The Illusion of Stock Market Performance as a Reflection of Economic Health - A Pakistan Case Study

By Amir Jahangir

It is a common but mistaken belief that the stock market is a clear reflection of a country’s economic health. Stock market movements are often equated with the broader economic landscape, but this assumption does not hold up under scrutiny. In reality, the stock market does not provide an accurate or reliable measure of a country’s true economic condition.

One key reason for this is the disconnection between stock prices and economic fundamentals. Stock prices can be influenced by speculative trading, investor sentiment, and short-term market trends, which are frequently unrelated to core economic indicators such as GDP growth, employment rates, and industrial production. For example, during speculative bubbles, stock prices may rise sharply even when crucial economic indicators stagnate or decline, revealing that market performance can be a misleading gauge of a nation’s true economic health.

Moreover, the composition of a stock market can significantly distort its relationship with the broader economy. In many developing countries including Pakistan, stock markets are dominated by a small number of large corporations or specific sectors and players. This can create a skewed perception of the overall economic situation, particularly when stock market performance is driven by the fortunes of a few companies rather than the wider economic landscape.

In cases where most citizens are not participants in the stock market—due to barriers like financial literacy or accessibility—stock market movements may fail to capture the economic realities faced by the average person. As a result, stock market gains may not translate into tangible improvements for the broader population, further distancing stock market performance from the lived experience of economic growth.

The influence of external factors further complicates the relationship between stock markets and domestic economic conditions. Global economic forces, such as foreign investment flows, global commodity prices, regional and international political events, can heavily impact local stock markets, often in ways that are disconnected from the country’s own economic fundamentals. For example, a rise in global oil prices can spur stock market activity in energy-related sectors, even when domestic economic indicators such as employment and industrial production are sluggish. These external factors can create volatility, leading to market movements that mask or distort the true picture of the country’s economic development.

In addition, the indicators used to assess stock market development, such as market capitalization, liquidity, and trading volume, do not always align with traditional measures of economic health like GDP per capita or employment rates. While some studies suggest a correlation between stock market development and long-term economic growth, this relationship is complex and influenced by factors such as financial systems, regulatory environments, and macroeconomic policies. Thus, a well-developed stock market does not necessarily equate to a thriving economy, and relying on stock market performance alone to gauge economic health is mostly misleading.

Furthermore, stock markets are inherently short-term in focus, often prioritizing immediate gains over long-term sustainable growth. Investors tend to focus on short-term returns, which can lead to decisions that boost stock prices temporarily but do not contribute to long-term economic health. Companies, for instance, may prioritize cost-cutting measures or short-term profit maximization at the expense of long-term investments in innovation, workforce development, and infrastructure. This short-termism can be detrimental to the broader economy, as it encourages decisions that benefit shareholders in the immediate term but fail to address the structural changes necessary for long-term economic growth.

While stock markets play an important role in capital formation and providing liquidity to companies, they should not be relied upon as the definitive indicator of a country’s economic health. Stock market performance can provide valuable insights into investor sentiment and corporate performance, but it is only one piece of a much larger economic puzzle. To gain a more accurate understanding of a nation’s economic trajectory, it is essential to consider a wide range of economic indicators, including competitiveness of the economy, GDP growth, employment levels, income distribution, and industrial production. Only then can a more holistic and accurate picture of a country’s economic health be formed.

Pakistan presents a compelling case study of the disconnect between stock market performance and a country’s actual economic development. Despite some bullish trends, such as the KSE 100 Index gaining over 20% in 2024, the stock market in Pakistan has often been characterized by volatility and stagnation, reflecting the country’s underlying economic challenges. Political instability, high inflation, and substantial external debt have long deterred foreign investment and created an environment where stock prices fail to reflect the broader economic reality. For example, the recent gains in the market were largely attributed to low valuations after fears of economic default, rather than to any significant improvement in economic growth. This highlights the complexity of using stock market performance as a reliable indicator of economic health, as the market’s movements often do not correlate with fundamental economic conditions.

Moreover, the impact of the stock market on real economic activity in Pakistan is limited. Research indicates that fluctuations in macroeconomic indicators, such as GDP and investment spending, tend to drive stock prices, rather than the reverse. This suggests a one-way causality, where economic fundamentals dictate market movements, rather than the stock market acting as a leading indicator of economic health. The average annual growth rate of real GDP in Pakistan has often been low, frequently below 1%, despite periods of stock market growth. This further supports the argument that stock market performance in Pakistan may not accurately reflect the broader economic reality.

The structure of the Pakistani stock market also contributes to this disconnect. The market is dominated by a few large corporations, which can skew perceptions of the overall economic health of the country. Additionally, the lack of widespread participation in the stock market, due to factors like limited access and low financial literacy, means that stock market performance does not resonate with the economic experiences of most citizens. This limited engagement highlights a significant gap between financial markets and the everyday economy, complicating any interpretation of stock market performance as a reflection of national prosperity.

Furthermore, the influence of external factors plays a crucial role in Pakistan’s stock market dynamics. Global economic conditions, such as agreements with international financial institutions like the IMF, can temporarily boost investor confidence and trigger stock market rallies, even when domestic economic challenges remain unresolved. These external dependencies create an illusion of stability and growth in the stock market, which does not align with the actual economic realities faced by the population. This is another reason why stock market performance cannot be viewed as a true reflection of Pakistan’s economic development.

The performance of the Pakistan Stock Exchange (PSX), particularly the KSE-100 index, over the last five years presents a useful lens through which to understand the relationship between stock market performance and broader economic trends. A closer look at the annual closing values of the KSE-100 index, its percentage change, and Pakistan’s GDP growth rates from 2019 to 2024 provides a detailed view of the stock market’s performance in the context of the country's economic trajectory.

Investor behavior in Pakistan often reflects short-term speculation rather than long-term investment strategies that would support sustainable economic growth. This short-termism in the market can lead to inflated stock prices that do not correlate with genuine improvements in productivity or long-term economic output. While the stock market may show impressive gains, these do not necessarily translate into lasting benefits for the broader economy.

Below is a summary table that outlines the KSE-100 index annual closing values and percentage changes alongside Pakistan’s GDP growth rates:

The comparison of the KSE-100 index’s performance with Pakistan’s GDP growth over the past five years reveals the complexities of the relationship between stock market performance and economic development. While the stock market has shown resilience during periods of economic growth, it has also been highly sensitive to economic downturns, political instability, and external shocks. The significant recovery in 2024 is indicative of a renewed outlook for both the stock market and the broader economy, although challenges remain in terms of long-term structural reforms. This analysis underscores the importance of a stable political environment, sound economic policies, and improved governance to foster both stock market growth and overall economic development in Pakistan.

The stock market in Pakistan presents both opportunities and risks for investors. For anyone considering entering the market, understanding which investors are at risk and which players can safely navigate its complexities is crucial for making informed decisions.

Retail investors are among the most vulnerable in Pakistan’s stock market. Many retail investors lack experience and a deep understanding of the market, making them susceptible to market hype and short-term trends. They may make impulsive decisions based on rumors or the latest trends, often incurring significant losses as a result. Without a solid grasp of market fundamentals and a disciplined investment strategy, these investors are at considerable risk, especially in an environment characterized by volatility and frequent market fluctuations.

Another group at risk are those who engage in speculative trading. These investors chase stocks based on rumors or short-lived market trends, often driven by the excitement of quick gains. However, the volatility that defines Pakistan’s stock market means that such speculative investments can be highly unpredictable and dangerous. Sharp price fluctuations in the market can wipe out substantial portions of an investor's portfolio if they are not practicing a disciplined approach to investing. Speculative traders often fail to account for the broader economic conditions, such as inflation, currency depreciation, and political instability, which can drastically affect the market’s performance. Despite recent bullish trends, these macroeconomic issues can lead to unpredictable long-term outcomes.

Conversely, some players are better equipped to navigate the risks and generate returns. Institutional investors, including mutual funds and pension funds, typically enjoy a safer investment environment due to their diversified portfolios and professional management. These institutional investors often rely on a mix of assets that mitigate risk while still capitalizing on long-term growth trends. In Pakistan, mutual funds provide a low-risk way for individual investors to access a diversified portfolio, offering an alternative to the volatility of direct stock investments.

Experienced investors with a long-term strategy are also more likely to succeed in Pakistan’s stock market. These investors tend to focus on fundamentally strong companies with solid earnings potential and stable business models. By taking a long-term approach, they can weather short-term volatility and benefit from sustained growth over time. In contrast to speculative traders, these investors understand the importance of patience and strategic decision-making, making them better positioned for success in a turbulent market.

Another group that can navigate the risks effectively is those who seek professional advice. Investors who consult financial experts or use reputable brokerage firms are more likely to make informed, data-driven decisions. Professional fund managers provide valuable insights into market trends and the overall economic environment, helping investors avoid costly mistakes and maximize their returns. By leveraging expertise, these investors can access information that would otherwise be difficult to obtain, which is a key advantage in a market known for its complexity.

Shariah-compliant investors may find a safer investment avenue, as they adhere to ethical guidelines that exclude high-risk ventures, such as those involving interest-based financing. Shariah-compliant investment strategies not only align with religious principles but also target sectors with more stable growth prospects. These ethical guidelines can provide investors with a sense of security, knowing that their investments are grounded in both moral and financial stability.

While the Pakistani stock market offers significant opportunities for profit, it also carries substantial risks, particularly for uninformed or speculative investors. Those who adopt a well-diversified investment strategy, seek professional guidance, and focus on long-term growth are more likely to achieve sustainable returns in this volatile environment. By understanding the inherent risks and opportunities, investors can make more informed decisions and better navigate the complexities of Pakistan's stock market.

In Pakistan, several key economic fundamentals serve as indicators of true economic development and growth, offering a deeper understanding of the economy’s health and the overall well-being of its citizens. These fundamentals are not merely statistics but reflect the underlying structural forces that determine sustainable progress and competitiveness in the global market.

One of the primary indicators of economic development is Gross Domestic Product (GDP), which measures the total value of goods and services produced within the country. Although Pakistan’s GDP has shown fluctuations, with a contraction of 0.2% in 2023 following a growth of 6.2% in 2022, it is projected to grow at a modest 2.4% by the end of 2024. While these figures suggest a slow recovery, a consistent increase in GDP remains a critical marker of economic resilience and growth potential. However, the real challenge lies in transitioning from recovery to sustained, long-term growth by addressing structural bottlenecks in the economy.

Closely related to GDP is GDP per capita, which is a crucial measure of economic development on an individual level. As of December 2023, Pakistan’s GDP per capita stood at approximately $1,664. This figure offers insight into the average economic output per person and is a key reflection of living standards. Rising GDP per capita signifies improvements in the material well-being of the population, suggesting that economic growth is benefiting a larger proportion of citizens. However, increasing GDP per capita requires significant investment in human capital and a focus on raising productivity across all sectors of the economy.

Another important economic fundamental is employment and unemployment rates, which provide a direct link between economic growth and its tangible impact on people's lives. High unemployment rates are often a symptom of economic distress, while low rates suggest a healthy and functioning economy. In Pakistan, job creation remains a significant challenge amid fluctuating economic conditions, and addressing this issue is crucial for sustaining growth and improving living standards. High-quality jobs, particularly in technology and industrial sectors, are essential for boosting productivity and ensuring that economic gains translate into broader societal benefits. With 15 million youth entering the job market every year, the Future of Jobs is a key challenge for any government in Pakistan.

Inflation rates are another critical factor affecting the true health of an economy. Pakistan has faced high inflation in recent years, eroding purchasing power and exacerbating living costs. Managing inflation is essential for maintaining economic stability and ensuring that growth is not offset by rising costs. A stable inflation environment encourages investment, enhances consumer confidence, and supports long-term economic planning. In Pakistan, addressing inflation through sound fiscal and monetary policies is vital to sustaining growth and improving competitiveness in the global market.

The Human Development Index (HDI), which combines indicators of life expectancy, education levels, and income, is also an important measure of development. A higher HDI signifies better overall quality of life and societal well-being, suggesting that economic growth is being coupled with social progress.

Pakistan’s performance on the Human Development Index (HDI) has raised significant concerns in recent years, revealing the pressing challenges the country faces in advancing human development. According to the 2023-2024 UNDP Human Development Report, Pakistan’s HDI stands at 0.540, ranking it 164th out of 193 countries, which places it firmly within the low human development group. This ranking highlights the critical socio-economic issues that are impeding the country's progress in improving the living standards of its population.

One of the most glaring trends in Pakistan’s HDI performance is the declining HDI value and ranking. In the previous year, Pakistan’s HDI was recorded at 0.544, with the country ranked 161st. This marks a drop of three places, continuing a downward trajectory from 0.557 in 2020, when Pakistan ranked 154th. This steady decline in HDI suggests that the country has moved from a medium level of development to the low human development category in a relatively short span of time. The trend underscores the growing gap between Pakistan and its regional peers, pointing to deep-rooted challenges in achieving sustainable development.

When comparing Pakistan’s HDI to that of its South Asian neighbors, the gap becomes even more pronounced. Pakistan’s HDI is notably lower than that of Bangladesh (HDI: 0.670) and India (HDI: 0.644), both of which fall within the medium human development category. Over the years, the disparity has widened, indicating that while countries like Bangladesh and India have made significant strides in human development, Pakistan has been falling behind. This growing divide reflects Pakistan’s struggles in addressing the core challenges that hinder its social and economic progress.

Several contributing factors explain Pakistan’s declining HDI. A key issue has been the country's ongoing economic challenges, including macroeconomic instability and the devastating impact of natural disasters like the 2022 floods, which have further strained resources and undermined development efforts. Moreover, public spending on education has been in decline, dropping from 2.1% of GDP in 2017-18 to just 1.3% in 2021-22. This sharp reduction in education funding has had a direct negative impact on educational outcomes, further hampering the country’s ability to develop a skilled and productive workforce.

In addition to economic instability, gender inequality remains a significant challenge for Pakistan, as reflected in its Gender Inequality Index (GII) score of 0.541. This disparity in gender equality results in a loss of about 3.73% of the country’s HDI value, underscoring the negative impact of gender-based disparities on overall human development. Despite improvements in poverty reduction (with a reported poverty rate of 4.9%), social indicators related to health and education are still underperforming. For instance, Pakistan’s expected years of schooling stand at only 8.6 years, well below the regional average, highlighting the country's struggle to provide its population with adequate education.

Pakistan’s performance on the @Global Gender Gap Index (GGGI), as published by the World Economic Forum (WEF), has consistently ranked among the lowest globally, reflecting persistent challenges in achieving gender equality. The table below provides a summary of Pakistan's rankings and key metrics over recent years, highlighting the country’s continued struggles in bridging gender disparities:

In 2023, Pakistan’s ranking improved slightly to 142nd, marking its best position since 2006, but by 2024, the country dropped back to 145th, highlighting the slow and uneven progress made in addressing gender disparities. Despite marginal improvements in certain areas, Pakistan's gender parity score—which fluctuates between 0 (inequality) and 1 (equality)—has remained consistently low. The score reached 0.575 in 2023, still below the global average, indicating significant gaps, particularly in economic and political spheres, that prevent the country from achieving true gender equality. A critical challenge for Pakistan is the limited economic participation of women, which stands at just 36.2% parity, reflecting the substantial barriers women face in accessing and thriving in the workforce. This inequality in economic participation remains a major constraint on Pakistan’s growth, as it limits the potential of half of the country's population.

While there have been improvements in educational attainment, with women's literacy and school enrollment rates showing progress, the educational parity for women is still low at 82.5%, suggesting that education alone does not translate into economic opportunity. Barriers such as social norms, limited access to higher education, and lack of job opportunities persist, preventing women from fully benefiting from their educational gains. Political empowerment, the area with the widest gender gap, remains a significant issue, with only 15.2% parity in political representation. This underrepresentation severely limits women's influence in political decision-making, affecting policies that shape their lives and the country’s future.

Despite some positive changes, such as improvements in wage equality and the increased presence of women in technical roles, the broader gender gaps in economic participation and political empowerment remain largely unchanged. These challenges reflect deep-seated societal and institutional barriers that continue to impede women’s advancement across various sectors.

Overall, Pakistan’s poor performance on the Global Gender Gap Index highlights the persistent structural inequalities that affect women’s opportunities and rights. To address these gaps effectively, Pakistan must prioritize comprehensive reforms that tackle gender discrimination, promote equal opportunities in the workforce, enhance female political representation, and invest in women's education and healthcare. Only through a sustained and focused effort can Pakistan unlock the full potential of its female population and achieve meaningful progress toward gender equality.

The declining performance of Pakistan on the Human Development Index is a stark reminder of the challenges that need urgent attention. The country's HDI value reflects deep-seated issues in education, healthcare, and gender equality that must be addressed for Pakistan to realize its potential for sustainable development. To reverse this negative trend, there is a pressing need for policies that prioritize investment in human capital—especially in education and healthcare—alongside effective governance reforms to improve social outcomes and stimulate inclusive growth. Focusing on improving the HDI by enhancing access to quality healthcare, education, and income is critical for long-term development in Pakistan.

Investments in infrastructure development, particularly in transportation, energy, and communication, are also fundamental to driving growth and enhancing competitiveness. Effective infrastructure not only facilitates trade and business but also improves productivity, reduces costs, and enhances the overall efficiency of the economy. However, Pakistan faces significant challenges in this area, with inadequate infrastructure often serving as a bottleneck to further economic advancement.

Political decisions that hinder economic activity have consistently proven to be significant barriers to Pakistan's growth and competitiveness. Critical disruptions such as internet shutdowns, road closures, and lockdowns, alongside broader interruptions in communication, have a direct and adverse impact on trade and the overall functioning of the economy. These decisions often stem from political instability or concerns over national security, but they come at a high economic cost.

Internet shutdowns, for instance, have become a frequent response to political unrest or social movements in Pakistan. The disruption of digital infrastructure significantly affects businesses that rely on the internet for operations, ranging from small startups to multinational corporations. E-commerce, digital banking, and online services are all severely affected by such shutdowns, leading to loss of revenue and stunted growth for many sectors. Moreover, internet shutdowns hinder the flow of information, leaving both domestic and international investors with limited access to critical data, which ultimately diminishes investor confidence and inhibits decision-making.

Similarly, road closures and lockdowns due to political or security reasons create significant bottlenecks in the movement of goods and people. Trade flows, both domestic and international, are delayed or completely interrupted, affecting supply chains and increasing the cost of doing business. For industries reliant on the timely delivery of raw materials or finished goods, these disruptions can be particularly damaging, leading to increased operational costs and decreased productivity. Additionally, workers' mobility is often restricted, resulting in lost work hours and a further strain on an already vulnerable labor market.

The broader disruption in communications, whether through internet shutdowns or restricted access to media, further exacerbates the issue. Clear communication is essential for trade, business operations, and governance. In a rapidly evolving global economy, any delay in communications can lead to missed opportunities, lost trade deals, and a weakening of Pakistan's competitiveness on the global stage.

These politically motivated disruptions create an environment of uncertainty, which is detrimental to long-term economic planning. When political decisions result in instability, they undermine the predictability needed for both domestic businesses and foreign investors to thrive. The uncertainty generated by such actions makes it difficult for businesses to forecast the future, plan their investments, or expand operations. As a result, Pakistan’s potential for growth and competitiveness is severely hampered.

Political decisions that stifle economic activity, such as internet shutdowns, road closures, and communication disruptions, create a volatile environment that undermines the country’s ability to grow and compete in the global economy. Addressing these challenges requires a more stable and predictable political environment that supports, rather than obstructs, economic activity.

Foreign Direct Investment (FDI) levels reflect investor confidence and play a crucial role in capital formation, technology transfer, and job creation. While Pakistan has seen fluctuating FDI inflows in recent years, driven largely by political instability and security concerns, increased FDI is essential for fostering innovation, creating new industries, and integrating Pakistan into global supply chains. Efforts to improve the business climate, reduce political risks, and ensure stability could boost FDI and provide the capital needed for sustainable development.

Finally, the agricultural and industrial output sectors play a critical role in Pakistan’s economic growth. Agriculture contributes around 11% to GDP, and the industrial sector remains a key driver of economic progress. Diversification within these sectors can enhance resilience to economic shocks and contribute to more sustainable growth. Strengthening agriculture through technology adoption and improving industrial competitiveness by enhancing value-added production are both vital for ensuring that these sectors continue to contribute to the economy in a meaningful way.

The true economic development in Pakistan is reflected through a comprehensive set of interconnected fundamentals. GDP growth, per capita income, employment rates, inflation control, human development metrics, infrastructure investment, FDI, and sectoral contributions all provide a clear picture of the economy's health. By addressing these fundamentals and focusing on improving growth and competitiveness, Pakistan can achieve more inclusive, sustainable, and long-term development.

About Amir Jahangir

Amir Jahangir, a global competitiveness, risk, and development expert, leads Mishal Pakistan, the country partner institute of the New Economy and Societies Platform at the World Economic Forum. As a leading narratologist and an expert on Artificial Intelligence (AI) policy for technology, and governance, he is an alumnus of Harvard Law School’s Program on Negotiation (PON), affiliated with Harvard University, Massachusetts Institute of Technology (MIT), and Tufts University since 2008. Jahangir is also an alumnus of the National Defence University Islamabad, and the Harvard Kennedy School of Government's Program for Senior Executives in National and International Security, he can be reached at aj@mishal.com.pk and @amirjahangir on X/Twitter.