Quoting Hugo, who famously said ‘no army can stop an idea whose time has come’, Ali Farid Khwaja, Director at KASB Securities wrote about the promise of retail investors at Pakistan Stock Exchange. Ali pins his trust and hopes on digitisation, echoing the sentiments of PSX’s newly appointed CEO Farrukh Khan who also thinks building a large retail base is no longer as challenging given both technological and (a few) regulatory changes.

Reportedly, the PSX is working towards new products (it recently launched an ETF) and streamlining regulatory and governance affairs to attract retail investors via mutual funds, pension schemes, and insurance companies. This is alongside its efforts to directly reach out to retail investors, courtesy awareness campaign across various platforms. (See Farrukh’s interview with BR Research in this paper’s Brief Recording section, June 12, 2020).

To this end, few measures are critical. One, iron out regulations to allow overseas Pakistanis and foreign investors to invest in mutual funds through the SCRA account. Two, allow distribution of mutual funds through online platforms of brokerage houses to help asset management companies increase their outreach.

And third, develop a rating mechanism to compare and evaluate the quality of both brokerage houses and asset management companies which are critical to the expansion of retail footprint since not every individual can pick stocks. This should be done periodically across multiple criteria and made public to allow retail investors to build a trust in the system.

When trust in the system is lost - as seems to be case since the crashes of 2005 and 2006 and evidenced by the popular perception that stocks are akin to gambling - then technology alone is not the panacea. Trust has to be gained through a system that regularly evaluates the cogs of the wheel and the drivers of the wheel including the comparative performance of mutual fund managers and investment committees whose decisions affect the performance of various funds under their management.

But perhaps two of the biggest stumbling blocks to promise of retail investors is the National Savings Scheme and the undocumented real estate sector. Although Covid-19 has flat lined investment in real estate, the government is looking to kickstart growth and development in the sector, hoping that it would in turn drive national output.

There is no denying the importance of housing and real estate sector at large. But if it remains undocumented - a haven of sorts allowing all and sundry to park their savings in the shadows - then it will continue to pose a serious threat to the well documented stock market. The PSX and the wider stock market community would do well to lobby for real estate documentation and comparable taxation, although of course they would do well to get new companies listed at both regular and SME counters. Failure to attract new listings would be akin to attracting more money chasing the same old companies, a huge percentage of which (in market cap terms) have either thin float or are victims of the circular debt problem.