Who’s afraid of the big bad stock market?

The Chinese are in on the PSX action but many Pakistanis are sceptical

Who’s afraid of the big bad stock market?
For an average Pakistani, the stock market is a rich man’s club. In a way, she’s right. Just look at the way money, the amount of it, changes hands—electronically with SMS alerts and emails—and the process the stock investor goes through to set up an account. Opening an account with a brokerage firm could take up to weeks with KYC (know your customer) requirements typical only of a marriage proposal.

And as for the comparatively less frightening stock market? Brokerage firms only act as middlemen who facilitate trading in the stock market. A stockbroker makes a living on commission when you buy or sell a stock. Hence, she doesn’t really care whether you make or lose money as long as there is any trading activity on your part. The higher the volume, the greater her profit.
The performance of the Pakistan Stock Exchange (PSX), formed after the integration of the Karachi, Lahore, and Islamabad markets, has been phenomenal. In 2016, the PSX was the best-performing market in Asia and among the top five in the world

She doesn’t hold any stocks for you. For that, there is a custodian called the Central Depository Company (CDC) where you also have an account. All your shares are traded through the brokerage firm but are deposited with the CDC. Since all of this is executed electronically, there is room for mischief. And herein lays the issue. At a time when brokerage houses did not have as many compliance requirements, these middlemen could get away with committing various kinds of fraud. But that is an issue for another day.

In terms of returns, the performance of the Pakistan Stock Exchange (PSX), formed after the integration of the Karachi, Lahore, and Islamabad markets, has been phenomenal. The KSE-100 Index, a benchmark for market performance, has rallied over 48% since the start of 2016. This is up till Tuesday, January 3. It had a rather subdued year in 2015, but has been on a growth trajectory for over five years.

In 2016, the PSX was the best-performing market in Asia and among the top five in the world. Not too shabby for a country that has just seen one smooth transition of power and only one democratic government complete its full five-year term.

So why exactly are there only a little over 270,000 accounts with the CDC? Of these, several remain inactive, which means stockholders do not trade on a regular basis. In a population of over 200 million, one would imagine more than just 300,000 people have the ability to invest and build savings through it.

The explanation is simple: Pakistanis fear the unknown. They hate the inherent risk of investing, remain unaware of the know-how, are disgusted at being part of the formal economy in which they have to pay taxes, suspect stocks to be artificially high, are sceptical of mischievous brokers, and lastly, have a great alternative: real estate.

One thing we can do is create awareness and explain how things work at the stock exchange.

In 2016, for example, an ‘average’ investor should have earned a return of around 45%. This means that if they put in Rs100,000 that should have become Rs145,000 by the year-end. This is a benchmark and not supposed to be taken literally.
So why exactly are there only a little over 270,000 accounts with the CDC in a population of 200 million? Pakistanis have a fear of the unknown and prefer to park their excess cash in real estate

But if one were to be smart about it, there were great returns to be had. For example, we know from what is going on around us that oil companies have been taking a battering. Low oil prices and the reluctance to curtail output by OPEC members meant supply remained on the higher side. This means this sector wasn’t going to do too well. It did at the very end of the year, but on expectations. The cement and auto sectors did well on the back of higher sales. Look around you. Isn’t construction picking up in almost every urban centre? Aren’t there more cars than there were ever before? Didn’t an auto company just launch a new model?

These indicators are enough as a start. This is where one gets cues. But this is just the start.

The stock market will forever remain an unknown territory because people aren’t willing to take the risk and are impatient. Losing money is hardly a pleasant experience. But when one is patient, there are some great returns to be had.

Now, for a slightly technical angle.

Recently, a Chinese consortium bought a 40% stake in the PSX. The divestment was made after the government integrated the three stock exchanges of the country so the sale could have been easier and convenient. Many people are sceptical of the Chinese. But admit it, they are technologically more advanced than you are and just do better business than most nations on the planet. They’re hard-working, willing to make sacrifices and, best of all, are on our side more so than any other neighbour.

The PSX, on the other hand, is also technologically much more advanced than most aspects of the Pakistani economy. But it’s still lagging behind some of the most advanced stock exchanges of the world. Derivatives and options trading is still a relatively unknown concept here. Additionally, across-the-border trading will probably be facilitated. Pakistani companies will also be able to access international markets and vice versa. Excess liquidity and investor interest is generally good for businesses looking to raise capital.

Why can’t a normal investor hop on for the growth ride then? Because we, as Pakistanis, have learnt to fear the unknown. We are satisfied with rent-seeking behaviour. This is why real estate remains the main avenue of investment for people with excess cash. Remind me, I thought the stock market was a rich man’s club. It isn’t really. It’s more risky, but real estate is really the rich man’s club.

The writer is a business journalist in Karachi