The Pakistan Stock Exchange (PSX) is not just a reflection of the country’s economic performance, but also a battleground for its political factions. The PSX has witnessed a roller-coaster ride in the past year, soaring to record highs and plunging to alarming lows, depending on the political scenario.
The market is bound to correct itself, but the question is how much? And where would it be by the end of this fiscal year?
The market does not move on fundamentals alone
The PSX is influenced by a number of factors, such as corporate earnings, macroeconomic indicators, foreign investment, and global trends. However, these factors do not account for the entire movement of the market, as there are other forces at play, such as speculation, manipulation, and sentiment.
One of the main drivers of the market in the past year has been the political situation, especially the fate of former Prime Minister Nawaz Sharif, who was ousted from power in 2017 on corruption charges.
Sharif’s supporters, who still have a strong presence in the ruling party and the business community, have allegedly pumped up the market to use it as a leverage against the opposition and the judiciary. They have also tried to portray Sharif as a victim of a conspiracy and a champion of democracy and development.
However, Sharif’s political future is uncertain, as he faces multiple legal challenges and a possible jail term. His party, the Pakistan Muslim League-Nawaz (PML-N), is also facing a rift between his loyalists and his younger brother, Shehbaz Sharif, who is seen as more pragmatic and conciliatory.
The PML-N’s main rival, the Pakistan Tehreek-e-Insaf (PTI), led by former cricket star Imran Khan, is also gearing up for the next general elections, scheduled for 2024. Khan, who has been under house arrest since 2022 for his role in the anti-government protests, has vowed to end corruption and bring a new political culture in the country.
If Sharif is not allowed to contest the elections, or if Khan is released and allowed to run, the market will be deflated, as the International Monetary Fund (IMF) programme, which has been a lifeline for Pakistan’s economy, will be endangered.
The IMF has been providing Pakistan with a $6 billion loan since 2021, conditional on fiscal reforms and structural adjustments. The IMF has praised Pakistan’s progress in stabilizing its economy, but has also warned of the risks posed by the political uncertainty and the COVID-19 pandemic.
The market’s reaction to different political outcomes
If Sharif wins the elections with a strong majority, the market will stabilize and grow, as he will bring money and confidence to the economy. Sharif, who is known for his pro-business policies and his close ties with China, will have to redevelop his party, his public image, and his goodwill, after being embroiled in scandals and controversies. He will also have to mend his relations with the military and the judiciary, which have been strained by his confrontational stance.
If the Pakistan Peoples Party (PPP), led by Bilawal Bhutto Zardari, the son of former Prime Minister Benazir Bhutto, wins the elections, the market will kind of crash, as the PPP has a reputation of being populist and fiscally irresponsible. One thing that the PPP has persistently done is distributing jobs and subsidies, and then printing money to pay for them. This has led to high inflation and fiscal deficits, eroding the value of the currency and the purchasing power of the people. The market will price in the inflation fears and the loss of credibility with the IMF and other international lenders.
If Khan wins the elections, there will be severe uncertainty, as he does not have a good relationship with the establishment, which includes the military, the bureaucracy, and the judiciary. Khan, who is seen as a charismatic and honest leader, but also as a populist and a nationalist, has promised to bring a radical change in the country’s governance and foreign policy. He has also criticized the IMF programme and the China-Pakistan Economic Corridor (CPEC), two of the main pillars of Pakistan’s economic stability and growth. Khan’s policies and actions will have a significant impact on the market, but it is hard to predict what they will be.
The market’s disconnect from the real economy
While the PSX has been fluctuating with the political winds, the real economy has been facing multiple challenges, such as the COVID-19 pandemic, the locust invasion, the energy crisis, the trade deficit, and the debt burden. The PSX’s performance has not been in sync with the economic indicators, such as the gross domestic product (GDP), the inflation rate, the exchange rate, and the interest rate.
One of the sectors that has shown a stark contrast between the PSX and the real economy is the real estate market, which has seen an average appreciation of 15% in the last 12 months, according to the Pakistan Real Estate Index. Property prices have appreciated by 18% in Karachi, 32% in Lahore, 57% in Islamabad, 40% in Rawalpindi, and -2% in Peshawar. The real estate market has been driven by the low interest rates, the amnesty scheme, the construction package, and the demand for housing.
On the other hand, the US dollar has appreciated by 23% against the Pakistani rupee in the last 12 months, reflecting the pressure on the country’s foreign exchange reserves and the balance of payments. The gold price has also appreciated by 5.7% in the last 12 months, indicating the preference for safe-haven assets amid the uncertainty and volatility.
However, the stock market prices have surged by five times, defying the economic logic and reality. The benchmark index, the KSE-100, was at 39,800 points on January 01, 2023, and it hit 66,000 points on December 22, 2023, a record high. The market is bound to crash and sooner than we think. To answer how much, looking at the trend where the market has shed 2,500 points in one day, it could touch the low of 38,000 points by the end of the first quarter of 2024. This would wipe out the gains of the past year and bring the market back to the level of the pre-pandemic era.
“former Prime Minister Nawaz Sharif, who was ousted from power in 2022 on corruption charges.”
2022 was not the year