Gold glittered in 2020 with the best return among investment avenues.

The price of a tola of yellow metal at the start of 2020 was Rs88,100. It climbed to Rs113,700 per tola by the last day of the year, providing a return of 29 per cent. It beat the best return of 15.8pc produced in 2019. The price of gold followed the price of the precious metal in the world market where it increased 25pc to $1,894 an ounce, from $1,561, during the year. It was spurred by the massive buying by investors who had fears about the fallout of Covid-19 on the economy. Investors thus ran for cover towards the safe haven of gold. Gold is also the investment of choice for it continues to remain out of the reach of the Federal Board of Revenue (FBR).

According to Insight Securities Head of Research Syed Noman Ahmed, various classes of assets posted the following returns in 2020: stocks 7pc, real estate 14pc, gold in dollar terms 25pc, six-month treasury bills 9pc, bank deposits 5pc, oil (WTI) in dollars -21pc and dollar 3pc.

In 2018, investors in the greenback got the highest gain of 25.8pc due to the massive depreciation in the value of the rupee. This, however, was a one-off win for the dollar. About 8m investors who put money in government securities through National Savings Schemes (NSS) have seen their returns evaporate as the government struggles to cut down on borrowings. The rate of return on Special Savings Certificates in 2000 stood at 7.4pc, almost half of 13.5pc delivered a couple of years earlier.

‘The share market is likely to gain 14pc in 2021, which is almost twice the wafer-thin return of 7.4pc in 2020’

Equity strategist at JS Global Hussain Haider affirms that optimists were clear winners last year. Equities delivered losses of 15pc in 2017, 9pc in 2018 and gains of 10pc in 2019. Last year was a story of two halves for equities. Until March 25, the KSE-100 index plunged 37pc. But as the fear about the extent of Covid-19 damage to life and the economy subsided, the index shot through the roof. It rose 61pc between April and December.

According to brokerage Arif Habib Ltd, the KSE-100 index is currently trading at a price-to-earnings multiple of 7.7 compared to the Asia-Pacific regional average of 18. Pakistani equities offer a dividend yield of 6pc, which is far higher than 2.5pc offered by the regional markets.

Expectations for 2021

Equities are expected to generate high returns going forward. But that is for the deep-pocket investors or those with an appetite for risk. For risk-averse investors, fixed income instruments, money market funds and government securities are considered the avenues of choice. Investment analysts will not venture to hazard a guess on real estate prices owing to both regulatory and market risks.

Next Capital Executive Director Zulqarnain Khan reckons that expectations of a gradual recovery in the global economy with massive global stimuli by central banks and the administration of the Covid-19 vaccine in the United Kingdom, United States and some other rich nations are likely to result in a continued rally in riskier assets, including equities and commodities, whereas the flight from safe havens, including the dollar, gold and silver, will result in negative returns for them.

“Oil with the rising demand outlook and production cuts to gain 20pc in 2021, bouncing back from a fall of 13pc during 2020.

Gold and silver, however, may continue their rally in short term, but are likely to close the year on a loss of 15pc and 25pc, respectively,” he says.

Mr Khan expects the equities market to maintain a positive trend, gaining 14pc towards the 50,000 index level, which should be almost twice the wafer-thin return of 7.4pc provided by equities in 2020. Fixed income instruments on the other hand, after a significant slashing during 2020 amidst the pandemic, are likely to remain flattish on an average basis. But in absolute terms, an uptick in interest rates is expected with increasing growth expectations and rising inflation. The 10-year Pakistan Investment Bonds are currently trading at 10pc against the policy rate of 7pc, implying that the market is pricing a rate hike of at least 100 basis points in the near term. With a stable external account and higher inflows from remittances and Roshan Digital Accounts, the exchange rate is expected to face a devaluation of 4pc during 2021 against 3pc in the earlier year mainly on the back of re-entering the IMF programme, a W-shaped economic recovery and slight fiscal consolidation.

Mr Haider of JS Global Equity expects the status quo in monetary policy for the entire calendar year and a range-bound rupee between Rs160 and Rs165 to a dollar. For stocks, he believes that those who carry the 2020 bullish view into 2021 will not be disappointed. “Let everyone unshackle themselves from one-year convention and look beyond, at a view of at least 60,000 index level by delimiting the short-term investment horizon,” he says. “Even if second- and third-tier sector performances might be a tough nut to crack for main board stocks, the latter can reasonably be expected to outperform its prior runs in 2018, 2019 and 2020,” he affirms.

Mr Ahmed of Insight Securities observed that most countries were witnessing negative real interest rates, including Pakistan. But interest rates are expected to remain stable in the near term owing to the second wave of Covid-19 and the imposition of lockdowns in Europe and the Middle East. He said equities were likely to remain the preferred asset class given lower interest rates across emerging markets.

“Limited opportunities in other asset classes justify staying long in equities. Typically, local investors substitute stocks with fixed income,” he said.

Published in Dawn, The Business and Finance Weekly, January 11th, 2021