The Pakistan Stock Market (PSX) is projected to reach 127,000 points by December 2025, driven by economic stability and fiscal consolidation. This growth suggests a potential return of 37%, including a 10% dividend yield, according to a report by Topline Securities.

The report anticipates a re-rating in the price-to-earnings (PE) ratio, primarily due to improving macroeconomic indicators and declining bond yields, which are channeling more liquidity into equities. This shift is expected to elevate the current low PE ratio towards its historical forward PE of 7x during the ongoing International Monetary Fund (IMF) program. By December 2025, the market’s forward 2026 PE is expected to rise to 5.75x from the current 4.6x.

Key drivers for the market in 2025 include:

• Completing the IMF review and the passage of the FY26 budget aligned with IMF guidelines.
• A potential credit rating upgrade for Pakistan, facilitating the launch of Eurobonds and Sukuks.
• Strengthened relations with the new U.S. government.
• Successful privatization of state-owned enterprises such as PIA and DISCOs, along with the materialization of the Reko Diq deal.

The report stated that mutual funds have been net buyers of $138 million in equities over the past two months, as returns on fixed-income instruments have declined. This trend is expected to continue, with one-year Sukuk and T-bill yields now at 10.99% and 13.1%, respectively, nearly half of what they were a year ago.

On the economic front, external indicators are improving, supported by controlled import growth and robust inward remittances from foreign workers. Consequently, foreign exchange reserves are projected to surpass $13 billion by June 2025, covering approximately 2.8 to 3 times the monthly import bill.

Inflation is expected to average 7-8% in FY25, down from 23.4% in FY24, due to lower food prices and negative fuel cost adjustments. As a result, the policy rate is anticipated to decrease to 11-12% by December 2025, from the current 15% and a peak of 22% in June 2024.

GDP growth is forecasted to be modest at 2.5-3.0% in FY25, with agriculture growth muted at 1.0% due to an expected 8% decline in major crops like wheat and cotton. The services sector is expected to grow by 4.1%, while the industrial sector is projected to grow by 2.3%.

Topline Securities highlights several sectors poised for growth amid falling interest rates, receding inflation, and a stable currency. Consumer discretionary and staple sectors, along with pharmaceutical stocks, are expected to see margin and volume expansion. The report also anticipates improved valuations for exploration and production companies like OGDC and PPL, as gas price hikes enhance recovery ratios.

The report recommends stocks such as OGDC, PPL, MEBL, FFC, LUCK, HBL, SYS, PSO, SAZEW, AIRLINK, and NML. In the Alpha stocks category, it highlights COLG, PKGS, SEARL, AGP, MUREB, and AICL as promising investments.