Pakistan stocks set to outshine gold for second year running

October 28, 2024 (MLN): Pakistan stocks are once again on track to outperform gold in delivering higher calendar-year returns, driven by improved macroeconomic indicators, declining interest rates, and an extended IMF loan program.

This would mark the second consecutive year in which investors booked more substantial returns by investing in equities rather than the safe haven asset.

Historical analysis shows that these two golden years for the local bourse follow six consecutive years in which local gold held the upper hand.

It is important to note that both investment destinations have gained significant attention this year, as they have continuously set record highs.

The key gauge of equities, the KSE-100 Index has topped 91,000 for the first time in history and notched its 45th record close this year.

Meanwhile, the 24-karat gold price is standing at a staggering Rs283,400 per tola compared to last year’s closing of Rs220,000.

Interestingly, the calendar year return of KSE-100 as of October 28 stands at 44.43%, significantly higher than the 28.82% gain of local gold.

Moreover, the benchmark index has delivered an astonishing cumulative gain of approximately 856% since January 2024, taking the lead in this metric as well, with the gain of gold standing roughly at 708%.

In Pakistan, gold rates are determined by international spot rates, converted to the local currency using interbank exchange rates with an additional $20 premium.

International spot gold is set for its best year since 1979, with the yellow metal being up 33.19% this year, beating 2007’s 31% gain, and the largest price surge since 1979 when it rose 127%.

The primary drivers of the ongoing rally include Middle East war tensions, robust central bank buying, and monetary easing measures initiated across various economies.

Apart from the global factors to which this rally is credited, the local gold market also witnessed an uptick in demand ever since the central bank announced to change the currency notes next year to enhance security features.

Resultantly, the yellow metal’s appeal to hoarders—who were looking to convert their informal currency into gold—created a rush in the bullion market.

On the other side, stocks in the country have been on fire ever since the country signed its long-standing Staff Level Agreement (SLA) with the International Monetary Fund (IMF) and narrowly avoided a sovereign debt default.

Last year, the Pakistan Stock Market posted its best yearly return in over a decade, with its key benchmark KSE-100 index recording an eye-popping gain of 54.5% in 2023.

The macroeconomic factors contributing to this outclass rally include the country's improved current account balance, substantial inflows of foreign investment, rising exports, and a relatively stable foreign currency.

Pakistan built on the hard-won macroeconomic stability achieved over the past year by securing a 37-month, $7 billion Extended Fund Facility agreement with the IMF this year.

Furthermore, inflation, which has been the most concerning economic indicator, saw a deflationary trend and slowed to 6.9% as of September, marking the lowest reading since January 2021 and falling within the central bank's target range of 5-7%.

This marked a significant shift, as in May of last year, inflation spiked to a record high of 38% year-on-year, driven by unprecedented increases in food prices.

Considering the disinflation trend, the central bank has already slashed the policy rate by 450bps since June, resulting in bond yields further plummeting.

As a result, the opportunity costs for investors to invest in stocks have been reduced, making equities more appealing.

Additionally, companies dependent on debt or those that are leveraged are experiencing and will continue to face, a reduced burden from finance charge payments, which positively impacts their profitability.

The downward impact on yields is also attributed to the government’s debt reprofiling initiative, marked by the inaugural buyback of T-bills and the rejection of high yields.

This indicates the government’s intent to retain control by setting its borrowing rate, rather than accepting the rates at which funds are offered.

As a result, secondary market yields have dropped further, strengthening expectations of an additional 200 basis point cut in the upcoming November 4 MPC meeting.

Sentiment in the country was bolstered as both rating agencies, Fitch and Moody's, upgraded Pakistan's ratings due to improved macroeconomic conditions and moderately better government external positions from very weak levels.

Moody's also indicated a positive outlook, reflecting a balance of risks skewed to the upside.

The foreign exchange reserves held by the State Bank of Pakistan (SBP) have reached the highest level in 2.5 years, up by $2.82bn or 34.3% calendar year to date.

Another surprising point that deserves attention is that six megacap Pakistan stocks have accounted for half of the total KSE-100 Index rally this year.

Fauji Fertilizer, United Bank, Engro Fertilizers, Mari Petroleum, Oil & Gas Development Company, and Meezan Bank have gained 13,179 points—49.7% of the total KSE-100 return, according to data compiled by MG Research.

Local Currency's impact 

Pakistan's currency has a major and impactful role in both gold rates and the USD returns of the KSE-100 index.

The currency has borne the hazards of high debt payments, depletion of foreign exchange reserves, increased profit repatriation, political instability, and soaring inflation, leading to its designation as one of Asia’s worst-performing currencies in 2023.

However, thanks to the IMF and an improved macroeconomic base, FY24 ended with a magnificent rebound from its all-time low against the mighty dollar in the early months to a modest gain by the end of the fiscal year.

In the ongoing calendar year (CY24TD) and fiscal year (FYTD), the Pakistani Rupee has demonstrated stability against the greenback, maintaining an upper hand in both periods.

Concerning gold, as it is denominated in U.S. Dollar terms, when PKR appreciates against the greenback, the value of PKR-denominated gold falls.

Hence, it can be stated that local gold lost some of its value due to the local currency's appreciation, but the gain was extremely minimal to cap the gains of the global rally.

In the case of equities, the strength of the PKR has had a positive impact, enhancing USD returns during the assessed period.

Fiscal Year 2025 Performance Overview

With just nearly four months passing by this fiscal year, it might not be entirely appropriate to decide the winner, but as of now, gold is beating the KSE-100 index.

The yellow metal is up 17.25% this fiscal year, whereas the benchmark index has delivered a 14.98% return.

Now if we delve deeper into determining which investment option has outperformed, a more effective method would be to use the 10-year average return.

Surprisingly, gold merged as the winner fiscal year and calendar year returns, based on a 10-year average, showcasing the population’s strong trust towards gold as a secured investment.

Over the past decade, 24-karat gold has delivered an average return of 18.16% in calendar years and 20.97% in fiscal years.

In contrast, the KSE-100 Index's average stands significantly lower at 13.29% for calendar years and 13.48% for fiscal years.

Nonetheless, credit is also due to equities, as over the past couple of years, they have shown a robust comeback, surging massively towards their destined target of a 100,000 index by December.

If we look ahead towards its performance, it is clear that this rally is likely to continue. This is because the index's forward price-to-earnings ratio — one of the most popular metrics of valuation — is still well below its historical average.

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