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Analyzing investment avenues

Published on 6th Jan, Edition 1, 2014

 

At a time when inflation is at its highest and cost of living is squeezing the pocket month-on-month, savings need to be placed to ensure that additional income can offset high cost of living. Investments by individuals depend on the knowledge of investment avenues. The simplest investment is keeping money in a savings account where more complex invest structures include mutual funds, equity and money market investments. 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 26,046.71 points where KSE-30 is trading at 19, 410 points at record high. KSE is currently the best performing stock market in the world with historic returns based on investment horizon through risk is there.

The general perception in the market is that the “bubble” of constant rise in stock prices and index will eventually take a turn though no one can predict as and when selling pressure will commence. 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. There are various factors which are causing variation in the KSE index. Banking , Oil and Gas, Cement, Fertilizers, Power and FMCG stocks are widely popular among investors. Remittances are averaging more than US$1 billion a month, which is seen as a positive sign to build reserves. Automobile car sales are expected to reach 200,000 through FY14 based on domestic production. 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 FY14. 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 increase in discount rate to 10 percent on the premise of inflation and devaluation. SBP reverse repo (ceiling rate) and SBP repo rate (floor rate) have also been revised to 10 percent and 7.5 percent, respectively. Thus, minimum deposit rate on saving accounts has increased from 6.5 percent to 7 percent which is 50bps lower than the prevailing SBP repo rate. The government wants to reduce the fiscal deficit and curtail the subsidy on power and gas. Clearance of circular debt has been a positive sign. Pakistan is also meeting the IMF repayment timelines with efficiency. The increase in interest rate will help improve the net Income of banks, which will also widen the spread between lending and deposit rate. In light of these changes, returns on NSS have been increased between 11 percent to 14 percent, however, considered a more popular option among the masses. 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 front 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 with yield averaging 9.95 percent. 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 from 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 that real returns should not be negative. Investments also depend on the risk and return profile acceptable to an investor. There are also options to trade in currency, however, require constant attention to market movements and factors affecting currencies around the world. The investment operations are the most likely to choose from. It is important that individuals could explore all avenues for placement of residual funds to ensure stability in income.

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