Several factors support the bulls. The State Bank’s shift
toward monetary easing has reduced borrowing costs, drawing investors away from
fixed income and into equities. Lower interest rates traditionally inflate
valuations, and Pakistan is no exception. Add to this the IMF’s continued
engagement and incremental fiscal discipline, and the picture looks markedly
better than just two years ago when fears of default loomed large.
International credit agencies have upgraded Pakistan’s outlook, further feeding
optimism.
Sectors like banking, energy, and cement — heavyweights in
the index — have reported improved earnings, lending substance to the rally.
Market psychology is also playing its part; momentum has a way of sustaining
itself, as more investors join in, driven by fear of missing out.
But euphoria has a habit of blinding participants to lurking
dangers. Pakistan’s political fragility remains the most potent risk. A sudden
shift in the governing coalition, renewed street agitation, or policy U-turns
could shake investor confidence overnight. Likewise, the country’s external
account remains precarious; a spike in oil prices or weakening of the rupee
could unravel the fragile stability. Inflation, though easing, is hardly
conquered, and any resurgence would force the central bank back into tightening
mode.
Overvaluation is another trap. After such a steep run, some
stocks now trade at stretched multiples. Unless earnings growth matches
expectations, disappointment could trigger a sell-off. And with global
financial markets on edge over interest rate uncertainty and geopolitical
flare-ups, Pakistan is hardly insulated from external shocks.
