Equities: January Ends with Economic Caution 📉

Pakistan Stock Exchange Navigates Volatility Amid Economic Shifts in January 2026

Karachi – The Pakistan Stock Exchange (PSX) concluded January 2026 on a mixed note, initially surging to record highs before experiencing a late-month correction driven by profit-taking and growing concerns surrounding economic stability and geopolitical uncertainties. The KSE-100 index demonstrated resilience throughout much of the month, but headwinds emerged in the final week, testing investor confidence.

Initial gains were substantial, with the KSE-100 index climbing 10,120 points, representing a 5.8% increase month-over-month. This upward trajectory was largely attributed to the typical influx of fresh equity allocations observed at the beginning of a new calendar year, signaling renewed optimism among investors.

State Bank Policy and Market Reaction

However, the positive momentum faltered following the State Bank of Pakistan’s (SBP) decision to maintain its policy rate at 10.5%, contrary to widespread market expectations of a reduction ranging from 50 to 75 basis points. This unexpected move injected a degree of caution into the market, prompting some investors to reassess their positions. The SBP’s rationale centered on the need to maintain price stability amidst ongoing economic challenges.

Macroeconomic Indicators: A Mixed Bag

The broader macroeconomic landscape presented a complex picture. Consumer price inflation eased to 5.61% in December 2025, a decrease from 6.15% the previous month, offering a glimmer of hope. Workers’ remittances continued their upward trend, reaching $3.6 billion – a 17% year-on-year and 13% month-on-month increase. Automobile sales, as reported by the Pakistan Automotive Manufacturers Association, showed a 35% year-on-year increase, reaching 13,280 units, although experiencing a 14% decline compared to November.

Conversely, the external account faced pressures, with the current account posting a deficit of $244 million in December, a significant shift from the revised surplus of $98 million in November. Net foreign direct investment also experienced a reversal, recording an outflow of $135 million compared to an inflow of $180 million the prior month.

Policy rate pause, weak results and geopolitics dent sentiment

International Ratings and Government Initiatives

Fitch Ratings reaffirmed Pakistan’s long-term foreign-currency issuer default rating at ‘B-’ with a ‘RR4’ recovery rating, providing a degree of stability. In an effort to bolster exports, Prime Minister Shehbaz Sharif announced a 300 basis point reduction in the Export Refinance Scheme rate, lowering it to 4.5%.

Market activity saw an increase, with average daily traded volumes rising 25% month-on-month to 1.08 billion shares, and average daily traded value increasing 45% to Rs108 billion, indicating heightened investor participation.

Weekly Performance and Contributing Factors

Despite the monthly gains, the final week of January witnessed a downturn. According to Arif Habib Ltd (AHL), the KSE-100 index closed at 184,174 points, shedding 4,993 points, or 2.6% week-on-week. This decline was attributed to a confluence of factors, including escalating geopolitical tensions, disappointing fourth-quarter results from Fauji Fertiliser Company, the SBP’s decision to hold interest rates steady, and typical rollover-week pressures.

On January 26th, the SBP reiterated its 10.5% policy rate and unveiled its macroeconomic outlook, projecting GDP growth of 3.75-4.75% for FY26, a current account deficit of 0-1% of GDP, and inflation stabilizing between 5-7% over FY26-FY27. To improve liquidity, the central bank reduced banks’ cash reserve requirements, lowering the average fortnightly CRR from 6% to 5% and the minimum daily requirement from 4% to 3%.

Sectoral Performance and Key Data Points

The banking sector demonstrated strength, with deposits growing 23.6% year-on-year to Rs37.4 trillion and investments increasing 30.1% to Rs37.9 trillion. The energy sector also showed positive signs, with gas production reaching 3,197 million cubic feet per day – the highest level since January 2025 – and oil output rising to 67,066 barrels per day, the strongest since August 2024.

Power sector circular debt decreased to Rs1.7 trillion by December 2025, down from Rs2.4 trillion a year earlier. SBP-held foreign exchange reserves increased by $13.4 million to $16.1 billion, and the Pakistani rupee appreciated marginally by 0.03% week-on-week, closing at Rs279.80 against the US dollar.

AHL anticipates a potential rebound in the coming week, supported by upcoming inflation data, projected at around 5.8% year-on-year, and the ongoing corporate earnings season. Currently, the KSE-100 is trading at a price-to-earnings ratio of 9.3 times, offering a dividend yield of approximately 5.3%.

AKD Securities Ltd shares a cautiously optimistic outlook, acknowledging the weekly loss of nearly 5,000 points but noting improved sentiment towards the end of the week as geopolitical tensions eased and banking sector indicators remained robust. The brokerage forecasts a positive trend for the benchmark index, driven by improving macroeconomic conditions, ongoing reforms, and political stability, with a year-end target of 263,800 points.

What impact will sustained geopolitical stability have on investor confidence in the PSX? And how crucial will continued reform initiatives be to unlocking the market’s full potential?

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Disclaimer: This article provides general information and should not be considered financial advice. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.