WHERE TO INVEST YOUR MONEY?
The returns are dependent on how efficiently and effectively the GoP is able to coup-up with internal and external crises
By SHABBIR H. KAZMI
Oct 22 - 28, 2001
This cover story is being published at a time when clouds of war are getting darker in the region. With the war in neighbouring Afghanistan, Pakistan's economy cannot remain immune. Pakistan has been promised rescheduling of external debt and some wrtiteoffs which should improve sovereign rating of the country. However, the on-going crisis and disruption in economic activities will largely erode the benefit of rescheduling and fresh inflow of forex. Economic slowdown will adversely affect the earnings potential of corporates and impair their debt servicing ability. At the same time, exports will also go down widening trade deficit gap and in turn once again cause pressure on forex reserves. In this scenario, fresh investment (both local and foreign) is expected to be at the lowest. However, one cannot sit with crossed fingers and has to look for the best possible deal.
Making investment decisions is much easier in a bullish economic environment. However, making prudent investment decisions in the prevailing situation is the real test of the abilities of economic and business managers and investment advisors. When the mood is gloomy and opportunities are few one has to take an optimistic view but also apply restraints to avoid being carried away. The situation is more vulnerable this time but Pakistan has experienced over a decade long war in Afghanistan in the past. While the external threats are being countered effectively, strike calls are causing disruption in economic activities.
Before one should talk about investment opportunities and potential return, it is necessary to look at geopolitical conditions in the region and the implications for Pakistan. According to some analysts, the situation would have been worse had the GoP not decided to join the US-led war against terrorism. They even go to the extent of saying that situation would have been the same even if there were no attacks on the US. For nearly one year grounds were being prepared to bring change in Afghan government.
The change of government in Afghanistan was deemed necessary to ensure oil and gas movement from Central Asian countries where the US and British companies had the biggest stake. It was also perceived that the Talibans were the biggest hurdle in execution of plan. On the political front, efforts were being made to weaken Taliban hold and install a broad-based government. Taliban's immediate substitute, Northern Alliance, was not acceptable for a number of reasons. Since installation of a moderate and broad-based government has not become possible, even after the attacks, option of deployment of massive ground troops is expected shortly. However, the key objective remains the same — formation of a broad-based government which is also acceptable to Pakistan. Therefore, it become evident why the US chose to involve Pakistan. Now it is up to the present government to strike the best possible deal.
By joining the alliance, the GoP has minimized threat for Pakistan. At the same time efforts are being made for the revival of the economy of the country with the assistance of international financial institutions. Since Pakistan has a hostile neighbour, it was also necessary to avert any potential assault from India. Analysts believe that now the countries, who are part of the alliance, are making effort to resolve Kashmir issue. The situation in Kashmir has become a serious threat for the security of the region. For the optimum utilization of oil and gas reserves of Central Asia, peace in the region comprising of Afghanistan, India, Pakistan and Iran is must. Therefore, efforts are being made to resolve outstanding issues in the region.
While the GoP is trying hard to minimize external threat, internal security risk is mounting with each passing day. The demonstrations being staged regularly are causing interruption in economic activities. It is apprehended that in case the war continues for a long time, it would be difficult to cap anti-war demonstrations. That is reason, Pakistan has been insisting on minimal damage to civilians in Afghanistan.
A detailed review of the economy highlights some opportunities as well as pitfalls. The biggest opportunity, as stated by the government officials, is that Pakistan has once again become an integral and important part of international community. There are efforts to resolve Pakistan's woes, debts relief tops the list of priorities for the GoP. There are indications that Pakistan may get debt relief to the tune of US$ 7 billion and fresh lending of around US$ 5 billion. However, how and when remains an important issue. Analysts say that while the lenders may be keen in offering a long-term solution, the GoP may insist on some immediate benefits to satisfy the domestic constituency which is against war in Afghanistan.
As regards pitfalls, the immediate and most pronounced threat is disruption in export shipments. Analysts believe that aid, grants and rescheduling of debts do not provide long-term solutions. Pakistan economy has to be structured in such a way that the practice of borrowing for debt servicing must be discontinued. Therefore, the GoP has been asking the US and the EU to ease quota restrictions and reduce duties on textiles and clothing exported from Pakistan. The EU has already reduced duties on certain products and also enhanced quota ceilings. The same is expected from the US after the two countries conclude discussions.
A question may arise in the minds of some people, why the GoP is over playing the importance of textiles and clothing? The fact is, textiles and clothing sector has a very significant contribution in the GDP as well as exports. Any negative impact on the sector has adverse repercussions on the economy. Besides, GoP assigns more importance to productive activities for strengthening the economy rather than surviving on aid, grants, loans and rescheduling of external debts. The GoP also wishes to fully exploit the advantage of bumper cotton crop this year.
This philosophy is based on the facts that higher agriculture growth and more funds for developmental projects will improve per capita income and in turn increase spending. Agriculture growth, estimated around 3.5 per cent this year, has the potential to usher greater rural spending. Inflow of funds for developmental expenditures as well as debt rescheduling are expected to further increase investment. This too should translate into higher domestic consumption.
Theoretically, there are five key areas where one can invest money. These are: capital market, real estate, foreign currency, government securities and bank deposits. The preference is directly linked to the needs of an individual and investment horizon. The investment in a particular area is also dependent on the level of risk an individual is willing to assume. However, investment horizon or the time frame remains the most important consideration.
According to the level of risk an individual is willing to assume, analysts classify investors in two categories: those who are contended with low return as their prime consideration is security of amount being invested and those who are willing to assume greater — but calculated risk — to enhance their return.
The first type of investors prefer to invest in government securities which normally offer lower return but are considered most secure. The various products offered through National Savings Centres fulfil the needs of a wide spectrum of investors. However, the return has been curtailed due to withdrawal of various incentives by the government lately. Still, this group is contended with the lower return and will continue to invest in these securities.
For the people who are willing to assume higher and calculated risk corporate bonds — Term Finance Certificates (TFCs) — is an attractive option. These instruments offer guaranteed return and are also being traded in the secondary market. Therefore, if a person needs to meet one of the urgent needs, can conveniently get the cash. Since most of the TFCs are 'live' at Central Depository Company trading is very convenient.
As regards, real estate most of the analysts suggest that only those investors should venture into this area who do not need their funds for more than five years. Historically, real estate has been the pick for those who have ample surplus funds. However, the plunge in real estate prices has also discouraged this group to make further investment. According to some sector analysts, investors are even liquidating their investment in upcoming projects. Saying this much, the sector analysts still highlight the importance of new residential schemes as the country in general and Karachi in particular suffer from acute shortage of housing units.
In the past people had a particular preference for the US dollars as a safe haven during a crisis. However, in the recent crisis the Rupee has experienced exactly the opposite. Probably for the first time in history, the convenience premium actually dipped into negative territory. According to some analysts, after the freezing of foreign currency accounts the preference for dollar has down considerably. With the stability of exchange rate the difference between official and kerb market rates can been narrowing.
A large number of people still keep their savings in bank but also complain about meager rate of return. According to some banking sector analysts, the return on rupee deposits being offered by the banks have improved a little but still do not commensurate with the rate of inflation prevailing in the country. A depositor pointed out that while the sponsors of any commercial bank are willing to pay a handsome dividend to their stockholders they have always been penny pincher when it comes to paying return to depositors.
According to a banking sector analyst, the prime reason for lower rate of return on deposits is that most of the management practice highly orthodox banking system. A large number of the commercial banks, both private and NCBs, prefer to invest in government securities simply because of virtually no risk. On top of this, huge amounts are available to the banks in 'current accounts' on which they are not liable to pay any return. Therefore, unless the depositors change their investment outlook, they will be treated like this and should not expect any improvement in return on their deposits.
A point which was highlighted in last year's cover story must be reiterated. While some Riba free products are being offered by financial institutions, people need improvised instruments. Financial institutions must exhibit their real commitment in eliminating Riba. from banking system.
Having explored various investment potentials, analysts often suggest that investors must look towards equities market — even though they are not willing to divert any amount immediately. As stated in the beginning, exploring any investment opportunity in the prevailing conditions is not an easy task. Each option has its own merits and demerits. However, the current low prices of shares of a number of blue-chips and attractive dividend yield call forth revisiting equities market.
There is unanimity among the analysts that equities offer an incredibly high dividend yield at present. To support their argument they say that Board meetings of most of the companies are scheduled in December and a large number of companies may declare very attractive dividend. They say that last year nearly 375 companies declared dividend amounting to around Rs 32 billion and most of them may announce similar results for the year 2001, at least.
Since the largest number of companies follow close their accounts in June and textile mills also close the year in September, their earnings will not be affected from September 11 incident. On top of this economic fundamentals for a large number of companies have not changed in any substantial manner in post September period. At the most, the Boards may prefer to retain higher amounts for contingency for 2001-2002 year.
Analysts also say that the companies involved in manufacturing and marketing of consumer goods in domestic market, may even witness higher demand for their products due to rise in per capita income. The situation at borders is also expected to curtail influx of smuggled goods and higher sale of local brands. Therefore, if an investor make the right choice in selecting his/her investment portfolio the prospects for earning higher return are better than those for the previous years.
Saying this much, analysts also warn about investors being carried away by herd mentality. They suggest that each individual, keeping his needs in mind, must make an informed decision. He should consult a reputed brokerage house, do thorough investigation about the companies, examine their past record and future plans and make his/her own decision. One should not let the broker make investment decisions.
Analysts also say that no individual should invest his/her total amount in any one particular area. Ideally, investment portfolio must comprise of equities, fixed income securities, bank deposit and liquid cash. The investment horizon for equities should not be less than a year. Analysts, say that most of the retail investors have lost their money in the past only because they were not sure about the investment horizon and were mostly influenced by the habits of 'day-players'. There should be a difference in the preference of traders and investors.
Some analysts say that investment in mutual funds may be the best for individuals. Since mutual funds have a diversified investment portfolio, selection of scrips is based on economic fundamentals and managed by professionals, probability of substantial losses is relative low.
Despite a war-like situation in Afghanistan, there is a forecast for better performance of the economy. This expression is not the normal sales pitch but based on detailed analysis of opportunities and pitfalls. While the GoP is making its utmost efforts to improve economic fundamentals, it is also the responsibility of each individual to help the government in achieving economic turnaround.
The God has given many opportunities in the past to Pakistan to come out of its usual mess but the nation has often failed. This is yet another chance to change the fate of people and it should become a lost opportunity.
If Pakistanis wish to attain a respectable position in comity of nations, the only way out is to make Pakistan a prosperous and economically viable country. Accumulation of arsenal cannot assure sovereignty of any country. Each rupee must be invested and spent with great caution to maximize return.
Last but not the least, those who still believe that the GoP has joined the alliance for any short term gains, must keep in mind that super powers have their own agenda to follow and they never spare those who are considered a hurdle in achieving their targets.