Phases of PSX boom | The Express Tribune

The stock market is booming as the Pakistan Stock Exchange (PSX) index is hovering around the 185,000 mark. The index has witnessed a growth of around 67% in the last one year and has achieved a growth of around 2.5% in the last one month.

Market and financial analysts are of the opinion that price/earnings (P/E) ratio is around 11 and there is still room for further improvement. Moreover, they think that stock prices are still cheap as per international standards. The duration of current boom is extended and many companies have already outperformed the index.

Mathematically speaking, stock prices reflect expected profitability. In the early phase of the boom, there is a consensus among bulls and bears that stock prices are undervalued. This consensus of opinion drives up stock prices a great deal.

During the early phase, expected profitability is greater than stock prices which, in turn, increases the net worth of listed business firms. The increase in net worth incentivises a business firm to increase real investment. Here real investment means investment in machines, tools, factory buildings, fixtures and equipment.

In this phase, banks also lend to business firms to meet their working capital and inventory requirements. The real investment increases the productive capacity of the economy. Hence, early phase of the boom is good for real investment.

In the later part of the boom, there is a division among bulls and bears. Bulls intend to take the market up while bears want to take the market down as they consider stock prices are quite high. This division of opinion either takes the market up when bulls dominate or takes it slightly down as and when bears rule.

However, bulls keep on dominating the market and hence bull-run continues. During this phase, stock prices are considered overvalued.

Keeping in view the overvaluation of stocks, many individuals sell their stocks as they anticipate a quick downturn. We may categorise these individuals as bears. Bears keep on increasing with the passage of time.

However, bulls still continue to buy stocks. Since they are short of cash, they start to borrow from banks. This borrowing increases the leverage position in the market. Since banks are willing to lend to bulls, bulls keep on borrowing by pledging their stocks. Thus, these stocks act as collateral.

As stock prices increase, collateral becomes overvalued. This overvalued collateral maintains funding from banks. During this phase, banks change their composition of assets as they buy bonds to supply deposits. In addition, banks keep on funding bulls so long as stock prices increase.

In simple words, boom continues through over-borrowing and stock prices keep on increasing. The current reduction in the Cash Reserve Requirement (CRR) for banks from 5% to 4% would further ease the liquidity position of banks. The purpose is to sustain the current boom.

Stock market analysts and financial commentators closely look at the rate of inflation. The average rate of inflation in FY 2026 is around 6%, which meets the target of the State Bank of Pakistan (SBP). If inflation rate remains in the target range of the SBP, boom will sustain as per their opinion.

These analysts are also looking at high international commodity prices. The international prices of coal, gas and oil is gradually increasing, which have become a cause of concern for them. In short, stock market boom is still on. Any random event may affect the market. Last but not the least, waning profitability of business firms and high international crude oil price of $75 per barrel and above will create jitters in the market. The readers should decide whether to jump in the market or not.

The writer is an independent economist and authored a book “Pakistan’s Structural Economic Problems in the era of Financial Globalisation”