Investment gurus are seen scratching their heads as they wonder how their forecast for returns on various asset classes went wrong in 2019.

Equities delivered losses of 20 per cent in 2017 and 24.9pc in 2018. That was why most money managers expected shares to bounce back in 2019. The return on equities was expected to be in the range of 17.5-20pc, higher than expected returns in other asset classes for investors with an appetite for risk.

Equities are currently trading at a price-to-earnings (P/E) multiple of 7.5, which is below the 14-year average P/E of nine. Yet the market has failed to lure investors.

Standard Capital Strategist Faisal Shaji says that many blue-chip stocks are available on discounted prices, which makes the Pakistan Stock Exchange (PSX) a buyers’ market. “The International Monetary Fund’s (IMF) stance on interest and exchange rates is keeping investors away. Even the government is clueless with no participation,” he said.

About seven million investors would receive a risk-free return of 11.3pc on government securities through National Savings certificates until recently. But they have also been robbed of their pittance after the imposition of higher taxes. The government had raised rates of return in July last year by a maximum of 2.3pc on National Savings certificates in line with the increase in the benchmark interest rate. But that was more than wiped off last week when the Central Directorate of National Savings (CDNS) announced an increase in withholding tax rates on profits earned by return filers to 15pc on the investment of more than Rs0.5m.

‘A money market fund investing in 90-day treasury bills will give a net return of 11.25pc. For all individuals, it can be the best place to park their money’

Non-filers have been severely punished by the hike in the tax rate, which rose to 20pc from 10pc last year on the investment of up to Rs0.5m in National Savings certificates. Non-filers investing more than Rs0.5m have to pay a withholding tax of 30pc, up from 17.5pc that they paid previously.

Gold glittered for the second year by yielding the highest return with the dollar following closely. A trader said that Sarafa Bazaar was doing brisk business as the per-unit price of the yellow metal reached an all-time high of Rs82,000 last Thursday. Besides being the only investment avenue still out of the reach of the Federal Board of Revenue (FBR), rising international gold prices also contributed to this factor. Currently at $1,415 per ounce, major international investment houses forecast it will touch $2,000 by the end of the year, which means room for a 10pc rise.

The dollar provided jaw-dropping returns this year due to a massive depreciation in the value of the rupee. But only the bold ventured to invest in the dollar because of the CNIC requirement as well as the risk of carrying greenbacks.

Most investment strategists will not bet on real estate owing to both regulatory and market risks. In addition, the sector is also a prime target of investigation into money laundering. A property dealer in Karachi complained that there were no buyers in the market although property prices had scaled down.

He mentioned that real estate in DHA Phase VIII had declined from Rs100m to Rs80m. Prices of plots in DHA City also dropped by Rs2-5m while rates of Bahria Town real estate also staggered. A source in Dubai claimed that investors from Pakistan were busy acquiring properties in the Emirate. But some local money managers dispute such claims pointing out that remittances would have slowed down if this was indeed the case. Remittances have in fact grew 9.1pc in 2018-19 to $21.8bn, providing major support to the country’s foreign exchange reserves.

Money managers differ on their opinion about investors’ penchant to part savings in bank deposits. Total deposits of the banking sector reached an all-time high of Rs14.5 trillion on June 30, showing growth of 11pc from preceding year. Analysts said it indicated that surplus cash is being parked in bank deposits.

Another strategist said that tax anomalies — such as ‘earned’ income from business being taxed at a higher rate of 35pc than ‘unearned’ income from interest income — are being corrected. Dividends received by corporate entities were treated as any other income and taxed at the corporate tax rate of 29pc. Mutual funds also enjoyed the benefit of a uniform tax rate of 15pc on dividends while interest income from bank deposits was taxed at 15-20pc on funds ranging from Rs5m to Rs36m.

For risk-averse investors, money managers recommend Pakistan Investment Bonds and treasury bills that yield 14pc and 13pc, respectively. In case interest rates decline in a year or two, investors can pocket capital gains and return to equities. “The 90-day maturity treasury bill is yielding 12.78pc currently,” said Nasim Beg, vice chairman of MCB Arif Habib Savings, an asset management company. “A money market mutual fund investing in such bills will give a net return of around 11.25pc. For all individuals, small savers as well as high-net-worth individuals, it could be the best place to park their money,” he said.

Published in Dawn, The Business and Finance Weekly, July 15th, 2019