Is the stock market in a bubble?

The KSE-100 index, which is the benchmark index of the Pakistan Stock Exchange (PSX), has increased by roughly 18,000 points or 37 per cent over the last 10 weeks. The earlier high in the range of 52,000 points that was set in 2017 has been far exceeded by the recent run-up in prices. The performance of the KSE-100 index had been lacklustre for the last five years as it was not able to exceed its peak despite a run-up in equity markets globally. A mix of policy uncertainty, political volatility, never-ending circular debt crisis and an economic model largely dependent on borrowing to fuel consumption were various factors that led to lacklustre performance of the equity market. More importantly, a pivot of earlier governments towards propping up real estate schemes also led to a redirection of liquidity towards real estate as an asset class. Macroeconomic instability also had a key role to play in a largely flat performance of the market. During the last five years, the volatility in the rupee-dollar parity has been much more pronounced than in the last 20 years, resulting in a sharp depreciation of the rupee. The absence of a coherent policy that charts out the direction of the rupee-dollar parity, or at least instils stability, further eroded confidence of foreign portfolio investors in Pakistan.