Pakistan’s stocks have been rallying since mid-December. There are several possible reasons why

  • A combination of factors are pushing up the Karachi Stock Exchange.
  • The State Bank of Pakistan's decision to withdraw support for its currency to encourage economic growth could only be part of the story.
Pakistani stockbrokers monitor share prices during a trading session at the Karachi Stock Exchange on January 1, 2016.
Rizwan Tabassum | AFP | Getty Images
Pakistani stockbrokers monitor share prices during a trading session at the Karachi Stock Exchange on January 1, 2016.

Pakistan's stocks have been on a tear since mid-December and, according to financial experts CNBC spoke to, a combination of factors are pushing up the Karachi Stock Exchange (KSE).

The country's benchmark exchange is currently trading up 16.7 percent since December 19, the start of a rally ostensibly linked to the central bank's decision to devalue the Pakistani rupee a few days earlier.

But the State Bank of Pakistan's decision to withdraw support for its currency in a bid to encourage economic growth could only be part of the story.

"The recent sharp surge in the KSE 100 stock index is first and foremost a natural correction following a sizeable sell-off over the second half of 2017," Michael Henderson, chief economist at risk consultancy Verisk Maplecroft, told CNBC via e-mail.

Henderson placed Pakistan's rally amid broader risk on sentiment for emerging markets, pointing out that: "Emerging economies are witnessing strong growth across the board and Pakistan is no exception to the rule — GDP growth is currently in a sweet spot of around 5 percent per annum."

But, substantial foreign investment from China could also be playing a role. The superpower is expected to pump $60 billion into its smaller regional neighbor as part of its Belt and Road Initiative, a massive infrastructure building plan to resurrect ancient trading routes across Asia and beyond.

"Investors may be getting in early in anticipation of big future gains," Henderson said.

The Pakistan Stock Exchange, the company that operates financial markets in the country, is itself 40 percent owned by a Chinese consortium, Reuters reported a year ago.

Pakistan's rallying stocks come ahead of a politically turbulent background. Earlier in January, news broke that the U.S. was cutting $2 billion of aid to the country, accusing it of refusing to combat terrorism.

In addition, former Prime Minister Nawaz Sharif was booted from office in July last year following allegations of corruption. No Pakistani prime minister has completed a full term in office since the country's formation in 1947.

"Pakistan's external position remains extremely vulnerable," Duncan Innes-Ker, regional director for Asia and Australia at advisory firm the Economist Intelligence Unit, told CNBC via email. "Rising oil prices have pushed up its import bill."

But, Emad Mostaque, co-chief investment officer at emerging market specialists Capricorn Fund Managers, told CNBC via email: "A rupee devaluation and rate hikes should stabilize inflation.

"We could see this rally continuing into elections given accelerating investment, improving politics and relatively low ownership. Pakistan is, however, a long-term play given the various forces at play and should be allocated to as such."