By Qamar Bashir

Bulls have continued their stampede at the Pakistan Stock Exchange (PSX) since the start of 2024, reaching a new milestone of 75,983 points on May 26. The market has been rising steadily, breaching psychological and physical barriers almost daily. This boom is causing even the most seasoned economic experts to scratch their heads in bewilderment and amazement. Despite sluggish economic indicators, dismal performance in agriculture, services, SMEs, and large-scale manufacturing, as well as a highly toxic political, law and order, and security situation, the PSX continues to soar.

This surge appears to be occurring in a vacuum or could be likened to a balloon that might burst at any moment, given the country’s stagnant GDP growth. Last year, the GDP growth was -1.27%, and the projected GDP growth for 2024 is 1.7%. Exports as a percentage of GDP stand at 9.06%, while imports of goods and services constitute 17.99% of GDP. Foreign exchange reserves are extremely low, around $8.1 billion. Inflation is at a staggering 38%. The unemployment rate is historically high at 8%.

The car manufacturing industry hit a historic low, producing only 79,513 units in December 2023 compared to 235,454 units in December 2022. Foreign Direct Investment (FDI), which peaked at $4,582 million in 2022, declined to $1,857 million in 2023, with only $659 million recorded from July to April 2024.

The electricity sector’s circular debt crossed PKR 5.71 trillion in 2024. Additionally, state-run commercial entities have incurred losses amounting to a staggering Rs 1.395 trillion over the fiscal years, with no visible measures taken to plug these financial holes.

Human capital outcomes remain poor, with high levels of stunting at 38 percent and learning poverty at 78 percent. Poverty rate is 40.1 percent and since 2018 7 million more Pakistanis are  living below the poverty line.

Repeated delays in implementing the International Monetary Fund (IMF) Extended Fund Facility (EFF) program and the associated decline in external financing inflows saw foreign reserves fall to critically low levels, amid high inflation and sharp currency depreciation.

Following the expiry of the incomplete EFF program, and a nine-month Stand-By Arrangement (SBA) the government continues to face a challenging macroeconomic environment. Significant downside risks include policy uncertainty, worsening external conditions, risks associated with large domestic and external financing needs, and liquidity constraints.

 On top of this, the country is in the grip of a high-intensity political crisis. The legitimacy of the government is under question due to alleged massive rigging in the 2024 elections, wheat farmers are protesting to get the government to buy their crop, lawyers are protesting against the Chief Justice of the Lahore High Court, and the judiciary is struggling against executive interference.

Yet, despite these challenges, the stock market is breaking barrier after barrier and recently touched the highest mark in the country’s history. This situation cannot be easily explained by the realities on the ground.

The stock market’s robust performance amidst a highly toxic political, economic, and financial environment in Pakistan might be driven by several factors.

The market could be experiencing a speculative bubble fueled by short-term investors seeking quick profits, and an influx of hot money from foreign investors looking for rapid returns in a volatile market. Wealthy domestic investors might perceive stocks as a safer option compared to a weakening currency or real estate.

There is also a possibility of government intervention, with state funds being used to buy back shares of specific companies, artificially inflating their prices. Incomplete information available to investors might be causing investment decisions based on partial data. High-interest rates could be making bonds less attractive, driving investors towards the stock market.

 Finally, with a stagnant economy and limited investment opportunities in other sectors, the stock market might appear to be the only viable option for some investors, despite the underlying risks.

The Pakistan Stock Exchange (PSX) in 2024 has shown a significant divergence between high turnover and market capitalization across different sectors, reflecting complex economic and market dynamics. Sectors like commercial banks, with a turnover of 39,987.618 million and market capitalization of 20,235 million, and oil and gas exploration companies, with a turnover of 18,212.720 million and market capitalization of 1,455 million, exhibit high turnover, indicating active trading.

This activity is potentially driven by speculative bubbles, an influx of foreign “hot money,” and wealthy domestic investors seeking safer investment options amid a weakening currency and unstable real estate market.

The technology and communication sector, with a turnover of 116,185.825 million and market capitalization of 266 million, also reflects this trend. The high turnover in these sectors, coupled with relatively lower market capitalization, suggests speculative trading and short-term gains rather than genuine economic growth.

Conversely, sectors such as cable and electrical goods, with a turnover of 19,212.720 million but market capitalization of only 8.56 million, and sugar and allied industries, with a turnover of 1,579.653 million and market capitalization of 83.69 million, despite substantial turnover, show low market capitalization, indicating possible undervaluation due to investor concerns about future profitability, structural inefficiencies, or regulatory challenges.

The engineering sector, with a turnover of 18,099.937 million and market capitalization of 126.34 million, and glass and ceramics, with a turnover of 247.045 million and market capitalization of 62.16 million, further illustrate this disparity.

This discrepancy underscores the need for careful analysis to understand the true health and vulnerabilities of Pakistan’s economy amidst a backdrop of political instability, high inflation, and low foreign reserves.

To protect small and middle-level investors if the market bursts in the near future, the government should take several measures. These include implementing stricter regulations on speculative trading to prevent bubbles, ensuring greater transparency and accuracy of market information to help investors make informed decisions, and creating safeguards such as investor protection funds to compensate small investors in the event of a market crash. Additionally, the government should promote financial literacy programs to educate the public about the risks and rewards of stock market investments, and provide incentives for long-term investments in stable sectors to reduce market volatility. Strengthening regulatory bodies to oversee market activities and preventing market manipulation can also protect investor interests.

The government should act now to avoid facing severe consequences in the future.

By Qamar Bashir

Former Press Secretary to the President

Former Press Minister to the Embassy of Pakistan to France

Former MD, SRBC