The IMF SBA was a breakthrough, which dictated the trajectory of the stock market,” Mahroz Khan, analyst at Optimus Digital, told Business Recorder.

Similar sentiments were provided by other market analysts as the resumption of the IMF programme ensured policy stability.

“From 2017 onwards, the performance of PSX was quite rangebound, as stock valuations remain fairly low despite strong corporate performance,” said Mustafa Pasha, Chief Investment Officer at Lakson Investments.

“The IMF programme emerged as a trigger point, as the risk of default was averted which pumped confidence among the investors,” he said.

The impact was evident as the benchmark KSE-100 Index jumped from 41,452.69 on June 27, 2023 to 62,451.04 on December 29, 2023, the last trading session of the calendar year, registering a massive growth of nearly 51%.

Following the IMF programme, another major positive for the stock market was the smooth transition of power to the interim government setup as a caretaker cabinet under interim Prime Minister Anwaar-ul-Haq Kakar, tasked with running the country until fresh elections, took charge in August.

“This diminished much uncertainty on the political front,” said an analyst.

What followed was a series of measures taken by the interim government including State Bank of Pakistan “structural reforms” for the Exchange Companies and the administrative steps against smugglers and hoarding of currency and illegal exchanges, which stabilized the rupee while adding to investor confidence.

“Measures in the energy sector, especially the gas price hike, was a key, as this alleviated the issue of circular debt in the index-heavy energy sector,” said Mahroz Khan.

“As a result, the performance of E&P sector improved, which also trickled down to the banking sector driving the stock market upwards”, he said.

Moreover, continuous talks with the Washington-based lender and improvement in rupee value kept the investors upbeat, as the PSX crossed the coveted 50,000 mark on October 19, a milestone achieved after over six years.

The momentum persisted in the following weeks and the stock market continued to ink new records with every passing trading session. The increased participation of foreign investors in particular was a sign that businesses were expecting an up cycle amid hopes of recovery in the country’s economy.

In November, Pakistan’s stock market saw the highest monthly net inflow of foreign portfolio investment in four years, as international corporates purchased shares worth $66 million and sold $31 million in November, resulting in a net buying of $35 million, the highest monthly inflow since 2017.

During the same month i.e. November 15, the IMF staff and Pakistani authorities reached an agreement on the first review of the $3-billion, nine-month SBA., which as expected further bolstered the equities, that were already enjoying a buying spree on account of attractive valuations and improved macroeconomic indicators.

Thus, the PSX continued its upward march well into the final weeks of the year hitting the highest-ever level of 66,426 on December 12. Meanwhile, despite some hiccups, which many analysts termed as much-needed correction, the stock market signed off the year on a bullish note.

“Sectors contributing positively to index include banks (7,162 points), fertilizer (2,661 points), E&P (2,553 points), Power (2,470 points) and cement (2,148 points),” said Arif Habib Limited, a brokerage house in its latest report.

“However, the laggards comprised of technology (-452 points) followed by miscellaneous (-170 points), textile spinning (-10 points), and vanaspati (-9 points).”

“Meanwhile, scrip wise top contributions to the upside were HUBC (2,077 points, 84% of total power sector contribution), UBL (1,611 points, 22% of total banking sector contribution), HBL (1,035 points, 14% of total banking sector) and MCB (1,031 points, 14% of total banking sector).

“Scrip wise negative contributors were i) TRG (-317 points), ii) PSEL (-308 points), and iii) SYS (-237 points).”

A dismal year for IPOs

Despite achieving new highs, the year 2023 was not good for Initial Public Offerings IPO as the Pakistani equities market saw just one IPO i.e. Symmetry Group that managed to raise a meager Rs435 million funds. This was the lowest amount raised in a year in the past decade and half of the previous record low of Rs800 million seen in 2013, shared Topline Securities.

“We attribute this bad IPO trend to macro-economic instability, coupled with the looming threat of default, cheap valuations and political uncertainty discouraging equity investment,” the brokerage house said in a report.

Meanwhile, Murtaza Jafer, Director of Equity Sales at Optimus Capital, blamed the trend on low valuations in the market, which didn’t help attract much interest.

“However, I believe we would see a lot of listings post-general elections,” he said.

PSX Outlook

Market experts believe that despite the record showing in 2023, PSX has more to achieve in the coming months, as market valuations remain attractive.

“2023 was a year of recovery, however, I believe it is just a start,” said Pasha.

“The KSE-100 index may climb to 85-90k level by the end of 2024.

“However, for that timely elections must be held, while a new IMF agreement should also be inked by the elected government. These will be the key macro triggers that will dictate the future market trajectory,” he added.

Other experts also echoed similar views.

“Timely elections are important, both for the general as well as the business community,” said Mahroz Khan.

Khan was of the view that under the new IMF agreement, expected to be reached next year, the lender is likely to stress increasing the country’s tax base, which remains very low.

“Even after the recent rally of 50%+ we believe there is much room for upside,” Amreen Soorani, Head of Research at JS Global, told Business Recorder, as she added that the KSE-100 Index is still trading on attractive multiples.

The market’s current price-to-earnings P/E (blue chips) is still close to 3x and still reflects a discount of ~40% to the Index’s recent mean of multiples, she said.

“(However) For the continuity of the rally, it would be very important for the ongoing developments on the macro front to continue and for the government to ensure the country’s gross financing needs are met, keeping PKR depreciation as gradual as possible,” Amreen added.