The most asked question in this age of hyperinflation is where should one invest savings? That triggers a debate exploring different asset classes — from real estate to stocks — available during these turbulent times.
According to 2020 McKinsey & Co. report, global net worth has tripled since 2000, with two-third of it driven by real estate instead of other productive investments. The real estate investment gives you a physical land/property that you can also rent out for a steady stream of income. Real estate investments offer diversification and passive income and above everything, these are hedged against inflation risks – at least in most cases. Rental values rise during inflation, providing an additional advantage.
On the other hand, handling real estate comes with the headache of dealing with tenants and less liquidity, while prices could stagnate in some cases. Despite all this, love for real estate trumps everything in Pakistan. According to a 2020 report by Profit, the total value of all residential real estate in Pakistan is estimated at $1.2 trillion, roughly 3.3 times the country’s GDP at the time. Although it seems as a profitable investment, it can create liquidity issues for individuals as it’s not easy to sell quickly for its real worth, and it locks up your capital. In addition, there are other challenges like fake or incomplete documentation and multiple trades on a single property. The sector needs to be properly regulated instead of providing amnesties.
The foreign exchange market offers more short-term wins with more liquidity. The Bank for International Settlements said in 2019 that global daily currency turnover surged to a record $6.6 trillion. The short-term benefits come with volatility that renders it riskier at the same time. Forex trading is open around the clock due to the overlapping of time zones, but it also demands more of your time and dedication given the often unstable state of the forex market. The rupee has depreciated 28% against the US dollar since Jan. 4, 2022, through Dec. 29, 2022. Exporters and forex traders typically make news in Pakistan for allegations of hoarding the dollars and artificially weakening the rupee. Even now there is a parallel forex market surfacing where dollars are being sold at 10% premium while the country ridden with floods and political unrest is battling to survive the dollar shortage.
Crypto is considered one of the most volatile and risky asset classes at the moment. In the 12 months to November, more than $2 trillion has been wiped from the crypto market globally. Crypto is being tainted with one of the biggest financial fraud in the US history as crypto exchange FTX went from $32 billion in valuation to bankruptcy in a matter of days. The collapse has triggered calls for increased regulations to protect consumers. In Pakistan, the market is still not recognized and transactions are considered illegal by the State Bank of Pakistan while FIA is seeking arrests of culprits behind a crypto scam that ripped $100 million from investors. While crypto may have a strong potential in the future, it lacks the necessary elements of a safe investment at the moment.
Coming on to the stock market, 2022 was a bad year for Pakistan Stock Exchange (PSX) with capitalization plummeting 17% to Rs. 6.4 trillion amid political and economic uncertainties. There is still little participation in stocks at retail level, which Ktrade put in 2020 at 0.1% of the population.
Long-term returns from stocks exceed various fixed-income assets by 15%-20%, Shoaib Lalani, co-founder FinPocket, told ProPakistani. He believes easing the access to stocks through FinPocket is a game changer as retail investors were waiting anxiously for such a tool. Crypto boomed as it was easy to invest in; Binance and Octafx are far more popular in Pakistan compared to PSX, commented Shoaib.
As for the overall market performance and digitization, critics are skeptical. As long as the macro-economic environment improves, including political stability, I see little prospect of PSX performing well or providing any superior returns, commented Javed Hassan, Chairman Economic Advisory Group (EAG). He also highlighted the issue of insider trading at PSX as a big hurdle in the way of democratization of stocks.
Lalani, however, was hopeful and revealed that their 80%-90% users are first-time investors stating that digitization access to stock investment will go a long way in improving the stock market landscape.
This article merely provides comparison of different asset classes, and doesn’t represent investment recommendation.