A political crisis followed by an economic crunch seems to be a recurring theme in Pakistan.
Add the global geopolitical volatility, a commodity supercycle as well as double-digit inflation rates in the mix, and things just get a bit too complicated.
With petrol prices rising, inflation is set to continue its upward trajectory after hitting a two-year record of 13.4 per cent in April.
In such a scenario, the question on everyone's mind is: What asset classes to invest in, and how?
If there is one inalienable truth right now, it is that your savings will continue to lose their value due to inflation, making it imperative that any surplus funds are at least invested in risk-free instruments.
In this world, there is no such thing as risk-free, but the closest that anything gets to risk-free is borrowing done by the government for various time periods, whether that is for three months, or for twenty years.
Read: How to invest
If the government borrows for one year or less, it borrows against something called a ‘treasury bill’.
If the government borrows for more than one year, it often borrows against something called the ‘Pakistan Investment Bond’.
In both cases, the government promises to pay a ‘mark-up’ on the funds that it borrows from the people or other investors.
To further clarify, whatever funds you put in your bank account, it is estimated that roughly 55 per cent of those funds are invested by the banks in either treasury bills, or bonds, wherein they get a much higher return than what you get as a depositor.
Given that, it makes no sense to use a bank as an intermediary, when you can directly lend to the government.
But how does one do that?
It can be done through opening an ‘Investor Portfolio Services’ account with your bank. Initially, the bank may refuse, or make excuses, but if you insist, they will open it.
Once open, you can instruct the bank to invest in either treasury bills or bonds. Due to high inflation and correspondingly higher interest rates, it is entirely possible to lock interest rates in excess of 13pc per annum for various time periods.
Considering how things are going, it may be possible to lock an even higher rate. Generally, interest rates follow a cycle: they reach a peak and each peak is followed by a trough. Locking interest rates at peak, or close to the peak enables an investor to maximise income.
This is a complex matter, and for the sake of clarity, I have tried to keep it simple. However, we may elaborate on it further in the future.
National Savings Scheme
Similarly, people can also invest in the government's National Savings Scheme. Due to increasing interest rates, the next few months would provide an ideal opportunity to lock in high interest rate for a period as long as ten years.
In effect, regardless of direction of interest rates in the future, you would be able to lock in a certain rate and benefit from the same. If you are a senior citizen, it is highly recommended to invest in Behbood Savings Certificate of the National Savings Scheme to get the best fixed-income returns, which are also tax free.
Similarly, if you are a pensioner, you can open a Pensioner Benefit Account, which has similar rates, and is also tax free. It is extremely important for senior citizens to manage their risks, and allocate their available funds to risk-free and government-backed schemes, rather than being duped by shenanigans of banks, and other charlatans.
Talking of charlatans, if anyone tries to sell you a bancassurance product, which often is your preferred bank, or someone cold calling you, run away from it. The product is structured in a way that it can only cause misery, and nothing else.
Although locking a peak, or close to peak rate for fixed income is a nice conservative goal, but real money is to be made in the equity market, or commonly referred to as the stock market.
During a crisis, or successive crises as in our not-so-unusual case, stocks of highly profitable, and growth-oriented companies are available at a sizeable discount to their earlier prices. What does this really mean?
Buying a stock of a company, in effect, makes you a partial owner of the company among many others, but owner nonetheless. As profitability of an entity increases, and it is able to generate sufficient free cash, the expectation is that the value of your stock would also increase.
The expectation of this value, also called price, is driven by buyers and sellers of stock in the stock market. During times of crises, the price of profitable entities may not be significantly affected by an economic slowdown or decline, providing an opportunity to buy the same stock at cheaper prices. An economic crunch provides such an opportunity; however, one needs to be careful, and not be tempted by falling knives.
A crisis or a crunch is a good time to take exposure in the stock market. Instead of investing in one go, it is better set up a plan to buy on a monthly basis, such that one can average out the cost basis.
Establishing a monthly investing regime enables one to avoid concentration, and allows one to capture better prices in case the prices decline further and so on. Currently, many stocks on the local exchange are at their ten-year low in terms of valuation, and are ripe for growth once the economy is brought back on track. This is a highly recommended track if you’re young and have high risk tolerance. If you’re close to retirement, or retired already, exposure to the stock market should be kept at a minimum.
But which specific stocks does one invest in? For starters, avoid anything that is recommended by your broker. Do your own research. It is your hard-earned money after all.
Sadly, we do not have any professional financial advisers, and whatever handful do exist, they are charlatans – so pick your advisers carefully. If that is too overwhelming, invest in a mutual fund which invests in stocks. Once you get the hang of it, you can always invest directly in the stock market.
Although the simplest thing to do right now is to buy the US dollar, supply of which is already constrained in the market. Why should the people suffer due to consistently bad economic policies? The state has largely failed to ensure preservation of value of the PKR, or provide an enabling environment for sustainable and broad-based economic growth.
These are challenging times, but the frequency of such challenges has made challenges perpetual. A crunch provides an opportunity to position one’s portfolio for growth for the long-term but that needs to be supported by sound economic policy. One hopes that some sense prevails, and better policy making replaces the ad-hoc interventions that have kept us in perpetual crisis mode.
The writer is an economist.