PSX boom: An investor’s dilemma

KARACHI:

Initial signs of excitement are obvious in certain business indicators. Indeed, the Pakistan Stock Exchange (PSX) is not a true representative of the country’s economic structure nor reflective of Pakistanis’ purchasing power. Nevertheless, achieving historic high levels is making people raise eyebrows on its sustainability and rightly so. We have already deliberated in detail that the rally is backed by improving investors’ expectations and attractive valuations. Remember, markets are forward-looking, thus pundits now don’t expect a credit default, are rejoicing over a smooth International Monetary Fund (IMF) review, and are optimistic over civ-mil resolve towards structural reforms in SOEs, taxation, and the energy sector.

Thus, the dilemma for Pakistani stock market investors – have I missed the rally? More commonly, “I will buy at ‘dips’.” It’s hard to not find humour in the fact that there has been no dip, no correction, no “technical” resistance despite KSE-100’s possibly sharpest rise of 50% in less than two quarters. Many are dismayed at seeing the writing on the wall but not putting their money where their mouth is. While others are dismissive of the run-up, citing the disconnect between the real economy and the capital market economy. Thank God there are no screams of manipulation by brokers and high-net-worth individuals. While those sitting with massive unrealised losses would (should) have recovered gains, new entrants were only a few.

The question to address is how fruitful is the human psyche of wanting to “time” the entry points. Empirical evidence points that long-term equity investors – not engulfed in superiority complexes using a myriad of technical and other calls – clearly outperform in wealth accumulation. These are the ones who bet on the economy, companies, and management outlook. That is what matters the most – having faith in the investment calls, actively monitoring your “partners”, and doing your due diligence while strictly following financial discipline to save wealth on a regular basis. If you don’t show due respect to Mr Market and take it for a ride – you’re putting your capital on a slippery slope.

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The current PSX rally is driven by a buying spree from large, sensible, and forward-looking buying from Insurance Companies and lately buoyed by strong foreign buying of Pakistan’s stocks. Mind you, people expecting multi-bagger returns are deploying $20-30M to earn nearly $100M in a few years if they can identify quality companies to take shareholdings in. These views are further supplemented as listed PSX companies are utilising their own cash to buy back their own shares. This calendar year, nearly $150M worth of shares have been scooped by sponsors/companies themselves. These were the early signs of confidence and owners showing faith in their operations - why then did people wait for a dip?

It’s no time to throw hats in the air nor throw in the towel. A lot of work is needed by policymakers to make capital markets grow as a sustainable source of capital for companies – the true cause of their existence - and a trustworthy means for savings for investors. The honourable finance minister is seemingly passionate about growing the reach of capital markets and enabling the government to raise debt more cheaply through direct borrowing. To make it a vibrant, equitable, and less volatile market, the number of active investors ought to increase 10x. How?

1. Progressive taxation is introduced; Capital Gain tax should be much lesser on a lower amount than Richie riches. A salaried guy is taxed 35% with lower income, why are millions of rupees of dividends and gains taxed at a lesser rate?

2. The perpetual pendulum of extremely low and high-interest rates must moderate and hover between a sustainable 13-17%. Avoid boom-bust and give predictability to investors about the opportunity cost of equity investment.

Read more PSX crosses 60,000 points milestone

3. The amount of money pumped into real estate with low tax generation needs to be plowed back into the capital market(s). Fairly assess values and a higher incremental tax for second houses/plots to disincentivise dead capital.

4. Corporate Tax rate – along with Super Tax - must fall gradually to 25% in the next five years with tax credits for listing to spur the documented sector. Yes, during Dar days, these good things did happen.

5. SECP’s efforts to enhance competition and investor awareness by lowering capital requirements for brokers and digitising the process should be accelerated. Regulations must incentivise companies to divert a portion of provident funds and take exposures in job-creating equity, venture, start-ups, and private equity markets.

Conclusively, for investors mulling to invest today at a relative “peak index,” must take a long-term view of parking a portion of their wealth - ideally every month - for a decade in companies of their liking, conviction, and outcome of thorough research. Remember not to put all eggs in one basket (equity market, sector, company) and beware of the consequences of receiving “tips” and overleveraging yourself in search of quick money. (Halal) money is hard to earn and no “phannay” khan becomes rich overnight. As our beloved Charlie Munger said, “the best thing a human being can do is to help another human being know more.” Don’t forget to give it back to society.

THE WRITER IS AN INDEPENDENT ECONOMIC ANALYST

 

 

Published in The Express Tribune, December 4^th, 2023.

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