Pakistan’s Capital Markets Enter 2026

Date: January 14, 2026

Arifa Zahoor
Program Officer, Jinnah Institute

Pakistan’s capital markets enter 2026 after one of the strongest equity rallies in the country’s recent history. The benchmark KSE-100 Index rose from about 117,000 points in January 2025 to nearly 174,000 by year-end, delivering returns of close to 50 per cent, placing Pakistan among the top-performing equity markets globally. The rally was driven by monetary easing, record retail participation, and a tentative return to macroeconomic stabilisation after years of crisis management. For many Pakistanis, this meant that money put into shares last year often outperformed bank savings and property. Brokerage houses project continued growth with KSE-100 reaching around 203,000 points by end-2026, implying total returns of roughly 25-30 per cent, including dividends.

In the last federal budget, the tax on interest income from bank deposits was raised from 15 to 20 per cent, reducing post-tax returns for household savers. By contrast, capital gains and dividend taxes on equities were left unchanged at 15 per cent, improving the relative appeal of stock market investments for middle-income households. Against this backdrop, retail investors played a central role in sustaining the 2025 rally. New trading accounts rose sharply as returns in deposits and real estate stagnated, pushing household liquidity toward stocks. Yet despite this momentum, stock market penetration remains extremely low. Active stock market accounts are estimated at just 0.1-0.13 per cent of Pakistan’s population. In practical terms, this means fewer than one in a hundred Pakistanis holds shares through the formal market. By contrast, approximately 9.5 per cent of Indian households invest in equities or mutual funds, equivalent to nearly one in ten families nationwide. This gap highlights both Pakistan’s vulnerability to volatility driven by narrow participation and its long-term upside potential if broader public engagement in capital markets can be achieved.

For most Pakistani households, savings decisions are still framed around familiar assets such as gold, jewellery, and foreign currency rather than financial instruments. In 2026, alternative assets may continue to compete with equities for household savings. Gold and silver outperformed many traditional assets in 2025 amid heightened geopolitical risk and sustained safe-haven demand, reinforcing long-standing investor preferences for non-financial stores of value. This dynamic suggests continued segmentation across asset classes, particularly during periods of macro or political uncertainty.

Pakistan’s exposure to climate-related shocks continues to weigh on long-term corporate earnings and sectoral performance, risks that global investors are increasingly pricing in. Persistent regional tensions also elevate risk premia, limiting sustained foreign portfolio inflows. Meanwhile, policy unpredictability and, in particular, abrupt changes in taxation, subsidies, or energy pricing remain a recurring trigger for market corrections. Progress on capital market reforms, including improvements in settlement infrastructure and regulatory processing, could support deeper participation, but such gains will depend on consistent implementation rather than episodic initiatives.

External shocks also pose risks: shifts in global risk appetite, especially those linked to elevated U.S. equity valuations and AI-driven market dynamics, could transmit volatility to emerging markets, including Pakistan. Rising trade protectionism and geopolitical fragmentation may further constrain capital flows and export demand. Sustained gains will hinge on macroeconomic discipline, IMF program continuity, and credible progress on structural reforms. Sectoral differentiation, particularly in banking, oil and gas, cement, and pharmaceuticals, will matter more than broad-based rallies. In a post-rally environment, markets that deliver durable earnings growth and credible risk management are best positioned to outperform.