Is the PSX rally a real sentiment shift or just a short-term bounce?

Key takeaways:

• The ceasefire agreement between Pakistan and India revives investor confidence.
• IMF unlocks over $2.4 billion, easing fiscal pressure and boosting reserves.
• SBP cuts policy rate by 100 bps amid cooling inflation, favoring equities.
• Attractive valuations and potential budget clarity position PSX for continued upside.

After a turbulent week marked by sharp declines, the KSE-100 Index staged a powerful rebound, briefly triggering a market halt due to overwhelming buying interest. On May 12, 2025, investors returned to the Pakistan Stock Exchange (PSX) with renewed optimism, as a host of macroeconomic and geopolitical catalysts aligned to reset the market narrative.

Ceasefire sparks confidence

The single most impactful development came from across the border: a ceasefire agreement between Pakistan and India, brokered with the help of the U.S. and regional diplomatic channels. For investors rattled by escalating tensions, this was the assurance they needed. The agreement immediately shifted sentiment, highlighting Pakistan’s renewed potential as a stable regional investment destination.

IMF steps in with significant support

Adding to the bullish momentum, the International Monetary Fund (IMF) unlocked $1 billion under its Extended Fund Facility (EFF) and approved a fresh $1.4 billion through the Resilience and Sustainability Facility (RSF). These inflows are expected to:

• Strengthen Pakistan’s foreign exchange reserves,
• Ease short-term balance of payments concerns,
• Support macroeconomic stability and upcoming budget measures.

With the FY26 budget approaching, investors are watching closely how the government aligns fiscal policy with IMF targets, particularly the challenge of raising revenue without derailing economic growth.

Interest rate cut boosts equities

Surprisingly, many market watchers expect the State Bank of Pakistan (SBP) to slash its policy rate by 100 basis points. This move comes as inflation begins to recede, thanks to falling food and energy prices. With real interest rates turning positive and more rate cuts likely, equities have become increasingly attractive relative to fixed-income instruments.

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Pakistan’s equity market, still trading at a price-to-earnings ratio of just 5.6x, offers compelling value. Insight Securities highlighted top investment picks, including OGDC, PPL, FFC, FATIMA, UBL, MEBL, MCB, LUCK, TGL, ILP, SYS, HALEON, and SHFA — reflecting strength across energy, banking, and diversified industrial sectors.

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Long-term resilience shines through

Historical data shows the PSX has consistently rewarded patience through periods of steep drawdowns. Despite periodic volatility, the long-term trend for the index remains upward, with structural reforms, policy consistency, and a maturing investor base contributing to deeper market stability.

What to watch next?

The FY26 budget remains the next critical event. The government must walk a fine line — raising tax revenues in line with IMF expectations, without stifling key sectors. Sector-specific tax adjustments and development spending patterns will be closely scrutinized for market implications.

The Pakistan Stock Exchange is not just bouncing back — it’s realigning itself for a structural uptrend. With a combination of geopolitical relief, multilateral financial support, favorable monetary policy, and compelling valuations, the PSX offers a promising case for long-term investors. The coming months, particularly the budget announcement, will determine how durable this momentum becomes.
Source: Insight Securities (Private) Limited

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →