OVER the past two years, a new asset class has emerged to provide investors with risk diversification and an alternate trading opportunity.

Traditional investing in stock markets is now complemented with the option to trade various commodities on Pakistan Mercantile Exchange.

Access to this new market has become easier as many big stock brokers also offer commodity brokerage services. Along with these, there is a growing number of small and medium sized commodity brokers providing client services across the country.

The chart below shows a comparison of trading activity between PMEX and the country’s stock exchanges.

Due to the different nature of products on these two exchanges, such comparisons can only be done on the basis of rupee value traded.

A natural question to ask is whether the introduction of a new alternative market has had any negative impact on stock trading.

PMEX research has found that even though a majority of brokers are offering stock as well as commodity services, their clientele for the two markets are very different.

There is more than one explanation for this pattern. First, stockbrokers are still very hesitant to introduce their existing equity clientele to commodity trading. This is borne out of a misplaced fear of cannibalisation. Stockbrokers would rather cultivate new clients for commodity trading than provide existing customers with an alternate asset class. This approach deprives customers of opportunities to diversify their portfolios and enhance returns.

Most brokers have separate heads for commodity and equity businesses and as such there is little motivation for managers to pitch business to common clientele. Internal rivalries limit the scope of cross product selling at stock-cum-commodity brokerages. PMEX has been actively working with brokers on the issue.

The growth of commodities trading is remarkable when one considers factors like tax and number of investors. The rally in stock market this year and the recovery in equity trading volumes over the past six months have mostly been attributed to the exemptions from capital gains taxes that the stock exchanges have managed to obtain from the government. No such explicit exemption exists for trading on PMEX.

In terms of participation, current PMEX volumes are being generated by just over 6,000 accounts and over 60 brokers.

These figures are dwarfed by the number of participants and brokers active in the stock markets.

The last two years have been one of the toughest in terms of economic conditions in the country. Despite this, the growth seen on PMEX is a testament to the gap that commodity trading is filling in terms of options available for investors to manage their savings. In the current economic environment of high inflation, political uncertainty, negative real interest rates and falling purchasing power, investors, traders and savers are faced with a difficult task of preserving their savings, investments and wealth. In times like these, investing in real assets becomes important.

Exchange-traded liquid commodity markets provide one of the best ways to protect against inflation and rising costs. While there are specific risks associated with both stock and commodity markets, having access to them increases options for investors.

The writer is Chief Business Officer at PMEX.