Pakistan Stock Exchange (PSX) in the Context of Global War and Economic Uncertainty

Introduction

The Pakistan Stock Exchange is the main capital market of Pakistan and plays a crucial role in reflecting the country’s economic performance and investor confidence. Like other global financial markets, the PSX is influenced not only by domestic economic policies but also by international events such as wars, geopolitical tensions, inflation, and global interest rates.

In recent years, the global economy has faced major uncertainties due to wars in different regions, disruptions in energy markets, and tightening monetary policies. These developments have had a direct and indirect impact on emerging markets like Pakistan.

Impact of Global War on Financial Markets

Global conflicts significantly affect financial markets around the world. When geopolitical tensions increase, investors often become cautious and shift their funds toward safer assets such as the US dollar, gold, or government bonds.

For example, recent geopolitical tensions in the Middle East pushed global oil prices close to $100 per barrel, creating volatility in international stock markets and increasing inflation risks worldwide.

Higher oil prices also increase transportation and production costs globally, which affects corporate profitability and investor sentiment.

In addition, analysts warn that disruptions in oil supply and trade routes can create stagflation, a situation where inflation rises while economic growth slows down.

Since Pakistan imports a significant portion of its energy requirements, such developments have a direct impact on the local economy and, consequently, on the PSX.

Performance of the Pakistan Stock Exchange

Despite global economic uncertainty, the PSX has shown resilience in recent years. The benchmark KSE-100 Index has reached record levels due to improved macroeconomic indicators, fiscal reforms, and investor confidence.

For instance:

• The KSE-100 index crossed 130,000 points in 2025, marking a historic milestone for the market.
• Market capitalization also increased significantly as trading activity and investor participation rose.
• Budget policies that maintained stable taxation on equities encouraged investors to move funds into the stock market.

Furthermore, strong industrial performance and economic reforms have supported investor sentiment in the market.

Key Economic Factors Influencing PSX

1. Inflation and Interest Rates

Inflation and interest rates are among the most important factors affecting stock market performance. When inflation rises, central banks often increase interest rates to control prices.

Higher interest rates make bank deposits and fixed-income investments more attractive than stocks, which can reduce stock market investment.

However, when inflation declines and interest rates fall, investors usually move their funds toward equities, which can support stock market growth.

2. IMF Programs and Economic Reforms

Pakistan’s economic stability is closely linked with financial support and reform programs from institutions such as the International Monetary Fund.

These programs aim to improve fiscal discipline, reduce budget deficits, and stabilize the currency. When investors see progress in these reforms, confidence in the PSX generally increases.

3. Corporate Earnings Growth

The profitability of listed companies also plays a major role in determining the performance of the PSX. According to market reports, corporate earnings are expected to grow by around 9–14% in FY26, which could further support the stock market.

Major sectors contributing to market growth include:

• Banking
• Oil and Gas
• Fertilizer
• Cement
• Textiles

These industries are considered the backbone of Pakistan’s stock market.

Investment Outlook for PSX

Despite global uncertainty, analysts remain optimistic about the future of the PSX.

Reports suggest that:

• Equities are expected to remain the best-performing asset class in Pakistan in 2026, outperforming gold and bank deposits.
• The KSE-100 Index could potentially reach 200,000 points by the end of 2026 if economic stability continues and investor confidence improves.

Such projections are based on expected economic recovery, corporate earnings growth, and potential reductions in interest rates.

Challenges Facing the PSX

Although the outlook is positive, several risks remain:

1. Global geopolitical tensions and wars
2. Oil price volatility
3. Currency depreciation
4. Political instability
5. External debt obligations

Any deterioration in these factors can create volatility in the stock market.

Conclusion

The Pakistan Stock Exchange remains a critical indicator of Pakistan’s economic health. While global wars, geopolitical tensions, and economic uncertainty have created challenges for financial markets worldwide, the PSX has demonstrated resilience and growth potential.

With continued economic reforms, improved macroeconomic indicators, and stable political conditions, the PSX could attract greater domestic and foreign investment in the coming years.

However, investors must remain cautious and monitor both global developments and domestic economic policies, as these factors will ultimately shape the future direction of the market.

Pakistan Stock Exchange (PSX) is expected to remain the best-performing asset class in 2026, supported by improving macroeconomic stability, easing inflationary pressures, and sustained domestic liquidity, according to Arif Habib Limited’s Pakistan Investment Strategy 2026: The Equity Edge Continues.

“In 2026, equities remain the top choice, with the KSE-100 projected to grow by 21.60%, significantly outperforming gold (5.15%), silver (7.89%), and T-Bills (10.05%),” read the report.

“The KSE-100’s strong 5-year CAGR (Compound Annual Growth Rate) of 31.31% further reinforces its growth potential, while alternatives like bank deposits (10.81%), USD/PKR (12.45%), and PIBs (12.77%) offer lower returns, making equities the preferred asset class for growth in 2026.”

AHL has set a December 2026 target for the KSE-100 Index at 208,000 points, “implying an upside of 21.6% from the closing level on 23 Dec 2025. Our index target is based on target price mapping and justified P/E.”

The report highlights a supportive macro backdrop, marked by declining inflation, a stable currency, improving foreign exchange reserves, and a manageable current account deficit.

With inflation projected to remain within single digits and policy rates expected to ease gradually, equities are increasingly positioned as a more attractive alternative to fixed-income instruments.

The report noted that merger and acquisition and Initial Public Offering (IPO) activity is surging, with AHL “planning 10–12 offerings in CY26 across sectors including FMCG, pharmaceuticals, oil & gas, automotive, IT, real estate, and financial services, projected to raise over Rs20–25 billion, signalling a robust capital-market pipeline.”

The report projected corporate earnings growth at a modest 5.9%; however, equities remain the most compelling asset class, offering meaningful relative value. “Market valuations remain compelling, with the KSE-100’s forward P/E estimated at 8.0x, in line with its long-term average,” it said.

AHL also points to structural reform momentum as a medium-term positive, citing the privatisation of Pakistan International Airlines (PIA) and progress on power-sector restructuring as important signals for markets.

“The PIA privatisation transaction is more than a sale; it is a catalyst for broader economic revitalisation,” read the report.

“Momentum is now building across the remaining Phase I assets. Preparations for IESCO, GEPCO, and FESCO are advancing swiftly, with financial advisors on board and Expressions of Interest expected in early 2026, as per media reports. As relatively efficient DISCOs, these entities are being positioned to attract strong investor appetite and set the tone for deeper power sector reforms.”

The report noted that although the outlook remains constructive, risk remain “spanning macroeconomic execution, external vulnerabilities, policy uncertainty, and global geopolitical developments, all of which could influence investor sentiment and asset performance”.

AHL highlighted that the Pakistan programme with the International Monetary Fund (IMF) remains crucial to ensure macroeconomic stability.

“Failure to meet IMF performance criteria could delay upcoming tranche disbursements, creating renewed uncertainty around external financing. Such delays may weaken investor confidence, elevate sovereign borrowing costs, and intensify pressure on the balance of payments, thereby constraining policy room,” it said.