Investment Strategy For a Salaried Class Investors

To be precise, if you are young are have a permanent and stable job then believe me investing in Stock Market is not that difficult for you. In fact you would be very unfortunate if you don't invest in stock market. Why? The most obvious reason to invest in Stock Market is Inflation. Inflation has been around 10-12 percent thourghout the history of pakistan and it will remain in the same zone in future. So if you are investing your saving at less than 10 percent for your future then actually you are losing value in real terms. As per the study done by a large brokerage house Pakistani Stock Market has given an average annual return of 31 percent for the last 10 years. (Ref: See Investor Guide on thefinancialdaily.com).

If you are afraid of volatility in Stock Market then this volatility is not a problem for you because you are young and can afford fluctuations since your ultimate purpose is to save for your future.

Consider a simple case:

Suppose you decide to enter in the market at current level which is around 9,800. You start putting saving from your salary in the stock market at the end of every month. You target is 11,000-11,500. That is you will take all your money out of the stock market once you reach this point. Now this point has 26 percent upside potential so any thing that put right now will give you 26 percent in future at some point in time. Now suppose at the end of the next month the market is at 9,200 level and stocks have come down. So what should you do? Actually this shouldn't be a problem for you, infact now you got same stocks more cheaply. Suppose you bought POL for 230 earlier and now you can get it for 220 so your average become 225. And suppose if the market goes up in the second month and again reached at 9,800 level and your PPL again reach 230. You have made a profit now because your average is 225. However your ultimate target is in 11,000 range so your startegy is very simple i.e. you buy more shares when market goes down and you sell shares when market reaches 11,000-11,500 level. But please note that you need to keep some common rules. First you need diversification and second always have some "know-how" of stocks, market and economy or you should take advise from your broker or any other market expert.

Conclusion: Averaging solves the problem of volatility. And since salaried class don't invest all of their money at the same point in time they naturally can average out their investments.

Best of Luck!

Monetary Policy: Who Is Responsible For Poor Economic Situation?

We are in a very unfortunate situation. A very simple economics tells us that Central Bank reduces money growth to curtail economic growth because too speedy economic growth will dry up the resources and that will induce the inflation.

In Pakistan, Central Bank has reduced money growth by increasing discount rate. Why? To curtail economic growth? Actually, we don't have a substantial growth. Last year (FY 2010) we achieved a growth rate of just 4.1 percent. While we compared this to our neighbours like India (8 percent) and China (9 percent) we are actually nowhere so why did Central Bank increase rate?

This can best be explained in points:

1. The Govt borrowing is exceeding it's limit and this borrowing is for Consumption purposes rather than Investment purposes.

2. Because of electricity shortages and poor law and order situation, the investment is very minimal. Therefore supply is limited and not increasing.

3. Govt borrowing is crowding out the private investment.

4. With no increase in supply, and continuous increase in Govt borrowing which is creating consumption led demand, inflation is increasing which is 12.7 percent for FY 10.

Therefore SBP has no option but to curtail this consumption led demand which will ease pressure on inflation.

This has been a story. As the above points clearly shows that Fiscal Deficit was the real problem. But the increase in interest rate will definitely slow our growth further which means this year we will see a growth rate much lower than 4.1 percent which imply poor economic conditions.

Who is responsible for it? Government? Surely it is. Government need to increase its resources from somewhere else like Tax. Remember Pakistan's Tax to GDP ratio is lowest in the world with around 8 percent. Government also needs to reduce corruption. The total Government borrowing from SBP in FY 2010 was 1,171 billion while the target was only 1,130 billion. The Government also borrowed Rs. 330 billion from commercial banks. So it left no money for private sector to borrow. Private Sector creates more jobs than Govt Sector. Private sector uses money more efficiently than Govt Sector. There is less corruption in Private Sector than Govt Sector. But very unfortunately Govt is borrowing all the money and the worse thing is that the Govt is not investing this money but most of this borrowing is to meet current expenditures (You can verify this by reading the monetary policy statement available on SBP website) which doesn't create jobs.

Surely, we got the answer. Who is responsible for this bad economic situation?

New Market Range: 9,000-11,400

With the unexpected decision of SBP to increase discount rate market fundamentals have certainly changed. I believe with the current macro-economic situation the range of KSE 100 should be 9,000-11,400 i.e. upper range is reduced by 800 points. I believe investors should book most of their profits as market reach 11,400.

There is no significant change in the Target Prices of individual shares that I recommended so Investors can still follow them. However as I have told you, be cautious now and do book your profits whenever you got them.

You can compare the current share prices of my recommended stocks with the prices when I recommended them on 7th July, 2010. Investors who took position with all those shares must have got good returns as most of the shares have appreciated well.

Monetary Policy: SBP Increases Discount Rate by 50bps

As I told you in my last post that general consensus among analysts was that discount rate will be unchanged and will be held constant 12.5%. Unfortunately SBP surprises the financial market with the decision to increase discount rate by 50bps i.e. now the discount rate is 13% for the next two months.

SBP attributed this increase in rate to the "inflation concerns" and growing "fiscal deficit" (reaching at almost 6% of GDP). Remember inflation for the fiscal year 2010 was recorded to be 11.73%. SBP expects inflation to be around 11-12% for the next fiscal year.

This will have a devastating impact on the Market as this action wasn't expected as 90% of analyst were not expecting this. The range of Market plus the Target prices of Shares that I recommended will all change because of this action. Investors are advised to be cautious (as they always should be in Pakistani Market and that is one of the reason that I told to always book profits in Pak Market in my previous post). Long Term Investors don't need to panic, just to remind them Pakistani stock market at 10,500 level is still a cheapest market in the region. However now all investors need to be highly cautious and now should try to sell shares that have appreciated in value. Just to remind them all of the shares that I recommended have gone up (except PACE).

Good Luck!