KARACHI:

The KSE-100, after touching euphoric highs, witnessed one of its sharpest single-day declines in recent history. Anxiety returned to trading floors. New investors panicked. Analysts rushed to identify the “reason” behind the correction. The easiest explanation is foreign selling.

Over the past six weeks, foreign corporates have offloaded nearly $130 million (around Rs36 billion) worth of equities. Yet, this selling was almost fully absorbed by domestic mutual funds, which bought approximately $140 million (Rs39 billion). That tells you something important – liquidity did not vanish; it merely changed hands.

Foreigners typically sell when US interest rates rise, when domestic political and economic stability appears uncertain, or when target returns have been achieved. This time, it appears to be a mix of all three. Add to that the Barrick security review narrative, global trade developments such as the US-India deal, concerns around Imran Khan’s health, and the familiar pre-election balance-of-payments anxiety – and you have enough “reasons” for a pullback.

But corrections are not crashes – they are breathers. Markets do not move in straight lines. Historically, Pakistan’s stock market has witnessed multiple 7-15% consolidations even within strong bull cycles. Globally too, the S&P 500 has corrected nearly every year on average without necessarily entering a bear market. The difference between a correction and a collapse lies in the macro foundation.

Today, that macro foundation looks firmer than in previous cycles. Inflation has moderated significantly. Policy rate is expected to gradually ease further. Industrial tariffs have been cut. Export refinance rates have supported textile exporters. Currency has been stable for nearly three years while credit rating agencies have been upgrading the outlook. Auto, cement, steel, and glass sales are expected to post double-digit growth, indicating improving consumption and industrial momentum. The current account remains stable, supported by strong remittances, while SBP’s foreign exchange reserves are on an upward trajectory. The central bank itself has indicated a growth outlook approaching 4% for FY26, with ambitions of 5% in FY27 as the post-IMF stabilisation phase transitions into expansion. PIA’s privatisation has given a fresh impetus to structural reforms.

The economy is stabilising – even if the index is consolidating. Yes, there are risks. Oil prices have moved from $60 to $70 per barrel amid Iran-US tensions. Security incidents across the country have resurfaced. Relations with Afghanistan and India remain fragile. Political uncertainty and potential street agitation add to investor discomfort. These are genuine concerns and markets price them quickly. But equally important structural changes are underway. The transition from T+2 to T+1 settlement has increased trading efficiency and improved Shariah compliance for many investors, although it may amplify short-term volatility on both sides. Retail participation has risen sharply, partly because post-tax money market returns of 6-7% are simply unattractive.

High taxes on bank savings and rental income have nudged savers towards equities. Participation in quality IPOs has generated confidence. Capital gains tax and zakat payments following strong profits reflect one reality – wealth has been created.

Pakistan’s renewed engagement with the US – from civil-military alignment to cooperation on critical minerals, crypto regulation conversations and Roosevelt Hotel redevelopment – signals improved geopolitical positioning. These developments matter for long-term capital flows. A comprehensive economic partnership is expected with Saudi Arabia as well in line with defence partnerships and scores of orders from friendly countries for Pakistan’s military equipment.

Noise is loud. Fundamentals are slower – but stronger. Valuations, however, deserve attention. The KSE-100’s long-term average P/E of 8x to 9x has been reached relatively quickly. Heavyweights such as OGDC and PPL face uncertainty surrounding Reko Diq timelines. FFC, PSO and Mari have delivered results below peak optimism. Banks, despite stability, will struggle to show sharp earnings growth until private sector credit off-take accelerates towards 15% in the medium term.

This suggests that the next phase may not be pure index-heavyweight buying. Stock selection will matter more. Mid-tier growth companies, cyclical beneficiaries of economic recovery, and select high-beta plays could outperform. Defensive dividend-yielding stocks will continue to build trust among conservative investors, delivering 15-20% steady returns, while select growth names may enter multi-year expansion cycles.

In bull markets, strategy evolves. It does not disappear. The government, however, must stay disciplined. Export-led and FDI-driven growth must remain central. Power sector reforms and DISCO privatisation must move forward. The tax base must widen – particularly in services and agriculture – while discouraging speculative plot returns and encouraging productive construction activity. The FBR’s digitisation efforts, including surveillance in tobacco, textile and cement sectors, must continue. Stability cannot be taken for granted.

For investors, the message is simpler. When risk-free returns are low, equities become the rational alternative – but only with discipline. Avoid excessive leverage. Diversify across sectors. Combine top-tier quality with mid-tier growth. Participate selectively in IPOs. Think like business owners, not day traders. Save monthly. Reinvest dividends. Build wealth gradually towards financial independence.

Retail participation in Pakistan remains tiny relative to population. In the US, nearly half of household wealth is tied to stock performance. In Pakistan, real estate and gold dominate. That imbalance will eventually shift as financial literacy improves.

Do not be a tourist in equity markets. Be a long-term participant. I expect that within the next 12 months, if oil remains below $80 per barrel and the current account deficit is contained within 1-2% of GDP, the KSE-100 could test 225,000 – roughly 30% upside from recent consolidation levels.

That does not mean a straight line upwards. It means volatility along the way. Corrections test conviction. They filter weak hands. They reward patience. Do your research before investing and consult experts. Excessive trading or leverage can wipe our confidence easily.

THE WRITER IS AN INDEPENDENT ECONOMIC ANALYST