Developing the debt market

It is quite rare to find economies with limited scope coupled with an itchy stance towards prosperity and progress. However, having access to almost everything and still not making use of it is unfortunate. While our capital markets continue to emerge, we still have miles to cover before a proper debt market comes into existence. The rapid popularity gained by the banking system in the ‘90s and the succulent returns advertised by them has given birth to a tendency among the masses to deposit their holdings, or savings for that matter, in bank accounts. I am not against this culture, but productivity is what I want to emphasise upon.
At the same time, we need to learn from the banking culture of inducing as well as attracting people towards them, something which the capital markets have failed to do. While I maintain my stance of rating stock market as the safest mode of investment, given that it is a mirror of the economy, investing in debt instruments should also be promoted by concerned authorities. By debt instruments, I refer to the corporate debt certificates which are issued with a pre-defined rate of return and in case of bankruptcy, get their share even before the shareholders. In Pakistan, companies have tried their best to promote this mode of raising capital, but lack of knowledge among the general masses has not helped their cause.
Talking specifically about the Asian belt, emerging economies and potential financial hubs have ensured that corporate debt adds up a decent percentage towards the GDP of the country. The nationalisation saga during the 70s and a subsequent regression of the same can be quoted as a major reason for the slow development in the same cause, but not the only reason. Frequent changes in investment policies and an irregular system of the existing markets has not done wonders to the investor confidence and the SBP, along with SECP, need to find a permanent solution to infuse a sense of stability among investors. 2002 saw Karachi Stock Exchange being named the Best Performing Stock Market of the World, attracting a sea of foreign investors thereafter.
This performance continued till 2008, when KSE was nominated the best performer among major emerging markets. However, record high inflation and political instability forced the index to record low levels, imposing a five-month floor thereafter. The inconsistent monetary policy stance coupled with the rapid depreciation in the local currency has served a hefty blow to the local as well as the foreign investor. A rise in discount rates unnaturally pulled funds out of the stock markets, directing them towards saving schemes and money market. With major investors fleeing to other havens, there was little incentive for retail investors to invest in the then prevalent circumstances.
Now that the inflationary trend is opposite and the SBP is reducing the discount rate steadily, a sense of calm seems to take cover. The relationship between interest rates and debt instruments is vital to understand before making an investment choice in the existing scenario. The inversely proportional nature of the two suggests that money should flow into the stock market with a decrease in the discount rate, which increases prices of bonds and thus reduces the yield. However, if there is a sentiment of an increase in the interest rate, investors should re-direct their savings towards the debt instruments in order to avail maximum returns. A rapidly depreciating rupee does not help investors. It might be of advantage to exporters, but quality production is pre-requisite. With energy crisis not allowing industry to function, I doubt its advantage, if any, at this stage.

The writer is Head of Strategy at First National Equities and can be reached at [email protected]