Institutional investors likely to diversify to shares, property

KARACHI: Institutional investors are believed to diversify a significant amount of investment from ‘secured’ government papers to ‘risky’ investment instruments to keep profit margins surging, as falling interest rates in Pakistan are denting their profits from such papers, said experts on Wednesday.

“The stock market is believed to stay on top most priority of investors as it offers highest rate of return in the asset class,” said Arif Habib, former president of the Karachi Stock Exchange. “Real estate sector would be second top priority of investors, as it remained underperforming since world recession of 2008 hit the world hard.”

As per the records, the cutoff yield on treasury bills (government papers) has declined sharply by 252 basis points on an average to date since the State Bank of Pakistan (SBP) made a significant cut of 150 basis points in the interest rate to 10.5 percent on August 10 this year. The interest rate, however, stands at 10 percent, at present, after latest cut of 50 basis points in October.

Habib said that the Karachi Stock Exchange’s (KSE) benchmark 100-index has already increased by around 10 percent, or 1,400 points, to the all-time high of 16,156 points to date since the central bank made the aggressive cut in the interest rate in August.

He believed that the stock markets would attract fresh funds when institutional investors opt to shift and / or diversify their investment from government papers as shares are still trading at low prices.

“The KSE is trading at a price to earning multiples of 7.5 against the multiples of 12 in 2008,” he said.

Other investment instruments like gold and world commodities may not attract significant amount from funds to be diversified from government papers as they are already trading at or around saturated rates, he said.

Nadeem Naqvi, managing director of the KSE, has on several occasions said that the rate of return from the KSE stayed on top in the asset class. Investors should take risk of investing in the shares to attain the highest possible return if they understand the dynamics of the share market. Otherwise, they should buy units of equity funds from the asset management companies to stay on the safer side, he said.

The KSE offered 30 percent return on an average in the last 10 years against 20 percent on gold, 12.5-13 percent on national saving schemes, 11 percent on treasury bills and five percent to six percent return on an average in the last 10 years from deposits parked in banks’ saving accounts, said Naqvi.

A market source said that the share market and real estate sector will attract huge funds when the government allows residents to transfer their black money from foreign accounts into Pakistan. “The shares and real estate sectors are usually used to convert black money into white,” said a source on the condition of anonymity.

Sayem Ali, an economist at Standard Chartered Bank, said that institutional investors will continue to invest in government papers till the current round of decline in interest rates and the cutoff yield on the treasury bills is ended.

Investors would shift and / or diversify their investments from government papers “once the interest rates cut cycle comes to an end”. “I think institutional investors will take around six months to start diversifying their investment from government papers to other assets class to keep their profit margins propelling,” he said.

Experts are expecting another cut of at least 50 basis points in the interest rates to 9.5 percent in December after inflation came to 36 months low of 7.66 percent for the month of October.

The expected cut would result in further decline in the profits on investment in government papers, they added.

Ali also believed that the stock markets and real estate sector would attract some of the likely diversified funds from government papers.

“The prices of property in Defence areas of Karachi and Lahore have increased by around 30 percent in recent times and the real estate sector is expected to attract more funds once institutions opt to diversify their investments.”

The level of investment in private sector projects may also increase in the result of diversification of investments. Besides, institutions may also opt to invest in the money market, energy sector and other potential projects in the private sector, he said.

The banks have invested around 90 percent of their funds in government papers, he said. “Given the fact that 2013 will be an election year in Pakistan and foreign exchange reserves are depleting, investors will not make a major shift in their investments to risky instruments.”

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