What does a turbocharged stock market mean for retail investors?

KARACHI: The KSE-100 index is on an eye-popping run: it closed at a record high on Thursday, crossing the 100,000 mark two days after witnessing its highest-ever, single-day decline of 3,506 points.

The gains -- the market soared by 813.52 points and closed at 100,082.77 -- point to an optimistic outlook for the country’s economy. But what does it mean for the average person?

As the news about the PSX’s historic milestone surfaced, most people took to social media to ask how this would affect them. The stock market’s rise may well delight investors, but it does give a hopeful picture for the economy, said Karim Punjani, an ex equities and treasury fund manager.

He said that for a common person, the PSX’s performance gives confidence that the economy is on the right track. “People will have more disposable income, and their purchasing power will likely increase going forward. This is what the market signals at.” For retail investors or passive investors, one who invest through mutual funds, a bullish stock market will lead to higher returns on investment.

“Rising markets attract many new investors to the market,” said Shankar Talreja, director research at Topline Securities. “This bullish run led by economic stability will definitely bring more investors to the market, further diversifying the investors base of the exchange.”

A financial analyst based in the Middle East, who wished to remain anonymous, said that rapid gains are tempting for retail investors. “Developing countries usually have a low rate of retail investors, and Pakistan is perhaps lower in ranking than its neighbouring countries when it comes to participation of individuals in the market.”

He explained that most individuals in Pakistan usually prefer parking their money in either saving accounts or real estate. The stock market, however, has less liquidity issues, allowing investors to cash out their investments easily. A bullish stock market will re-route that money from bank accounts or real estate to the stock exchange.

Karim added that previously, investments mostly travelled to low-risk Treasury bills and savings accounts on the back of high yields. “That avenue has now disappeared. The returns have slumped to 8-10 per cent on average.”

CEO of Topline Securities Mohammed Sohail said the Pakistan Stock Exchange (PSX) has delivered a remarkable 150 per cent return from 40,000 to 100,000 in just 17 months. He said investor sentiment has been significantly boosted by a new IMF loan, coupled with fiscal and monetary discipline. Additionally, a faster-than-expected decline in inflation and interest rates has injected substantial liquidity into the stock market, fuelling this unprecedented rally.

According to Sohail, over the past 25 years, the market has demonstrated resilience and delivered impressive returns of 20 per cent annual return in PKR and 13 per cent annual return in USD.

Karim agreed with this. He emphasised that ‘dollarised returns’ “are important as the devaluation of the rupee had rapidly eroded our wealth”.

But the challenge for small investors remains as they often fail to tap into the potential a bull market offers. Macroeconomist Ammar Habib Khan said “the bullish really does not mean much for the common Pakistani. By the time they may tap into equity markets, it may be too late. However, if economic policies that promote sustainable growth continue, the equity markets will continue to provide above average return compared to its long-term return.”

Another equities and fund manager, who spoke to The News on the condition of anonymity, said, “an average Pakistani can benefit from it by investing through mutual funds. Active investing will require a lot of knowledge and specialised skill, which takes years to hone. It is best to keep your money with savvy mutual fund managers.”

He added, “when a country is moving out of economic distress, even if things do not become highly satisfactory, sustainability kicks in. Things like monetary easing, disinflation, narrow current account deficit or a positive current account, rebuilding of reserves, and overhauling of SOEs all point towards stable economic outlook.”

Per Mohammed Sohail, the PSX has come a long way from under 1,000 points in the late 1990s to 100,000 today -- an incredible 100-fold increase over 25 years marked by periods of volatility, including bull runs, bear markets, optimism, and pessimism.

Despite this surge, the market remains undervalued, trading at a price-to-earnings (P/E) ratio of 5x, compared to its historical average of 7x.

Some experts have also raised alarm bells. A Karachi-based financial expert who works at a private bank, however, sees this growth as a bubble, inflated by few investment options in the country. “I believe since a few economic indicators have improved, this has resulted in positive market sentiment. However, I also feel that there is a huge influx of liquidity in the market.”

He added that [the bubble] will soon burst. “For a retail investor who has made fortune [on the back of the bullish activity], it is a good time to sell and leave,” he suggested.

Muhammad Awais Asharaf, director research at AKD Securities, said, “political and macroeconomic stability have driven a significant bull run in the KSE-100 Index, delivering a remarkable 150 per cent return over the past 18 months.”

He said that the IMF programme has enabled the government to stabilise the external account, contributing to a sharp reduction in inflation from 38 per cent to 7.2 per cent. This improvement allowed the State Bank of Pakistan (SBP) to lower the policy rate by 700 basis points (bps) this year while also boosting foreign exchange reserves.

Naveed Nadeem, an analyst at Topline Securities, said the KSE-100 Index closed at an all-time high of 100,083, recording a gain of 814 points or 0.82 per cent. “The market sustained its bullish momentum, reaching an intraday high of 100,540. Investor confidence was bolstered by declining T-Bill yields, reduced political uncertainty, and a rally in leveraged companies supported by falling Kibor rates,” he said. Major contributors to the index’s surge included PPL, HBL, OGDC, LUCK, and TRG, which collectively added 629 points to the index.

Trading activity remained robust, with a total volume of 1,164 million shares and a turnover of Rs39 billion. BOP dominated the volume charts, with 179 million shares changing hands during the session.

Mubashir Anis Naviwala at JS Global said, “Strong investor confidence, driven by improving macroeconomic fundamentals and declining fixed-income yield, the equity market is likely to maintain its bullish momentum,” he said.

Despite the overall market strength, some banking sector stocks acted as notable drags on the index. United Bank Limited (-3.52 per cent), MCB Bank (-4.14 per cent), and HBL (-6.46 per cent) experienced declines, tempering the day’s enthusiasm.

The rally has shifted the market’s support level to 98,000 points, and analysts now await to see how far the index can climb above the landmark 100k level in the coming sessions.

Market participants remain optimistic as the index’s momentum continues to reflect positive investor sentiment driven by a stable macroeconomic environment and improving liquidity conditions.