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WHERE TO INVEST YOUR MONEY?
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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.
GEOPOLITICAL SITUATION
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.
PAKISTAN ECONOMY
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.
INVESTMENT OPPORTUNITIES
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.
CONCLUSION
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.
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FOREX RESERVES
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(Million Dollars)
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Jan |
1,109 |
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Feb |
1,063 |
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Mar |
2,106 |
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Apr |
2,146 |
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May |
2,321 |
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Jun |
2,841 |
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Jul |
3,254 |
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Aug |
3,346 |
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Sep |
3,304 |
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IMPORTS
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(Million Dollars)
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Jan |
967 |
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Feb |
823 |
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Mar |
842 |
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Apr |
805 |
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May |
938 |
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Jun |
861 |
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Jul |
786 |
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Aug |
931 |
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Sep |
793 |
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EXPORTS
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(Million Dollars)
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Jan |
748 |
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Feb |
755 |
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Mar |
727 |
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Apr |
748 |
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May |
793 |
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Jun |
860 |
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Jul |
683 |
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Aug |
778 |
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Sep |
800 |
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