Pakistan Stock Market Set to Gain 27.4% in FY26 Amid Lower Interest Rates, IMF Reforms

Pakistan Stock Market Outlook FY26: KSE-100 Projected to Surge 27.4%

KARACHI, July 2025 — Pakistan’s benchmark KSE-100 Index is poised for a strong performance in FY26, with projected returns of 27.4%, driven by lower interest rates, corporate earnings recovery, and macroeconomic stability, according to strategy reports by Arif Habib Limited (AHL) and Topline Securities.

While optimism remains high, analysts caution that persistent external and structural risks, such as fiscal slippage, foreign outflows, and regulatory inconsistencies, could temper investor enthusiasm.

Key Drivers of the Bullish Forecast

📉 1. Lower Interest Rates Boost Valuations

• The State Bank of Pakistan (SBP) has already cut the policy rate to 11%, with more reductions likely.

• This shift is expected to attract liquidity from fixed-income markets to equities, supporting valuation rerating.

• Topline Securities predicts the KSE-100 Index to reach 160,000, estimating:

  • 11% from PE rerating

  • 9% earnings growth

  • 9% dividend yield

📈 2. Corporate Earnings Recovery

• AHL forecasts 14% earnings growth (ex-banks & E&Ps) and 9.2% overall.

• Sectors leading the recovery:

  • Cement: Benefit from lower energy costs and demand recovery.

  • Banks: Strong deposit growth and improving spreads (MCB, Meezan Bank, NBP).

  • Oil & Gas: Margin expansion due to price normalization and cost controls.

🌍 3. Macroeconomic Stability and IMF Backing

• Continued engagement with the IMF underpins confidence:

  • $2.6 billion disbursement expected

  • Reforms in taxation, energy, and SOEs

• Macroeconomic outlook for FY26:

  • GDP growth: 3.3%

  • Inflation: 5.4%

  • Rupee: Rs293/USD

  • Current account deficit: $1.6 billion

💹 4. Attractive Valuations and Local Participation

• KSE-100 trading at a forward P/E of 6.8x—below its 10-year average and regional markets.

• Rising domestic investor share (93%) led by:

  • Mutual funds

  • Companies

  • Retail investors

• Anticipated IPO inflows of Rs14–18 billion in FY26 to deepen market activity.

Forecast Range: 160,000–168,000 KSE-100 by June 2026

• AHL Target: 168,000 points (forward P/E of 7.4x on FY27 earnings)

• Topline Target: 160,000 points (27.4% upside)

Risks to Watch

Despite the strong upside potential, several risks could affect market momentum:

⚠️ Structural Challenges

• Regulatory delays in the E&P sector (e.g., payout issues).

• Low capacity utilization in cement and textile industries.

• Inconsistent export incentives for tech and textile sectors.

⚠️ External Pressures

• Foreign portfolio outflows of $304 million in FY25.

• Only modest inflows expected in FY26 despite IPO momentum.

• Continued reliance on IMF with two reviews and $2.6 billion disbursement pending.

• Fiscal deficit may widen to Rs5.8 trillion (5.2% of GDP) amid revenue concerns.

Conclusion

The Pakistan Stock Exchange (PSX) appears set for another year of strong gains, following a 60% return in FY25. The projected 27.4% return in FY26 signals confidence in the economy’s recovery narrative—powered by monetary easing, fiscal discipline, and corporate resilience.

However, sustaining this momentum requires policy continuity, regulatory clarity, and a stronger push for foreign inflows. For investors, FY26 offers both opportunity and volatility, making sectoral selection and timing more important than ever.