Given the volatility displayed by stock markets
worldwide and in Pakistan also, equities is a tough asset class to sell.
The objective of this article is to point out that investments in
equities is the best vehicle available to most individual investors.
Before describing the returns that are available in the equities
markets, it would be informative to put down, for comparison, the other
investment avenues available: Gold, Government Securities, Property, US
Dollar, Term Finance Certificates (TFCs) and bank deposits. One may also
include the capital-protected state lottery (Prize Bonds). Ideally an
investment portfolio should consist of a mixture of these asset classes.
Gold until recently was one of the best performing
asset classes, its price touched US$ 312/ounce on the back of war fears
between Pakistan and India, threat of US attack on Iraq, instability in
the Middle East and the weakening US Dollar. Gold has always been a safe
haven when political uncertainties are peaking. Since then, though it
has weakened, it is still higher than levels post September, 2001
(9/11). Given present price levels, the significant easing in tensions
between Pakistan and India and a softening in the US stance towards Iraq
one may expect gold to under perform. Property prices experienced a
significant rise post 9/11 as expatriated funds returned to the country
in the wake of fears of freezing in the West. Prices remain about 30%
higher according to IAMC estimates and hence further upside potential
The US dollar has weakened substantially in global
markets and saw a sharp reversal since 9/11 against the Pakistan rupee.
With forex reserves in a relatively stronger position, rising
remittances through official channels and the prospects for further cuts
in the Fed Funds Rate, it is believed that the US Dollar is likely to
remain stable against the rupee. Rupee appreciation, in our opinion, is
only kept at bay by regular purchase of dollar by State Bank of Pakistan
from the kerb market.
Term Finance Certificates (TFCs) offer a maximum
return of 13 per cent per annum. The TFCs have the advantage of
protecting investors against a reversal or further loosening of monetary
policy as most offer a floating rate of return (within a floor and cap).
There are two reasons on which equities analysts feel that equities
provide a better asset allocation solution for investors. The first
reason is on the basis of dividend yield. Quality companies such as
HUBCO and Fauji Fertilizers provide an opportunity to lock into a
perpetual dividend yield in excess of 15 per cent even at the 8-year
high index levels the market is currently experiencing. All this,
despite that the KSE continues to be one of the most undervalued markets
in the Asian region. The second reason is due to the outlook for the KSE
index. Analysts feel that the KSE-100 Index could trend even higher to
the 2650 level. This projection is based upon a host of fundamental
drivers such as sustained liquidity and improved profitability of index
heavyweights. Obviously for equities to offer such returns one or two
conditions must exist. One, that equities are more risky and hence
require a higher yield.
Obviously this is true as the equities market tends
to be much more volatile than assets such as TFCs and term deposits
(currency, gold and property are also considered riskier). If one is not
using borrowed funds and is investing for dividend yields then the price
function weight in the investment decision should fall substantially. In
the presence of imperfect information investors have yet not priced in
the real value of listed equities. This is the value proposition and
where the real money is to be made. If this is true, then equity
investors will be laughing all the way to the bank.
Investment in the equities market is not meant or
structured to provide people with a living or cater to people's
fantasies about getting rich quick. Rather equities are a vehicle for
long-term investments and to gain from economic or specific industry
growth through ownership of companies, which are of a sufficient quality
to meet KSE listing requirements. Hence, as with all other investment
vehicles, equities also require significant homework and perhaps more
due to the premium returns. If an investor is unwilling to put in this
effort then it is best to look for a professional fund management to
look after his/her investments. In this regard mutual funds offer better
* The author is Head of Reasearch at AKD Securities.