EXPLORING ALTERNATIVES TO INVESTING IN THE STOCK MARKET
SAAD ANWAR HASHMI
Oct 22 - 28, 2012
The stock market is one of the most vibrant of investments offering a high risk and return trade-off. The stock market returns may be exponential in a short span of time and yet again fall immediately below market perception. Those willing to take on such risk maybe rewarded with high rate of return through dividend yield and capital gain based on the price of shares. The Karachi Stock Exchange (KSE) is known to give the best returns in the market historically. Currently the KSE 100 index is trading at 15,660 points where KSE 30 is trading at 12,800 points. Looking at the past trends, specially since January 2012, KSE 100 is consistently on a rise with the current index trading at an all time high.
A positive sign is the implementation of the Free Float Index which commenced on Monday 15 October 2012 which has revamped the traditional KSE-100 index. Previously, KSE-100 index was designed on market capitalization to determine the weights of stocks. KSE-100 therefore accounted for total shares in the market times the stock price which showed the total market capitalization. The free float index will only account for only those under free float.
The general perception in the market is that the "bubble" of constant rise in stock prices and index will eventually take a turn through no one can predict as and when selling pressure will commence. Investors have a mindset looking at a threshold of 16,000 points which is when the selling pressure will start, therefore, those who wish to exit should do so before the threshold is reached. The market movement currently is more of a game of greed. Large asset management companies and investment firms have the muscle to maneuver the index whereas individual layman investors who mainly look at market movements day to day without looking into fundamental analysis and intrinsic value of the stock will tend to suffer as seen in the past. When the index takes a nose dive, even undervalued stocks tend to decline through the trickledown effect of the selling pressure.
The market movement shows variations in the most superficial of issues with change in valuation from "buy" to "sell" and vice versa immediately as the news become public. During the days when rumors were circulating of privatization of PSO, the stock price showed a decline of more than 15 percent to 20 percent before the press conference or statement by PSO and would reach its previous threshold the following day. Markets would therefore show movement more on speculation.
We understand that no one can predict if the selling pressure will start before or after or will not even commence one the hypothetical index value reaches 16,000. There are various factors which are causing variation in the KSE index. From the economic stand point, inflation is 9.1 percent which is the first time inflation has reduced below double digits. Banking , Oil and Gas, Cement, Fertilizers, Power and FMCG stocks are widely popular among investors. Remittances are averaging more than USD 1 billion a month which is seen as a positive sign to build reserves. The trade deficit reduced to USD 4.66 billion in 1QFY13 compared to USD 5.18 billion during the same period last year. Automobile car sales are expected to reach 180,000 through FY13 based on domestic production whereas an estimated 60,000 vehicles will be imported. Cement industry due to reconstruction efforts in Afghanistan and domestically is increasing at a rate of more than 15 percent. With demand oriented economy, the FMCG and Pharmaceutical industry is growing at an exponential rate expected to remain at 20 percent through FY13. In addition, stocks of FMCG and Pharmaceutical industry have registered growth in share value between 20 percent to 300 percent during the CY12 which is a positive sign for investments. With the ongoing gas curtailment by SNGPL due to low pressure at Qadirpur, the fertilizer plant including Engro, DH Fertilizers and Fauji have been affected; however, since fertilizers are in demand throughout the year, there always remains a positive sentiment by the investors on these stocks. The government has urged to convert all existing and new thermal plants to generate electricity through Thar coal.
Stock market investments depend from individual to individual based on the risk they are willing to take. A young professional would be willing to take on a higher risk for a higher return than a senior career professional would rely on medium risk for a stable return where principal is secure. Other than the stock market, there are various options one could explore for placement of funds for a return.
With the reduction in discount rate to 10 percent, the profit rate offered by banks have declined. Long term deposits with banks ranging from 1 year to 3 years range between 7 percent to 9 percent. The returns on NSS have been further lowered with the reduction in discount rate ranging between 10 percent to 11 percent, however, considered a more popular option among the masses. Bahbood Saving Certificates and Pensioners Saving Certificates are offering 12.96 percent. The above mentioned investment options are such where there is a penalty of early withdrawal of principal which would reduce the net return by 100bps to 200bps. Mutual fund investment in Fixed income would yield stable return, however, the font end load and management fees would reduce the net return.
Another alternative to investment in the stock market is Investment Portfolio Securities (IPS) where individuals can invest in Treasury Bills for a tenor from 3 months, 6 months and 1 year. The advantage of IPS is that returns are at par with short term NSS or Money Market Mutual Funds which are guaranteed over a short tenor. Another investment option that could be explored for diversification is investment in REITS with returns tagged through rental income of the property under REITS. Various Insurances companies also offer investment plans based on bonus schemes based on annuity payments with a lump sum return after the end of the tenor, another option which can be explored with the time horizon of the investor is long. Trading in Gold, Silver and crude oil as mode of diversification form conventional stocks is also gaining popularity.
With high inflation in the economy, it becomes pivotal that investments are done to hedge against rising prices for a stable income with an aim the annual returns should not be negative. Various investment options would depend on risk and return profile, age, education, experience, savings and retirement goals. Though options are various including stock investments, it is important that individuals could explore other avenues for placement of funds to ensure stability in income.