Navigating Pakistan's Market: A Strategic Sector-by-Sector Breakdown

If you're investing in Pakistan's stock market right now, you're probably wondering how to position yourself amid rising interest rates, shifting oil prices, and a recovering economy. In this discussion, we break down the macro picture and then dive deep into the sectors that matter most—OMCs, exploration and production, cement, fertilizer, and banks—so you can make informed decisions with the right risk appetite.

The Macro Picture: What's Driving the Market Right Now

Before we get into individual sectors, let's talk about the broader economic environment, because company valuations at the end of the day are driven by top-down factors like interest rates and the current account.

The State Bank's 100 BPS Rate Hike

The most important recent decision was the State Bank's move to raise interest rates by 100 basis points. This was a significant step, and honestly, it's something we had been discussing inside our advisory community for a while. We kept saying that consumption was staying ahead of the curve—and the State Bank finally acted to address that.

This was a good step. Inflation is dependent on interest rates, and with oil prices running higher, there's no doubt that inflationary pressures are building. The State Bank is trying to stay ahead of the curve, and it's not just the central bank—it's the overall machinery of the government working to get ahead of these issues before they build into something bigger.

What This Means for the Currency and Growth

The end result of staying ahead of the curve is that your currency remains stable. And if the currency stays stable, then inflation will have a broad-based effect and will be relatively controlled over time. That's the cost of growth, but it's a trade-off worth making.

Yes, we'll still have ups and downs, but the difference between the peaks and troughs will be relatively narrow—much more stable than what we've seen historically. For a business owner, that stability is gold. You can make predictable decisions about capacity and efficiency without worrying about wild swings in the economy.

Think about it this way: if you're going to grow in the Pakistani market, you want to put up capacity that will remain relevant regardless of how efficient it is, because demand is there. But the moment we enter a boom-bust curve with excess capacity, everybody starts fighting for market share, and you get inefficient excess capacity that can't be exported. So a more stable growth trajectory will help us in the long run.

The Oil Price Trajectory

On the oil front, Pakistan is an oil-importing country, and we were recovering from the oil collapse when prices fell from that $100 level down to $30, $40, or even $20. That was a huge shock.

But looking forward, there are reasons to be optimistic about oil prices taking a sharper trajectory downward. You have countries like Kuwait potentially adding almost a million barrels per day in incremental capacity if they can commission it. You also have Venezuela in the mix. So the supply side looks like it could ease, which would be a tailwind for us as an importing nation.

The Revenue Problem

However, there's a persistent concern: government revenue. We're struggling more on the revenue side than the expense side. The FBR collection target has fallen short, and we still have a long way to go. This gap has been a concern for the IMF and will remain so.

The tax base is narrow, and the only real solution is broadening it—but that takes a lot of time. For the Pakistani economy, which is tax-driven on the revenue side, this is tricky. It's a very flippable situation, though. The only real solution we have is to cut expenses, but that might hurt growth. I've always been a proponent of broadening the base rather than just picking at the edges, because that's troublesome.

Sector-by-Sector Analysis

Now, let's get into the specific sectors and how you should be thinking about them as an investor.

Oil Marketing Companies (OMCs): Beyond the Inventory Gains

The Core Drivers

When it comes to OMCs like PSO, Atak Petroleum, and Wafi, people need to understand something crucial: inventory gains will eventually translate into inventory losses. So if you're looking at these stocks, you need to focus on only two variables—volumes and margins. There's a third factor too: interest rates, because working capital is a huge problem in this business.

The OMC Catch

Receivables increased significantly this quarter. This was because in March, we didn't know how to deal with the situation. The receivables story was big—management told us they corrected it early on after April, in the first week, and they found other ways to control prices rather than using PDC. They moved to a formula of capping refinery margins and reimbursing OMCs with that money.

So, OMC results were primarily due to expectations of inventory gains. Historically, retail investors get confused by this—they see inventory gains and think it's a repeatable story, but it's not. The only things that matter in an OMC are margins, volumes, and working capital. That's it.

If you're looking at OMCs, make sure you're understanding the margins and not getting caught up in inventory-driven volatility. We can link this to digitization for better tracking, but the fundamentals remain the same.

Exploration and Production (E&P): Where's the Real Value?

The Gas Circular Debt Issue

Let's talk about E&P companies, specifically the gas circular debt issue. This has been circulated on gas because the cost was the front-end recovery. The price differential between local gas and blended source input is significant. If you're computing in dollars versus the exchange rate, when you're not taking in ten, the cost falls—but so do the features, because you're not taking advantage of the cost.

Essentially, if this is revenue and this is cost, we should be in a surplus. But that surplus has not yet reflected in the books. Why? Because of receivables.

Exploration Is the Value Addition

For a company in this space, cash usually goes to one of two things: exploration (which creates long-term value) or shareholder returns. When receivables are high, that's good for short-term gains, but as an investor, I want to see aggressive exploration activities—especially from the two state-owned companies, OGDC and PPL.

If you can't afford to buy a receivable, you can buy a shareholder. But let's think about the next ten years. Can you increase your barrels per day from 10 to 40? To 45? To 50? What's your three-year plan? What's your five-year plan? That's where real value generation happens.

A Positive Development: The Sujal Field

There's a lot of potential in exploration. One of the state-owned companies wants to ramp up production to 10 to 15 thousand barrels per day in the first phase, and then to 25 thousand in the second phase. They feel this field has the potential to sustain 25 thousand barrels per day. Historically, it's been a good oil producer, so this is a massive development.

Why "Personal" Is the Right Word

When I say I'd want to see aggressive exploration, I use the word "personal" because risk appetite is different for everyone. There's no right answer here. The right answer is only what you think is good for you.

The oil price is a tailwind, but the real bet in this sector is RLNG. Oil prices are always transitional—they increase and decrease. A purely oil-price bet will not help you in the long run. But if you bet on counter-cyclical development, that will help you.

Here's a thought: back in 2012, I met with a foreign client, and one point stuck with me. If you want to bet on oil prices, you can do that with leverage in the international market. Why would you use OGDC or PPL for that? What matters is whether you're paying for long-term growth or not.

Cements: A Sector That Has Changed

The New Cement Cycle

Cement is an interesting sector because the current demand structure is completely different from what we saw two years ago. Historically, we had low utilization, and the players used to fight amongst themselves—an ugly price war during every boom cycle. We'd get 2% artificial growth, and that was it.

But something has changed in the industrial structure of cements. We don't want the government to be sanctioned—not just the government, but Pakistan as a state and nation. We want stable growth, and that's what we're getting.

From Debt-Ridden to Cash-Rich Companies

What's also different is the debt cycle. Cement companies used to be the most debt-ridden companies in the market. Now, except for a few, they've become cash-rich. Lucky is extremely cash-rich, Kohat is cash-rich, and Cherat is cash-rich. Some of these players have net cash positions that could cover a significant percentage of their market caps.

Think about five years down the line: they'll have a stable demand outlook, no debt burden, and they'll be operating with underutilized capacity. Historically, a boom cycle was the peak of demand with 50% underutilized capacity. Now, the sector has matured.

A Shift in Earnings Composition

Cement used to account for a large percentage of earnings in the market. Now they're not even on the list in terms of percentage. The sector has become different—it's matured.

For an investor, you can understand the cyclicality and get the fundamental story right. You can build a portfolio that includes cement at the right point in the cycle, understanding your own risk appetite and the sector's dynamics.

Fertilizer: The 2026 Opportunity

A Supply-Demand Mismatch Mending

Let's shift to fertilizers—another sector where the dynamics are clear. This is an oligopoly with limited players, and expansion costs are known and trackable. Historically, every company gave discounts in this sector, but we think 2026 could be different. Why?

There are two main reasons. First, there was a lag effect in farm income. Farmers coped with last year's floods, and wheat prices collapsed in the first year of the sugarcane transition. But this year, farm income has been relatively better—significantly better than it was in July. Maize is up, wheat is up significantly, and canola is up. The number of acres under cultivation is up 10 to 15%, which is a decent increase. And that 10-15% is essentially all of their profit.

Why 2026 Is Different

The market income will be better, and overall demand should be better than last year. But demand in isolation is nothing—it has to be compared to supply to understand pricing pressure.

Last year, supply was high because all plants were running almost throughout the year. Demand was slightly lower, so there was a gap, which led to inventory buildup. When inventory starts building up, everybody tries to grab market share by discounting—and the cost winner usually wins.

But now, with demand recovering and supply being intermittent (two plants were offline), the supply will be relatively lower. There's a very high chance that demand and supply will match—or even that demand will surpass supply. If that happens, discounts should go away. And that's exactly what we're starting to see right now, even though off-takes are seasonally low. Demand is low in April-May but will be high in May and June.

The Food Price Angle

Pakistan's food prices in normal conditions are relatively higher than global prices. But now global prices have increased significantly. If international pressure translates to local prices, then local selling will benefit. However, if they open up the market, efficiency will be cleared in this sector. Sugarcane has become so big in Pakistan's agriculture that an open market would promote efficiency—but of course, it will come with costs and rewards.

Banks: Cash-Rich or Cyclical?

What Banks Actually Sell

Let's talk about commercial banks. You can add your own pointers here, but this is how I look at the banking sector. Banks sell money. So the question becomes: do you want to be cash-rich, or do you want to be rich betting on a cycle?

That's the perspective I always come from. The fundamentals are important, but you need to understand whether the sector's earnings are structural or cyclical before you decide.

The Advisory Portfolio Approach: Alpha Calls

What Alpha Really Means

Now, let's talk about the approach we take inside the advisory portfolio. We have experienced market cycles firsthand, and we've been able to generate alpha calls. But to make these calls, you need to know the exact economics of the business.

For us, "alpha" means high risk, high return—broadly speaking. But what we try to do is sell stocks if they don't hit our return expectations, and sell the risk relatively quickly. The downside is sustainable, but if the business model is broken, the business is not here. That's what we try to avoid in our alpha stocks.

The Advantage of Alpha Stocks

The advantage of having alpha stocks is the additional kicker to your overall returns. You can flip a stock and make a lot of money—but you can also get stuck and lose the most money there, because they carry the most return potential. It's a double-edged sword.

In the advisory portfolio, we try to include stocks that have high return potential but with a controlled, sustainable downside. The broader portfolio will have higher volatility, but the return profile over the long term should be relatively higher than the rest of the portfolio. We seek out developments and look at the structure of the company—not just individually, but in the grander context as well.

Thematic Alignment: Tariffs and Brands

Let me give you an example. The national tariff policy—except for cement and fertilizer—is favorable for anything that has a brand. Think about Nestle, Friesland, or Temple Big Bird Foods. Retail consumable brands benefit from tariffs because they protect the local supply chain and the brand that's being built.

So we have thematic alignment: one alpha stock might not be good at this time, but it could turn out to be great six months later. In retail, everybody wants to be in that alpha stock, but if you have a downside scenario, your confidence needs to be high. That confidence is low because of cyclicality and potential weakness in the core structure of the company.

Risk Management in the Portfolio

Our allocation rules are straightforward: alpha stocks shouldn't be more than 40% of the portfolio at any given time. Individual stocks shouldn't be more than 15%, and a single sector shouldn't be more than 25%. This keeps the risk manageable while still allowing for alpha generation.

And just to clarify—alpha does not mean penny stocks. Alpha is a sector stock—a single sector stock without the broader sector's stability. The sector is relatively more changeable, so you need to be careful.

Final Thoughts

The Pakistani market is at a critical juncture. With the State Bank staying ahead of the curve and the economy stabilizing, the long-term picture is positive. But the key is to understand which sectors offer sustainable value versus which ones are driven by cyclical factors like inventory gains or oil price fluctuations.

Whether you're looking at OMCs, E&P companies, cements, fertilizers, or banks, the fundamentals matter more than ever. And if you're going to take on additional risk with alpha stocks, make sure you understand the exact economics of the business and manage your downside accordingly.

As always, the right answer for you depends on your risk appetite, your time horizon, and your understanding of the cycle. So invest accordingly, stay diversified, and keep your focus on the long term.

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