WHERE TO INVEST YOUR MONEY

The options are few but money is in abundance

By SHABBIR H. KAZMI
Sep 27 - Oct 03, 2004

Low return on bank deposits, volatile stock market, and high real estate prices have become the serious concerns for the investors. On top of this, rising inflation is not affecting the purchasing power but also pushing down the already low savings rate. In the hope of making overnight gains, some of the investors are indulging in speculative buying, which often lead to losses rather than providing a consistent and regular income.

As against this, investment in productive facilities by the corporates has picked up, but very few new companies are being listed at local stock exchanges. In the recent past, corporates were issuing term finance certificates (TFCs), but relatively low interest rates forced them to revert back to bank borrowing. Therefore, the only emerging option seems to be submitting applications for shares against the public offers being made by the GoP under its divestment strategy.

Many people have started believing that the economic fundamentals may have improved for the corporates, but small investors hardly have any option. The situation seems to be the worst for the olds and widows looking for regular and consistent income. The returns being offered by the banks are lower than the inflation rate. Making investment in equities is too risky and investing in real estates is the ballgame of large net worth investors. The situation may not appear very encouraging, but one has to opt for 'the lesser evil'. The choice certainly depends on the mind set of that particular investor.

ECONOMIC FUNDAMENTALS

Before exploring the various potentials it is necessary to have a closer look at the prevailing economic situation in the country. A broad-based economic recovery, further strengthening of macroeconomic stability and a near elimination of external account vulnerability has been the major success for Pakistan. However, the country still faces many challenges that require further investment for achieving higher GDP growth rate, reducing poverty, improving social indicators and improving the financial health of public sector enterprises.

The major achievements include: a pick-up in growth, aided by stellar growth in manufacturing sector and a robust recovery in agriculture; double-digit growth in per capita income, favorable interest rates environment, reduction in fiscal deficit and foreign trade registering impressive growth. Pakistan achieved surplus current account, though it has once again turned negative mainly due to record high prices of crude oil. Foreign exchange reserves touched new highs but expected to come under pressure due to rising oil bill and import of wheat and fertilizer. Some of the potential threats facing Pakistan economy have also been pointed out in a recently released report of Asian Development Bank.

Pakistan's overall economic performance has been relatively much stronger when compared with the economies of other developing countries within and out side the region. Pakistan posted a relatively stronger growth, exceeding the average growth rates achieved by most of the developing countries. The growth is not only impressive but is board-based as well as testifies the sharp pick up in industrial activity. This has been the second highest growth achieved over the last thirteen years.

SUSTAINABILITY

Investment is one of the most important determinants of long-term economic growth. The stable macroeconomic environment influences investment. The stable macroeconomic environment is believed to be conducive for investment and therefore, to growth. However, the fresh investment has not picked up to the desired level. Despite acknowledging the recent achievement, analysts do not hesitate in saying, "The demand for goods and services has been growing but new production facilities are not being created at a corresponding rate. Most of the investment over the last couple of years has been for balancing, modernization and replacement (BMR)."

PRIVATIZATION PROGRAMME

The privatization programme being followed by the GoP has attracted both the local and foreign investors. The transactions receiving overwhelming response from general public were: various branches of National Bank of Pakistan (NBP), public offer of additional shares of Sui Southern Gas Company (SSGC) and Initial Public Offers (IPOs) of Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL). However, it is also necessary to point out that public offer of additional shares of Pakistan International Airlines (PIA) may have helped the government in realizing millions of rupees but only added to the miseries of those receiving these shares after becoming the victim of bonanza created before the public offer.

The size of public sector entities has been gradually shrinking. Finding the strategic buyers and off loading the remaining government holdings is still a big task for the Privatization Commission. Some key transaction yet to be concluded are: Karachi Electric Supply Corporation (KESC), Habib Bank (HBL), Allied Bank of Pakistan (ABL), Pakistan State Oil Company (PSO), Oil and Gas Development Company (OGDC), Sui twins, Pakistan Telecommunication Company (PTCL), corporatize entities of Power Wing of WAPDA and some of the cement and fertilizer manufacturing units still operating under the government control.

Sound macroeconomic policies are not an end in themselves they simply indicate government's commitment. Macroeconomic stability and the blanket investment policy are not sufficient to convince the investors to make long-term commitments. The GoP has to come up with sector specific policies, remove the existing irritants and provide further boost to investors' confidence. It is no secret that unless local investors prove by act that they are willing to make long-term commitment, no foreign investor will be keen in investing in Pakistan.

EQUITIES MARKET

After having a closer look at the macroeconomic perspective, it is equally important to explore the investment options available to individual investors, particularly the small investors. Keeping in view the general perception that equities market offers attractive return, it becomes all the more important to peep through this window. At present, investors have the options to either invest in equities or corporate bonds. At the outset, many analysts say that individual investors should only invest in equities and stay away from corporate bonds. This advice is not based due to any weakness or risk attached to corporate bonds. It is simply based on the fact that corporate bonds do not enjoy a very strong secondary market.

Some analysts also say that small investors should not invest directly in the equities market. The preferable option is investment in mutual funds. Mutual funds operating in Pakistan have a long history. The first fund was established in the country as back as in 1962 with the public offering of National Investment Trust (NIT) units. NIT is an open-end mutual fund. Investment Corporation of Pakistan (ICP) was established in 1966, which subsequently offered a series of closed-end mutual funds, totaling twenty-six. Management rights of all the 26 ICP funds have been transferred to the private sector. Therefore, It may be said that now all the mutual funds, except NIT, are managed by the private sector.

A closer look into the history of mutual fund industry, extended over four decades, reveals some interesting facts. The first ever open-end fund, NIT, was established in 1962 in the public sector and remained the only such fund in the country for over 30 years. It regular maintained its virtual monopoly for decades based on the belief that private sector was 'incapable' of managing an open-end fund. To ensure regular and substantial flow of business offering of 25% shares of every public limited company to NIT was also made mandatory. While this practice helped in building NIT's portfolio, it also led to certain 'bad investments'.

This expression, in no ways, suggests that NIT is an imprudent fund manager. Its investment got stale only because the portfolio entirely comprised of equities. Since the objective was to expand the portfolio, hardly any attention was paid to investment policy and asset management strategy. It is worth noting that in the recent past the NIT management has overcome both the deficiencies.

While the mutual funds offer numerous benefits to investors, this sector has still not attained the size it deserves. Presence of a vibrant mutual funds industry is a must for a country like Pakistan, where the savings rates and number of equity investors is low as compared to other countries in the region. This sector needs more attention of the players as well as the regulators because now small investors are also keen about investing in the equities market. Since the small investors does not really know much about the listed companies and it is also almost impossible to keep a watch on day to day changing economic fundamentals affecting the performance of listed company, they need the help of qualified and experienced advisor. Getting access to such advisors is not easy. However, this limitation can be overcome by investing in mutual funds. The added advantage is that these funds normally maintain diversified portfolio, the investors can get comparatively better return on investment.

In the declining interest rates scenario people with small savings are getting the worst hit. Retired people and widows who have been investing in various products offered by National Savings Scheme (NSS) are feeling the brunt. The government has promised to offer specific products for these disadvantaged groups. However, the government faces a limitation that it cannot afford to offer unrealistically high return.

RETURN ON DEPOSITS

Depositors also have a grudge that banks do not offer good return on deposits. A simple fact is that with the decline in average lending rates, banks were forced to also cut down return on deposits. But analysts say that most of the banks are operating with very substantial spread. The two rationales for the higher spread in the recent past were given. First, some of the commercial banks previously operating under state control were still carrying a heavy load of non-performing loans. Therefore, they needed a wider spread to ensure appropriate provisioning. Second, the banks established in the private sector were busy in expanding their operations and consolidating their positions also wanted to retain as much funds as possible to execute their plans. The general perception of depositors was that whether the banks were cleaning their slate or expanding/upgrading their infrastructure, depositors were deprived of modest return on their deposits. They also felt that the employees and the shareholders were benefiting from the growth of banking sector but the only losers were the depositors. However, this negative perception has diluted to some extent but not changed completely otherwise.

Another important observation is that now most of the deposits maintained with banks fall in the category of short-term deposits having less than one-year maturity. According to some banking sector experts, neither the depositors are interested in locking their money for longer duration nor the banks are encouraging such moves. One of the reasons for the banks to discourage longer term deposits was the declining interest rate. However, the scenario seems to be changing fast due to an upward trend in the interest rates. The quantum of money at the disposal of banks could be gauged from the bids submitted against recently held auction of 6-months Treasury Bills. The cutoff rate was also an exhibit of shift in the monetary policy being followed by the central bank.

The rationalization put forward by the banks that return on deposits have gone down due to substantial fall in the yields of government was not appreciated. Some of the depositors were critical of banks' policy because they did not accept this as a plausible excuse. The critics were of the opinion that the banks are making handsome profits in credit cards business and consumer finance and should not use reduction in yield on government securities as an excuse for paying low return on deposits.

Two options often ignored by the investors are real estate and gold. Only a limited number of large net worth investors is seen investing in the real estate and even fewer in gold. However, their preferred choice is open plots in few localities. One of the reasons for the overall lack of interest for investing in real estate is said to be absence of clean title. The other reason is very erratic movement of real estate prices. The general perception is that the price movement is often cyclic. Prices come down in certain months and touch highs around the month of Ramazan. During this period a lot of Pakistanis living abroad come home. Having hardly any clue of the prices they make spontaneous purchases, much above the prevailing prices. However, as soon as they go back, the prices fall drastically.

A new breed of real estate investors has emerged recently. They are investing in condominium being built in the Middle East. One see a large number of advertisements appearing in the local newspapers placed by the promoters of such projects. Taking the cue from these promoters, some local builders have also started offering similar projects, particularly in Karachi, Lahore and Islamabad. The bonanza is also fueled by the financial institutions offering financing facility.

Gold has never lost its glitter. Jewellery has always been a preferred choice of housewives. However, with the growing business of Ten Tola Gold Bars this option is also being exercised by a few. One of the reasons for not developing this mode is the limited supply of these bars. The inflow of these bars into Pakistan is also seasonal and the demand is also erratic. Gold demand is normally high during wedding season. Taking the advantage of demand for gold bars, some local gold refiners have also started offering indigenously produced bars.

Prize Bonds are also a preferred instruments. Many people buy these for two reasons: investment as well for the prize money. Prize bound are considered as good as currency notes. In some of the markets, particularly in the cloth markets, this instrument is commonly used in lieu of currency notes. Some people may not believe this, but the investors of Prize Bonds say that once a number appears in the prize winners list, it is sold at premium. However, after the imposition of withholding tax on the prize money the bearer instrument has lost the glitter.

Yet another option is investment in cars. These investors book a car and the booking document is sold at premium. Those who wish to make extra bucks go one step further and get the delivery of car and then put it on sale at one of the car showrooms. This is the reason the concept of 'on money' has emerged in the car market. Despite the best efforts the government has not succeeded in abolishing this trade.

It is interesting that the government wishes to document all types of transactions but the investors are always in search of a bearer instrument, be it a prize bond or capital gains made at stock exchanges. This belief is fully substantiated by the resistance put against imposition of capital value tax. According to an analyst, "The government keeps on offering money whitening instruments that further proliferates making undocumented gains. If the government is really serious in documenting the economy it must stop offering money whitening schemes immediately.