Pakistan’s equity market delivered one of its strongest performances in recent years during 2025, yet the rally failed to translate into sustained foreign investor confidence. Data released by the State Bank of Pakistan indicate that overseas investors continued to exit the Pakistan Stock Exchange (PSX), recording significant net outflows during the first half of the current fiscal year despite sharp gains in share prices.
According to SBP figures, foreign investors withdrew a total of $393 million from Pakistan’s equity market during July–December FY26, while fresh inflows amounted to only $142 million. This resulted in net outflows of $251 million over the six-month period, underscoring a persistent gap between market performance and foreign investor sentiment.
The continued exit of foreign funds came even as the benchmark KSE-100 Index posted exceptional gains. During the first half of FY26, the index surged by 38.8%, closing at 174,472 points on December 31, compared with 125,627 points at the start of the fiscal year. On a calendar-year basis, the market delivered an annual return of approximately 51%, placing PSX among the top-performing equity markets globally in 2025.
Market participants observed that the rally was largely driven by domestic investors, including individuals and local institutions, who continued to allocate capital to equities despite challenging economic conditions. Analysts noted that the stock market’s upward trajectory has increasingly decoupled from broader macroeconomic indicators, such as modest economic growth, elevated inflation, and rising poverty levels.
Foreign investors, however, remained cautious. Analysts attributed this hesitation to structural economic concerns and lingering uncertainties surrounding Pakistan’s external sector. The divergence between strong equity returns and weak economic fundamentals has made foreign investors reluctant to increase exposure, despite attractive valuations and high short-term returns.
The lack of foreign interest was not limited to equities alone. SBP data show that foreign direct investment declined by 25% during the first five months of FY26, pointing to broader caution among overseas investors across multiple sectors of the economy. This trend suggests that concerns extend beyond stock market volatility and are rooted in macroeconomic and external account pressures.
Privatisation efforts have also struggled to attract foreign participation. The recent attempt to sell Pakistan International Airlines failed to draw bids from international investors, despite incentives such as debt restructuring and the carrier’s extensive international route network. The process ultimately attracted only a local consortium, mirroring similar outcomes in other privatisation initiatives.
Analysts believe that pressures on Pakistan’s external accounts remain a key deterrent. The country’s trade deficit widened to $3.7 billion in December 2025, reflecting a year-on-year increase of 24% and a month-on-month rise of 28%. On a cumulative basis, the trade gap expanded by 34.57% to $19.204 billion during July–December FY26, compared with $14.271 billion in the same period of the previous fiscal year.
The current account position also deteriorated during the ongoing fiscal year. SBP data show that Pakistan recorded a current account deficit of $812 million during July–November FY26, reversing a surplus of $503 million reported in the corresponding period last year. This shift has heightened concerns over the sustainability of external financing and foreign exchange stability.
Market observers noted that while Pakistan’s equity market continues to offer strong returns, foreign investors tend to place greater weight on external balance indicators, trade sustainability, and long-term economic momentum. Until these structural concerns are addressed, analysts expect foreign participation to remain subdued, even if domestic investors continue to support market valuations.
The disconnect between robust equity performance and weak foreign inflows highlights a broader challenge for Pakistan’s capital markets: translating short-term gains into long-term confidence by addressing macroeconomic vulnerabilities and strengthening the overall investment climate.
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