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
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
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.
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)."
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
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
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.