Fueled by economic stability and fiscal consolidation, the Pakistan Stock Market (PSX) is set to touch 127,000 by December 2025, suggesting a return of 37 percent including a dividend yield of 10 percent.
A report by Topline Securities expects a re-rating in PE primarily on the back of improving macro indicators and falling bond yields which is flushing more liquidity in equities, thus helping the current low PE to march towards its historic forward PE of 7x during the current IMF program.
It also expects the market forward 2026 PE to reach 5.75x from the current level of 4.6x by December 2025.
During 2025, key drivers for the market would be:
As a result of falling returns on the fixed-income instruments, the mutual funds have remained net buyers of US$ 138 million in the last 2 months in the equity market. This conversion from fixed income to equities will likely continue as 1 year Sukuk and T-bill is now yielding 10.99 percent and 13.1 percent which is almost half of the yields seen 1 year ago.
On the economic side, external indicators are gradually improving on the back of contained import growth and strong momentum in inward foreign workers’ remittance. As a result of this, FX liquid reserves are likely to cross the US$ 13 billion mark by June 2025, covering ~2.8-3x of monthly imports.
Inflation will likely average around 7-8 percent during FY25 after posting 23.4 percent in FY24. Inflation is receding sharply owing to lower food prices and negative fuel cost adjustments. As a result, the report sees the policy rate to clock in at 11-12 percent by December 2025 from the current level of 15 percent and peak of 22 percent in June 2024.
There is likely to be a modest growth of 2.5-3.0 percent in GDP in FY25 on the back of muted agriculture growth of 1.0 percent. Agriculture growth may remain lower on the back of an expected decline of 8 percent in major crops due to the poor outlook of wheat and cotton crops. While the services segment is expected to deliver 4.1 percent growth followed by industrial segment growth of 2.3 percent in FY25.
Amidst falling interest rates, receding inflation, and stable currency, the consumers; both discretionary and staple, and Pharma stocks will witness expansion in both margins and volumes.
Alongside this, due to improved recovery ratios in E&Ps after the gas price hikes, we anticipate E&Ps valuation to revert to their mean of 7-8x gradually from the current level of 4-5x (OGDC and PPL mainly). Furthermore, companies trading at a higher valuation gap or discount to their SoTP value are also expected to converge to their historic valuations/multiples.
Based on the above theme, the report recommends OGDC, PPL, MEBL, FFC, LUCK, HBL, SYS, PSO, SAZEW, AIRLINK, and NML from our universe. While in Alpha stocks, the report picks COLG, PKGS, SEARL, AGP, MUREB, and AICL.