The financial sector has done well in the last couple of years — with high interest rates, the fixed-income side has been the winner, says Nadir Rahman, CEO of Faysal Asset Management Limited, a subsidiary of Faysal Bank Limited.

But in terms of equity, not much has changed, he observes. The companies that were popular a decade ago are still the ones being bought and sold. New companies that do enter are not big movers and shakers; we need some ‘monsters’ in the league of Oil and Gas Development Company Limited, MCB and United Bank Limited, he adds.

However, the retail investor base has started growing over the last 18 months. Smaller cities have shown a notable uptick in new stock exchange accounts, fueled by digitisation. As an asset management company with ties to EasyPaisa, Faysal Funds has enabled even small-scale investors to participate with as little as Rs500. Since EasyPaisa’s introduction, over 200,000 investors have joined Faysal Funds. But, as Mr Rahman points out, without substantial new companies, this surge cannot become a game changer.

Old wine in the same bottle

As a fresh trainee, Mr Rahman had written the prospectus when the Pakistan Stock Exchange (PSX) opened up to foreign investors in the 1990s. The argument then to lure investors in was PSX’s price-to-earnings (P/E) ratio is better than others. The PE ratio is a valuation ratio that compares a company’s current share price to its earnings per share. A lower P/E ratio suggests a stock is undervalued relative to its earnings, making it potentially more attractive to investors seeking bargains.

Sukuks and a rising retail investor base signal promising trends, even as ETFs and REITs wait for a more mature market environment

Today, 34 years later, Pakistan still use the same argument to attract investors, laments Mr Rahman. Till the macros of the economy improve, the equation will not change. Peer countries such as India (though it is not leaps and bounds ahead of us), Sri Lanka and Bangladesh all have higher valuations than Pakistan. Having said that, Pakistan is still attracting investors, but those are the ones who evaluate specific companies rather than the country’s performance. Banks and oil and gas sectors, in particular, are ones that investors are interested in, he explains.

The banking sector, he notes, will remain profitable even if interest rates fall. Banks benefit from maintaining a spread — the difference between borrowing and lending rates — and will continue to prosper as long as the government needs to borrow, which shows no sign of slowing.

Sukuks and government listings

With Sukuks, the PSX plays a vital role in offering new avenues for financing. Mr Rahman sees this as a positive step. Currently, the government funds everything for the budget. However, if the government creates a business model for, say, Karachi Metropolitan Company as a viable company and lists it, it can raise finances for a specific project, he hypothesises.

The investor base has grown over the last 18 months with smaller cities showing an uptick in new PSX accounts, fueled by digitisation

In 2019, the government listed the Pakistan Energy Sukuk-I to fix the circular debt. That is when the government realised it could go to the public directly and save money instead of going to the banks. Since then, the frequency of Sukuks has increased, explains the CEO.

Deeming them ‘black holes’, Mr Rahman said the Ministry of Finance manages money raised from treasury bills. However, in the case of Sukuks, the government will have to develop projects from which the public can see a return. This could potentially increase transparency and accountability of government borrowings.

REITS — a high risk business

Real Estate Investment Trusts (REITs) are companies that own or finance income-generating real estate properties, allowing investors to participate in real estate without directly owning properties.

Back in 2022, Mr Rahman’s predecessor, Khaldoon Bin Latif, had been optimistic about REITS. Since then, however, Mr Rahman has had a different opinion. While acknowledging REITS to be a good space, he explained that the mindset of a conventional fund manager who is managing public money is completely different from someone who is managing private equity or venture capital.

Globally, the larger asset managers start with conventional funds and then enter into private equity and venture capital after many decades of experience under their belt. “Owned by a bank, you are naturally risk averse, and REITS are a high-risk business,” he added. While the launched REITS are doing ‘alright’, they are a longer term play for when we have evolved more, he said.

Optics of ETFs

Similarly, Mr Rahman tempers expectations for Exchange-Traded Funds (ETFs), a product previously championed by his predecessor as a strategic direction for Faysal Funds. An ETF is a bundle of assets traded on the Pakistan Stock Exchange, allowing investors to access diversified portfolios easily.

Despite seven to eight ETFs currently listed on the market, their collective assets are modest — around Rs700 million, primarily comprised of asset management companies’ own funds with no new investors. “ETFs are largely optics here; they don’t generate much revenue and are operationally demanding,” Mr Rahman explains. ETFs have a strong following in more developed markets, but in Pakistan, stock brokers lack incentives to promote them.

With high interest rates, money makes money even with limited efforts, but as rates decline, the industry will have to hustle to attract fresh inflows. While Pakistan’s financial landscape is evolving, Mr Rahman sees untapped potential and a need for larger, impactful companies to catalyse a real transformation. Meanwhile, Sukuks and a rising retail investor base signal promising trends, even as ETFs and REITs wait for a more mature market environment.

Published in Dawn, The Business and Finance Weekly, October 28th, 2024