So you think you can invest?

KARACHI: The year is 2000 and you have just received a crisp one thousand rupee note from a distant uncle on Eid. Being the prodigious aspiring investment banker that you are, you invest the amount and look forward ten years into the future.

A decade later, a real estate investment would be worth Rs2,195, a foreign exchange portfolio would get you Rs1,819, a purchase of a typical basket of KSE-100 shares would be valued at Rs6,301 and an investment in gold would total Rs6,950, based on reports published by the State Bank.

Unfortunately, investment decisions should be taken in foresight not hindsight.

Popular notion in Pakistan dictates that real estate and gold are the safest investments. “The price of land never falls,” declared one enthusiastic middle-aged gentleman, when asked why he believed real estate is the best investment. Clearly, the shockwaves of the US housing crisis did not reach our shores.

Similarly, a mother of three proudly declared that although she was tempted to sell all the gold she owned in order to finance her husband’s business three years ago, she is proud that she held on to her prized possessions. Gold, after all, is immune to the decay of time.

According to the central bank, rental incomes from owning land have grown at roughly the rate of inflation. Since land prices are roughly a function of rental incomes, an investment in real estate of Rs1,000 in the year 2000 would be worth Rs880 in 2010 after adjusting for inflation.

Real estate values appreciate ‘systematically’ or ‘randomly’, highlighted the vice president of corporate strategy at a renowned real estate and infrastructure company in South East Asia. He explained that a piece of land appreciates with increases in macroeconomic factors like inflation, savings to GDP ratio (systematic change) and due to local factors such as the development of infrastructure and adjacent areas (random change).

Increases in real estate prices are concurrent with inflation during booms and a history of real estate in Pakistan indicates that investment in real estate serves as a hedge against inflation.

Gold prices have increased rapidly over the last two years, including an approximate 51 per cent rise during the last fiscal year. Although prices seem to have peaked, notions that gold is the best investment have not.

“Beliefs that gold and real estate are the best investments stem from the fact that here people look back to the plot of land or gold jewellery bought by their grandparents and are overawed by the increase in value,” explained a banker from JP Morgan, New York who has over ten years of experience in sales and trading.

Labelling the notions about the Pakistani real estate market “absurd”, he went on to clarify that global gold prices have increased due to pessimistic investor outlook and a massive increase in money supply in the developed world.

Although it is true that neither the price of property or of gold have decreased in the past ten years, it must be remembered that both assets serve as important hedges. Real estate serves as a hedge against inflation while the stability of gold hedges against economic downturns.

Since developed world currencies are stable too, investment in a basket of such currencies serves as a hedge against local inflation as well. A Rs1,000 investment in such a basket in the year 2000 is worth Rs986 after adjusting for inflation ten years later.

Investing in securities remains the most intimidating proposition for the uninitiated investor. A Rs1,000 investment in the KSE-100 index would oscillate between Rs898 and Rs6,057 before settling at Rs2,527 ten years later. The figures have been adjusted for inflation.

Regardless of various investment options, the custom of letting one’s money grow under a pillow still seems to have some disciples. The Rs1,000 of Eidi you received in 2000 is worth a whopping Rs400 ten years later under your pillow after adjusting for inflation! Let’s just hope you emerged Rs600 wiser.

Published in The Express Tribune, September 6^th, 2010.