KARACHI, Jan 28: Excepting the ‘real estate’ business, where the real amount of returns is shrouded in mystery over the last five and 10-year period, Pakistan’s stock market has offered the highest returns to the investors, compared with all other avenues accessible to the ordinary people.

Let’s first consider the returns on various classes of assets over the previous five year period: The Pakistan stock market yielded annual average return of an incredible 51 per cent, based on risk return theory. Closest second was the glittering gold, which offered far lower gains of 14 per cent; followed by Defence Savings certificates 11 per cent; 10-year Government Bonds 9 per cent; 6-month T-Bill 6 per cent; Bank deposits (PLS) 4 per cent and rupee/dollar parity 1 per cent.

The information is contained in the ‘Pakistan Market Strategy’ report released this month by Jahangir Siddiqui Capital Markets. The report has been compiled from information contained in the SBP annual report, Economic Survey, Karachi Stock Exchange data and JS Research department’s in-house studies. “The local stock market can generate return of 28 per cent in 2006”, says Mohammad Sohail, director stock broking and research at JSCM. He backs his assertion with arguments.

Taking KSE index as a proxy, the 10-year average annual return from Pakistan market worked out at 29 per cent in local currency terms and 23 per cent in dollar terms. The return is inclusive of cash dividends due to the reason that the KSE-100 Index is a market cap based total return index. Comparable gains that accrued to investors from other avenues stood at 14 per cent from KSC; 12 per cent from 10-year Government Bonds; 9 per cent from gold and the same from 6-month T-Bill; 6 per cent on bank deposits and 5 per cent from rupee/dollar parity.

In 2006, Pakistan equity markets have entered into the fifth year of their bull-run. Last year, the stocks yielded a return of 54 per cent, which was in spite of the stock market crisis of March, which had wiped out at least a quarter of the gains until then. The only avenue, (and here we are not quoting from the JS report) where the returns are generally believed to have been phenomenal is the real estate. But, it is impossible to measure the gains. Like in the developed world, Pakistan has not built-up a real estate index, which keeps all of the property business cloaked in mystery. Also there are no price records. The benefits of investment in real estate are enormous, but they accrue at an equally high risk. Such risks include the illiquidity; non transparency and irregularity of the property trade. Who hasn’t heard of ‘exchange of files system’, without actual transfer of property Or even more heinous crime such as selling the same plot or apartments to several parties, by the builder who then plays the disappearing act.

But back to the stocks, the sleepy capital markets in Pakistan, awoke in early nineties as the government threw open its doors to foreign investors. Stock prices sky-rocketed and the easy going, pan chewing, pyjama clad stock brokers began donning designers’ suits and discarded their one-room rickety offices and shifted to vast spans of well-equipped buildings, eager to make them presentable to the visiting foreign clients. The gains that accrued in those hay days made the first billionaire from stock trading.

Then, came a long spell of bear-run lasting till the turn of this century, when 9/11 re-channelled overseas remittances back into the equity markets. And the rest is history. But stocks are pre-disposed to risks. Prices can go up as well as down. Until the change in the monetary policy some where in mid-nineties, one of the most attractive, easily accessible and risk free fixed income investment avenue for small investors, particularly the widows and pensioners, was the Defence and Khas deposit certificates. Nothing could compare the offer of 16 per cent risk-free return and the ease of drawing the monthly sums from those National Savings Schemes (NSCs). But then, the interest rates began to dip. Yet, there is nothing better to turn to, and widows, pensioners still take what is offered, though perhaps not with a bad taste in the mouth and a foul word on the lips.

Government bonds and T-bills are clearly for financial institutions and not the small investors, so that had better be left un-discussed. Perhaps the most illogical place to ‘park’ investment is in banks, particularly in the PLS accounts. The returns offered are absurdly low at around 2 per cent. The life of investor with small savings has been made miserable by cut in returns on the one hand and increasing ‘service charges’ on the other.

Gold has remained man’s (or maybe women’s) best friend and perhaps the most sought-after metal since the time immemorial. And the recent decline in returns from other avenues has given a new lustre to gold as an investment commodity. Gold, as is well known, has both consumption and investment properties. Inflation and gold prices are generally seen to move in tandem. However, gold can be a good bet during deflation as well. But any small investor, who may decide to head for the ‘sarafa bazaar’ to put some money in the precious yellow metal, must stop a while and look up the price list. This may be the time to wait. Around the world and so in Pakistan, gold is currently selling at its 15-year peak price.