KARACHI: The Pakistan Stock Exchange (PSX) extended its rally for a third consecutive week of the current month, closing at a fresh all-time high amid strong investor optimism over an expected cut in the policy rate, despite weaker external account indicators and a sharp fall in foreign investment.

The benchmark KSE-100 index ended the week at 189,167 points, up 4,068 points or 2.2 per cent on a week-on-week basis. Market participants largely looked past the emergence of a current account deficit and net foreign direct investment (FDI) outflows, focusing instead on falling interest rate expectations, easing geopolitical tensions and abundant liquidity.

According to Topline Securities Ltd, the rally was primarily driven by expectations of a rate cut at the Monetary Policy Committee meeting scheduled for Monday. Sentiment was further buoyed by a continued decline in yields at the treasury bill auction during the week.

Key macroeconomic developments, however, presented a mixed picture. Pakistan posted a current account deficit of $244 million in December 2025, reversing a revised surplus of $98m in November. On a cumulative basis, the balance of payments for the first half of FY26 swung to a deficit of $1.17bn, compared to a surplus of $957m in the same period last year.

Benchmark index hit record peak above 189,000 as falling T-bill yields and investor optimism outweighs current account deficit and FDI outflows

Foreign investment data was also discouraging, with FDI recording a net outflow of $135m in December, against a net inflow of $180m a month earlier. For 1HFY26, FDI inflows declined 43pc year-on-year to $808m from $1.43bn. China, Hong Kong and the UAE accounted for around 86pc of total inflows during the period.

During the week, Fitch Ratings affirmed Pakistan’s long-term foreign currency issuer default rating at ‘B-’ and assigned a ‘RR4’ recovery rating, removing the earlier “under criteria observation” status.

Average daily trading volumes stood at 1.14 billion shares, while average daily traded value was recorded at Rs61bn, reflecting sustained market participation.

Arif Habib Ltd noted that investor confidence was supported by easing geopolitical risks, fresh liquidity and expectations of monetary easing. Treasury bill yields touched multi-year lows, with three- and six-month papers falling into single digits and the 12-month yield hovering just above 10pc, amid slowing inflation and a dovish policy outlook.

On the real economy front, power generation rose 8.8pc year-on-year to 8,487 gigawatt-hours in December, the second-highest monthly output on record. Generation during 1HFY26 increased marginally by 1.1pc year-on-year to 67,356GWh. Meanwhile, the real effective exchange rate declined 0.98pc month-on-month to 103.73 in December.

The State Bank of Pakistan’s foreign exchange reserves increased by $15.9m during the week to $16.1bn as of January 16. The rupee appreciated slightly, gaining 0.03pc against the US dollar to close at Rs279.86.

The primary market also witnessed activity, with Pak-Qatar General Takaful Limited launching the first initial public offering of 2026. The issue was oversubscribed by 21 times, reflecting strong investor appetite.

AKD Securities Ltd highlighted that market momentum was reinforced by a sharp decline in T-bill yields — the first return to single-digit levels in four years — and positive diplomatic engagements with China, the US, the UK and Saudi Arabia, aimed at strengthening economic cooperation. The brokerage also noted that IT exports reached a record $437m in December, up 26pc year-on-year.

Sector-wise, refineries, fertilisers, leather and tanneries, insurance and property stocks outperformed the broader market, gaining between 5pc and 10pc over the week. Conversely, transport, jute, woollen, technology and communication, and engineering sectors lagged behind.

Flow-wise, mutual funds and individual investors were net buyers worth $22.1m and $11.5m, respectively. Foreign investors and companies emerged as net sellers, offloading shares worth $21.1m and $10.4m.

Looking ahead, analysts expect the index to maintain a positive trajectory, supported by a likely 50-100 basis points rate cut and ongoing corporate result announcements. The market is currently trading at a price-to-earnings ratio of 9.4 times, offering an estimated dividend yield of 5.3pc. AKD Securities forecasts the index to reach 263,800 points by December 2026, citing monetary easing, reform momentum and improving investor sentiment as key drivers.

Published in Dawn, January 25th, 2026