Over the past few years, a large segment of the
Pakistani population has espoused the belief that the dollar is the best asset
class in Pakistan. Traditional economic theory would differ from this belief as
prices and exchange rates have a one-to-one relationship in the long run, thus
holding the vehicle currency (dollar) over the long run provides no real
return. But let’s take a deep dive into how gold, USD and stocks perform over
time.
Firstly, Pakistani fixed income investments are being
omitted from the analysis as they’ve barely provided a positive real return
over the long run; inflation has averaged around 7.9% over the long run while
interest rates have averaged around 8%. Moreover, real estate has been excluded
due to lack of aggregative data on property prices. Zameen.com does have a
property price index but it is limited in its time frame as well as
geographical aggregation.
Historically, gold has been expounded as an inflation-neutralizing asset
class. However, that statement applies when the comparison is made for
developed nations. In Pakistan, it is generally an inflation-beating asset
class. This is a result of gold being a dollar-denominated asset so not only
does its return reflect depreciation/devaluation of PKR but also increase in
the price of gold over time. The twofold source of return provides a nice
cushion for a gold investor.
As for cross-comparison of asset classes versus inflation, it is
observed that the USD has not beaten inflation over a long-time frame.
Meanwhile, both the KSE100 index and gold have significantly outpaced
inflation. Till the end of 2023, gold edged out the KSE100 index but the
trajectory of both stocks and gold in Pakistan is fascinating, to say the
least.
Interestingly, there have been time periods where the KSE100 index has
outperformed gold but also a huge stretch of time where it has lagged behind
gold. Much of this is down to the market cycles observed in stocks and real estate in Pakistan.
Based on these observations, an astute investor would not allocate any
of their capital towards the USD as gold is a much better inflation hedge which
already incorporates the return from holding the USD. But to take it one step
further, allocation between gold and stocks should be tinkered with from time
to time.
When the market cycle enters the growth phase, one should shift their
allocation towards stocks as stocks tend to outperform gold during this phase.
Meanwhile, when the market cycle returns to the stagnation phase, one must lean
more towards gold in their allocation.
It is important to note that correlation between gold prices and the
KSE100 is 0.68 suggesting a moderate positive relationship. Thus, reflecting the
fact that both asset classes adjust to nominal inflation effectively over the
long run.
My personal gripe with real estate in Pakistan is the lack of liquidity
and the large amount of investment required to invest in real estate – which leads
to overallocation of capital to real estate. Nonetheless, selective pockets of
real estate in the major cities of Pakistan have been excellent investment
opportunities. If one possesses information not available to the public, plenty
of money can be made in real estate. But that means high barriers to entry so
not something a regular investor can count on. Thus, the emphasis on gold and
stocks remains.
Regardless of the viability of real estate as an asset class, this much is clear: holding the USD makes for a very poor investment. One should stick to a mix of gold and stocks. Gold can be a great inflation/depreciation hedge, while stocks can act as a good source of steady income (dividends) and inflation hedge over the long run.
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