Economy Back on Track?
Pakistan Stock Exchange returns to its 2017 level, crossing 49,000 points after a turbulent era.
The Pakistan Stock Exchange (PSX) is incorrectly viewed as a significant barometer for gauging the health of the country's economy. Recently, the stock market reached its highest level in the past six years, surging to 49,000 points. The movement reflected the country’s positive outlook ahead of the latest IMF deal. On the other hand, however, there has been an increase in petroleum and electricity prices, leading to concerns about impending inflation.
Should we still celebrate the stock exchange win? Short answer, ‘not really’. Long answer…👇
For starters, it is important to observe the trend of market capitalization to GDP ratio in Pakistan since 2008. Following the impact of the 2007 financial crisis on the economy, the ratio experienced a substantial decline and has been unable to regain its previous peak since then.
The market capitalization-GDP ratio represents the contribution of stock market growth to the overall growth of the economy. In short, when the market capitalization-GDP ratio is high, it's a good sign because the stock market is doing well and helping the economy grow. Unfortunately, in FY22, the ratio hit its lowest point ever, reaching only 11% (scroll down to see the graphic).
Therefore, it is safe to conclude that the stock market has been unable to contribute a lot to the overall GDP. In other words, the increase in the value of goods produced was not driven by the stock market. Various studies on the subject have resulted in the same conclusion, i.e., the stock market follows the economy, not the other way around, and it is essential to address temporary speculative bubbles with proper transmission of information.
In conclusion, investors, institutions, and policymakers need to consider broader economic factors in determining the health of the economy. Although we should be delighted with the stock market recovery, a little caution never hurts.
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