ISSUE OF RGST: NOT AS SIMPLE

The government wants to impose RGST as soon as possible but given the fact that even government coalition partners are now dissenting it has created a lot of confusion. The impact of RGST issue is not that clear on stock market. Let me briefly explain you why it is like that.

If government somehow manages to impose RGST inflation will shoot up and some believe that for some time it might reach near 20%, remember it’s hovering around 15%-16% right now. Therefore, this is the negative point of RGST for the stock market. However, there is a positive point as well, we will be to able to receive our next tranche of IMF of Rs. 1.7billion after which only 1.7 billion remains which we will receive afterwards plus we will also be able to be in a better position to get grants/donations/loans from other foreign institutions. Foreign institutions want to see out tax to GDP ratio higher (which is just 8% much lower than regional countries). Secondaly, as we all know one the main problem of our economy is fiscal deficit and it is because of this reason Govt is borrorwing heavily from Private Banks and State Bank and crowding out investment, after imposition of RGST fiscal deficit could be improved. Therefore, if RGST is imposed there is a disadvantage (inflation) and advantage (increased revenue for government). Similarly if it is not imposed then there will be no inflation but we would not be able to receive further loans that easily.

As you must have noticed, the situation seems to be tricky and it is not that easy to predict the impact of RGST on market. It seems both impact can cancel out each other and there would be no impact on market but that would be the case only when two impacts are equal in importance. It is not easy to say which impact is more important. However, the only thing that I can say in this situation to investors is to remain cautious and do not over invest in market at this moment.

Let me also inform that SBP has announced its monetary policy today and decided to increase discount rate by 50bps so now the benchmark rate has reached 14%. The possible impact of this decision on market have already been explained in previous post.

Please note that if any positive news regarding leverage product enters the market then I expect that market will further go up because un like the other two issues (RGST, Discount rate) leverage product is directly related to the market.

NOVEMBER 2010 MONETARY POLICY

SBP is to be announed its decision regarding discount rate. The expectations in the market are that 50bps increase in discount rate is higly likely which will cause discount rate to reach 14%. The reason for this increase is high inflation (around 15%) and possible hike in inflaton after RGST, plus the amount of government borrowing is also not decreasing at all. However, some believe that SBP needs to understand that it can not control "CPI Inflation" consisted of consumer items simply by increasing discount rate. This is exactly what we have seen. SBP non-expansionary stance is not depressing inflation at all. If SBP has realized that then there is a chance that it might not increase rate. However the chances of this are very minimal.

POSSIBLE IMPACT ON MARKET:

The 50bps increase is expected in the market so if increase in discount rate is less than this then it would be positive for the market and in case of change of more than 50 bps market is expected to be negatively impacted.

YOUNG INVESTORS: LESS DIVERSIFICATION CAN BE ACCEPTABLE

If you are in your 20s and suppose you want to retire at the age of 60 years then we can safely assume that you have around 35 years to work.

We read in finance that diversification is the key and based on some international research it is recommended that you need to have at least 15-20 shares in your portfolio. However there is also a view that being a young investor you should invest in a promising and relatively young and risky company/companies simply because you have capacity to do so or if we use pure finance language then your risk tolerance should be high. You don’t need much diversification right now actually.

Let me explain this with a case. Suppose you are 25 years old and have a stable job and you want to build your portfolio for your investment. Suppose you picked three relatively young companies with promising outlook from promising industries like Power, Textile, IT, etc. If even one of the company becomes a successful venture then you can make a lot of money. You shouldn’t think of yourself as an investor in stock market but as an investor in individual company or companies, feel as an owner of a company. Off course, these young companies must be very cheap right now and you can purchase many shares cheaply. In addition, it is possible for you to get a 0.5-1% ownership in these companies, which is a very big stake in a company if you check the number of outstanding shares of even small companies in stock market, they are in millions and total market value of one company is in billions.


Consider the attached figure. What does this figure imply? It shows that as you gets older your investment in your chosen company (or companies like we supposed above) as a proportion of your total investment decreases. When you are 25 years old your investment is entirely in your chosen company or companies. But as you get old, you start diversifying your portfolio. This graph is just an example and the exact shape of graph could be different for different investors depending on their attitude towards risk. But the principle is the same for all which is “As you get older you capacity to take risk decreases”. When you reach 60 and now you are totally dependent on income from your portfolio, you surely can’t put all your eggs in one basket. As you can see at the age of 60, your investment in one company is very small because now you have many companies in your portfolio. In fact at the age of 60 you shouldn’t be entirely invested in stock market but should have some decent portion (or even majority) of your portfolio in fixed-income.

MARKET OUTLOOK:

Kse 100 Index is hovering around 10,900 level. Off course investor have made profits. However in order to further go up market needs three things which are (in priority):

1. Market needs a "Leverage Product" as soon as possible.
2. If the discount rate is held constant (at 13.5) in an upcoming monetary policy to be announced at the end of this month.

3. Issue of RGST should be resolved peacefully. In case if this is not implemented there is a very strong chance that Pakistan won't receive it's next tranche from IMF and further this could impede other aids as well.

But let me stress this again "Leverge Product seems to be the key trigger atleast for the short term".

Thanks and Good Luck with your investments.

You can post a comment if you have any question or you can send me an email at tahiradeel001@yahoo.com.