Brokerage house Arif Habib Limited (AHL) expects the KSE-100 Index – largely seen as a benchmark for stock market performance – to hit 120,010 points by December 2025, a rather precise projection that foresees a return of nearly 27% in the remaining time period of 13-and-a-half months.

The KSE-100, which has been the world’s top-performing market in the time period between October 2023 to November 2024, has extended its pole position in the last few weeks and closed Friday’s session with a 0.61% gain. The KSE-100 closed November 15, 2024 at a record high of 94,763.64, briefly also crossing 95,000 as calls for 100k before the end of the year got louder.

After a while, the benchmark index has also outperformed rallies in gold and other asset classes as it offered a 52% return during the current calendar year with a stable exchange rate and cushion of another bailout of the International Monetary Fund (IMF) allowing investors to freely focus on stocks and their earnings.

“The stage is set for a potential market rerating, driven by a mix of declining interest rates, a stable PKR, and improving macroeconomic fundamentals,” AHL said as it began its 117-page ‘Pakistan Investment Strategy 2025’, an annual report the brokerage house publishes.

This year’s theme ‘Conquering new heights’ comes after the KSE-100 has hit fresh peaks throughout the year, a momentum AHL believes will continue as 2025 starts.

“Our projection is grounded in the methodologies of target price mapping and justified P/E ratio,” it added, citing the KSE-100 currently trading at a price-to-earnings (PE) multiple of 5.3, a 35.8% discount to the last 10-year average of 8.3x.

“Even with the return during CY24TD, the KSE-100 remains undervalued across various valuation perspectives.”

It maintained its positive outlook for the ongoing fiscal year, with a manageable current account, slowing pace of inflation, easing in monetary policy and stability in the exchange rate as its reasons.

However, it also envisaged corporate earnings growth at 4.2% in 2025, the slowest pace since the pandemic year (2020) as a high base effect drags on the heavyweight banking sector and takes a toll on Pakistan’s struggling textile industry as well. The last year the KSE-100 earnings growth had clocked in lower was 2020 at 3.9% and 2019 when it clocked in at 5.5%.

It argued that higher mobilisation of domestic liquidity and foreign direct investment, which remains on the horizon, as well as a boom in mergers and acquisitions will keep investor interest going.

However, it flagged macroeconomic imbalances during the IMF programme, volatility in commodity prices and political instability as key risks to the stock market’s bullish run.

In its note on domestic liquidity, AHL said KSE ownership has witnessed an “astonishing shift and now free float is predominantly (76.4%) held by High Net worth Individuals (HNWIs), companies, brokers, and other entities”.

“Pakistan’s mutual fund industry’s assets under management (AUM) grew from Rs742 billion in FY20 to nearly Rs3.0 trillion by September 2024, out of which only ~8% or Rs232 billion are equity AUM. Recently, with the declining interest rates and improved macros, we have witnessed net inflow from the mutual fund industry in CY24TD amounting to Rs34 billion which is highest net inflow after 7 years.”

“Our estimation suggests that with every 1% reallocation from fixed income to equities, mutual funds and insurance companies could potentially deploy Rs29.8 billion and Rs15.0 billion, respectively, into the market.”

The brokerage house, in the business of stocks, said equities will be the preferred asset class in 2025.

“We believe that a key driver for the re-rating of the KSE-100 Index in 2025 will be the growing preference for equities as the primary asset class. We expect fixed-income returns to remain in single digit (after-tax) territory next year, reducing its attractiveness relatively.”

It said the outlook for real estate as an investment avenue remains subdued, with rising costs and regulatory hurdles dampening its appeal.

“Stringent measures to combat dollarisation, coupled with a stable balance of payments outlook, are expected to limit investment in foreign currency, further curbing investment in dollar-denominated assets.

“Furthermore, the previously attractive auto sector as an investment class has also lost its attraction amid lower purchasing power and higher car prices and is unlikely to recover in the near term.”

This combination of factors creates an ideal environment for equities to outperform, positioning them as the preferred investment class in 2025, AHL argued.