Tips for Successful Long Term Investor

Investing is an art that anyone can learn. The difference between an investor and a trader is a lot more sensitive. But the basic difference is that an investor tends to have a longer-term perspective. Many follow analysts and a financial adviser, but they can only take you so far. They can recommend, but the best fit for you will come from making your own choices. There are some basic guidelines & rules that investors and traders across the country should follow, after all it is your hard earned money and it should be channeled wisely.

Rules to help you become a successful Long Term Investor;

1.      Your success at trading depends on your knowledge of markets. Learning to invest doesn’t happen overnight. Try to learn from the very scratch, and don’t consider yourself as an expert even if you know better the others.

2.      Take a long-term view on investing in stocks, this is the fundamental rule. You cannot hope to make money even in quality stocks invested in less than 2-3 years. Normally, a holding period of 4-5 year is what you need to be prepared for.

3.      Concentrate on a few high-quality stocks. There’s no need to own twenty or more stocks.

4.      Do your homework on the stock. There is really no alternative to solid research. Understand the business the company operates in and its prospects. Know the entry barriers and understand the competition.

5.      It is OK to be wrong but it is bad to stay wrong. It is normal for many investors to hold on to stocks where price movements go against you. That is not a very wise thing to do because idle money has a cost. Most investors, even the best among them, get a good number of their investment ideas wrong. The idea is not to fall in love with a stock.

6.      Averaging your positions is something best avoided. If you bought a stock and the price went down by 10%, the normal tendency is to buy more of the same stock to reduce the average cost. Firstly, you were wrong the first time and by averaging you are being doubly wrong. Secondly, you are increasing your exposure to one stock inordinately.

7.      Keep an audit trail of your trades. The best insights into successful investing are available when you look back and analyze your own trades. An investor has to be extremely willing to learn from his own mistakes and taking remedial action in the future.

8.      Don’t concentrate your portfolio on a handful of stories. You may rightly believe that auto industry could outperform in the next 5 years. But allocating 80% of your portfolio to auto defeats the basic grain of diversification. You need to spread your risk.

Investors should use their own judgment before investing in stocks. This skill can be learnt over a period of time. It is like planting a seed and watering it over the years for the plant to grow into a tree. It needs time and patience for the fruits to be harvested.

Higher Dividend Yielding Stocks

The quickly changing market landscape in a country like Pakistan makes it more difficult for investors to figure out what strategies will help grow their portfolio. Just when you think you’ve adjusted for market factors, like low interest rates, retirees and other investors turn to dividend paying stocks to provide them with a reliable source of income. In fact, investing in companies paying high dividend yields is often viewed as the "Sensible" or "Rainy Day" approach to creating an investment portfolio.

Stocks of the PSX:

Various companies offering shareholders a higher dividend yield, let's take a closer look at the yields of some stocks at Pakistan Stock Market - PSX.  We used AZEETRADE.COM a division of AZEE Securities, Stock Screener to pull a list of companies that are paying higher dividends in excess of 8.0% CY 2017.

Analyzing the above information reveals that top ten of the stocks in the KSE-100 Index were paying dividends of 8.0% to 15% or higher from varied sectors. 

Stocks Paying High Dividends:

Common stocks paying high dividends, we might conclude that high dividends were the result of limited internal investment opportunities.  Let's take a closer look, it helps us understand why companies offer dividends to their stockholders

Stocks that pay cash dividends to stockholders. Dividend payments are distributed to shareholders when a corporation generates profits or has a cash surplus. Some companies make regularly scheduled dividend payments. Others provide stockholders with the dividend bonus on a more sporadic basis.

There are a number of reasons to consider dividend paying stocks. Stocks that pay dividends can help generate cash flow, which can be used for living expenses or reinvested to increase the overall gains in your portfolio.

Buying dividend-paying stocks, keep in mind that the frequency or amounts of past dividend payments are not always indicators or future dividends. Companies can decide to greatly reduce the amount or frequency of dividend payments to shareholders.

What is KSE-100 Index and How to Calculate Indices:

A common question is asked in Pakistan Stock Market is " Kya Diyhan Hai Market Ka " ? However no specific answer, when the person is referring, what is the likely levels of the KSE-100? The KSE-100 is benchmark index which capture’s the general idea of the market movement. When the KSE-100 index consistently moving upwards for a longer period of time, its referred as TEZI in (Bull Market) local phrase. On the other hand, if the KSE100 are consistently moving downwards then it is generally referred to as a MANDI (Bear Market).

But what exactly is the KSE-100 and what do this indicates? How to trade the markets when the KSE-100 is going up and how to trade the market when the KSE-100 is going down? Indices are an important part of the stock market.  Here’s why we need stock indices.

As we have seen earlier, KSE-100 is a benchmark index for Pakistan Stock Exchanges. Some similar stocks are selected and grouped together to form an index. This classification may be on the basis of the industry the companies belong to, the size of the company, market capitalization or some other basis.

Market Cap Weight-age:

Market capitalization is the total market value of a company’s stock. This is calculated by multiplying the share price of a stock with the total number of stocks floated by the company.

Price Weight-age:

In this method, an index value is calculated on the basis of the company’s stock price, and not market capitalization.

Composition of KSE-100 index:

• The idea of an index is that the index should be broadly reflective of the overall Pakistan economy.
• Representation from all sectors of the PSX and includes the largest companies on the basis of their market capitalization.
• Represents over 85% of the market capitalization of the Exchange.
• KSE-100 Index is based on the free-float methodology that means only shares that are freely traded will be included in the calculation of the index values.
• The KSE-100 index is weighted based on market capitalization. The market cap is the product of the price of the stock and the number of shares of free float available. Greater the market cap, greater is the impact of the stock price movement on the KSE-100.

Azee Securities  through  its  daily  market  commentary  gives  the  highlights  of the major stocks contributors in 100-Index movement.

 
Globally, the performance of stock markets is judged by the performance of the indices. Dow Jones in the US, FTSE in the UK, DAX in Germany, Nikkei in Japan and Hang Seng in Hong Kong are the equity benchmark indices. For Pakistan, it is the KSE-100 Index!

Watch Out Crude Oil After Tension in Middle East:

Oil & Marketing Companies (OMC) climbing to 1 percent in early trade in Pakistan Stock Exchange – PSX on Thursday after further spike in crude oil prices in International market. Oil surges to $67.33, hitting 3-year higher yesterday.

One of the immediate factors helping to lift the oil prices are heaping concerns of a military escalation in Syria, but prices were some way off Wednesday's 2014 highs as bulging American supplies weighed.

Both Brent and WTI crude hit 2014 highs, after Saudi Arabia said it intercepted missiles over Riyadh and US President Donald Trump warned Russia of imminent military action in Syria.

Then Chinese President Xi Jinping showed signs of relenting in the trade spat with the United States, promising to open up China’s economy, including lowering tariffs on cars and enforcing intellectual property of foreign firms—something that the Trump administration has been eyeing for some time.

Higher crude oil price is always a concern for country like Pakistan which imports more than 70 percent of oil requirement. Government's still is falling short of target, worries about not letting fiscal deficit widen any further is a tough ask. However, imports remained under pressure due to continuation of oil prices on the higher side. The increase in fuels imports (oil, coal and LNG), both in terms of price as well as quantities, kept the balance of trade around $3 billion in March 2018.

The government may ask state oil marketing companies to absorb a potential hike on petrol and diesel retail prices or even by the centre in the run-up to the General Elections when OMCs were not allowed to hike prices in line with increase in global crude prices.

The final hour Stock Market saw activity somewhat improving as local institutional investors became active in select index names across E&Ps (+0.3%), fertilizers (-0.4%) and financials (-0.5%). Foreign Institutional Investors were net buyers of $3.84 million worth of shares during the Thursday’s trading session.

Banking Sector Lookout

The banking system is one of the most important parts of the economy. Banks perform two key functions - accepting money as deposit for safe-keeping and lending to individuals as well as government bodies. Major corporate companies also borrow from banks to fund their projects, keeping the economy running. This shows the sheer power the banking system wields. We are done with the Financial Year ended results season, most leading banking sector have released their financial results.  We would analyze the performance of the banking sector in CY17 & taken 18 listed commercial banks in consideration which represent 95% of the sector market capitalization.

Diminishing Earnings: 

This was even more eventful considering the tumultuous performance banking sector had in the last year. Earnings of the banking sector drop by 17% in the calendar year 2017 as profit after taxation stood at Rs 142.70 billion in CY17 against Rs 170.97 billion in CY16. Factors for decline in profitability are:

·         One time penalty of Habib bank,

·         Stable net interest income

·         Flat non funded income.

However, excluding one time penalty of Habib bank, profit after tax of the sector down by 3% to Rs 166.42 billion in CY17 versus Rs 170.97 billion in CY16 owing to higher administrative expenses despite 93% lower provisions. However, there’s more to the story.

Net Interest Income Remained Flat:

Interest income of the bank increased by 4% to Rs 864.42 billion against Rs 827.78 billion in CY16 mainly due to higher earnings assets and maturity of PIBs despite reduction in interest rate. Similarly, Interest expense surge by 9% to Rs 435.03 billion versus Rs 399.18 billion in CY16 mainly due to higher deposits growth. Consequently, net interest income marginally rise by 0.2% to Rs 429.39 billion in CY17 compared to Rs 428.60 billion in CY16. Net Interest Income is one of the most important indicators of profitability for banks. It measures the difference in interest paid on deposits and interest earned through loans. So, the larger the NII, the more a bank earns from its loans.

Massive Decline in Provisions Provided Support:

Profitability of the sector was supported by 93% YoY drop in provisions to Rs 377 million in CY17 against Rs 5,080 million in CY16 owing to lower speed of accretions and better coverage of bad loans during the period. On the other hand, non-funded income of the sector totaled to Rs176,260 million in CY17 which is 0.2% YoY up from non-interest income of Rs 175,911 million in CY16. This growth was mainly on back of higher income from fees and commission.

Recovery in Numbers:

Meezan Bank, Bank Al Habib and Bank Alfalah remain the top performers in banking sector with earnings growth of 13.5%, 6.5% & 6% respectively. Among the top five banks, MCB posted highest growth of 3% as profit after taxation (PAT) to clock at Rs 22.45 billion (EPS: Rs 18.95) compared to Rs 21.89 billion (EPS: Rs 18.47) in CY16 due to tax reversal as AZEE Securities research report said.

Overall, earnings of big 5 banks (excluding one off of HBL) namely ABL, HBL, MCB, NBP & UBL posted decline in earnings growth of 3.5% to Rs 114.42 billion from Rs 118.62 billion in CY16 owing to lower spreads.

Future Outlook:

 

Two areas which need to be attended urgently by the banking authorities to increase the development prospects of the country. Firstly, spreads between the deposit and lending rates need to be reduced and profits on deposits may be particularly increased so as to encourage the depositors to save more rather than consume. And secondly, the investment in securities like MTBs, PIBs and Sukuk need to be substantially reduced in order to advance more credit to the private sector to accelerate economic growth. However we have market weight stance on the sector with our Dec'18 target price for ABL, BAFL, HBL, MCB, NBP & UBL of Rs 104/share, Rs 53/share, Rs 215/share, Rs 242/share, Rs 56/share and Rs 219/share respectively.