The Pakistan Stock Exchange (PSX) has been experiencing a remarkable surge in its value, popularly termed a "bull run".
On Monday, PSX KSE-100 index surged to 53,600 points first time in the stock’s history.
However, cautious investors are questioning whether this upward trend is sustainable or merely a temporary bubble.
What is stock market bubble?
A stock market bubble is a type of economic bubble that occurs when the market price of a stock or other asset rises rapidly and significantly above its intrinsic value.
This rapid increase in price is often driven by speculation and irrational exuberance rather than by fundamental factors such as earnings or dividends.
As a result, the bubble is unsustainable and eventually bursts which leads to a sharp decline in the asset's price.
PSX rising
Several factors are contributing to the PSX's recent positive performance including anticipated favourable outcomes from negotiations with the International Monetary Fund (IMF) and the potential for interest rate reductions.
Nevertheless, it's crucial to assess whether this growth is built on a solid foundation or fuelled by speculations.
Former PSX director Zafar Moti expresses confidence in the sustainability of the current bull run. He thinks that the PSX is going up for the right reasons and that it will keep going up for a while.
He said that the yield of T-bills will also force a cut in interest rate which has remained unchanged for long.
Moti explained that as interest rates decline, companies would be more inclined to distribute profits to shareholders in the form of dividends.
He said that the PSX is doing well in a lot of different areas, and that some areas that were struggling before are starting to do better.
He also said that people aren't using as much credit as they used to, which is a good thing because too much credit can make the PSX go up too fast and then crash.
But there are still some things to worry about, like the dollar-rupee parity.
This means that the dollar is worth more than the rupee, which can make it harder for Pakistani businesses to compete with foreign businesses.
However, Moti doesn't think this is a big problem but it's important to keep an eye on it in case it starts to affect the PSX.
