Bloomberg News

Pakistan Stocks Best as Violence Ignored: Riskless Return

November 21, 2012

Pakistan Stocks Beat World as Violence Ignored

A man looks at financial data screens in the trading hall of the Karachi Stock Exchange in Karachi, Pakistan. Photographer: Asim Hafeez/Bloomberg

Pakistan is handing equity investors the world’s best risk-adjusted returns as terrorist attacks, power blackouts and a war with Taliban insurgents fail to curb gains in consumer spending that sent profits to a record high.

The KSE 100 Index, the benchmark for Pakistan’s $43 billion equity market, rose 7.3 percent in the past three years when adjusted for price swings, the top gain among 72 markets worldwide, according to the BLOOMBERG RISKLESS RETURN RANKING. Pakistan had lower stock volatility than 82 percent of the nations including the U.S. (SPX) Over five years, Pakistan’s risk- adjusted returns ranked eighth.

The country’s 190 million people are boosting purchases three times faster than Asian peers as higher rural incomes and record remittances outweigh fighting on the Afghan border, violence in Karachi that led to at least 2,100 deaths this year and power outages that sparked rioting. The region’s fastest earnings growth may increase economic stability, according to Karachi-based Atlas Asset Management Ltd. Foreign investors added to holdings for five straight months, lured by Asia’s lowest valuations and biggest dividend yields.

“Stocks are very cheap and there are some very good businesses in Pakistan,” said Andrew Brudenell, whose HSBC Frontier Markets Fund has returned 18 percent this year, beating 92 percent of peers (HSFAX:US) tracked by Bloomberg, and holds more shares in the country than are represented in benchmark indexes. “We still think there’s some positive growth to come from the markets.”

Record High

The KSE 100 returned 52 percent this year through yesterday. The gauge climbed 49 percent since al-Qaeda leader Osama bin Laden was killed by U.S. commandos during a raid on his compound in Abbottabad 18 months ago. It increased less than 0.1 percent to a record close of 16,256.97 today.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

The Sri Lanka Colombo All-Share Index (CSEALL)’s 6 percent risk- adjusted return was the second-biggest worldwide in the past three years, while the Standard & Poor’s 500 Index of U.S. companies had a 1.9 percent gain.

Profits Surge

Equity volatility is low in Pakistan partly because investors are no longer surprised by violence in the country, according to Muhammad Umair Chauhan, who oversees the equivalent of $127 million as the chief investment officer at Lakson Investments Ltd. in Karachi. Terror attacks have killed more than 40,000 people in Pakistan, President Asif Ali Zardari said in a speech in Tehran in August, without giving a time frame.

Earnings in the KSE 100 index advanced 45 percent during the past year, the largest gain among 17 Asian equity indexes, and this month hit the highest level since Bloomberg began tracking the data in 2005.

Consumer spending in Pakistan has increased at a 26 percent average pace the past three years, compared with 7.7 percent for Asia, according to data compiled by Euromonitor International, a consumer research firm. While the growth in Pakistan may slow to 6.6 percent in 2012, it will still exceed the 5.3 percent pace in Asia, according to Euromonitor estimates.

Engro Foods Ltd. (EFOODS), a Karachi-based seller of dairy products, reported a 214 percent jump in net income for the third quarter, while Unilever Pakistan Ltd. (ULEVER), a unit of the world’s second- biggest consumer-goods company, had a 36 percent gain, according to data compiled by Bloomberg.

Foreign Buyers

Dividends in Pakistan have also climbed at the fastest pace in the region. Payouts increased 49 percent in the past 12 months, giving the KSE 100 index a dividend yield of 6.6 percent, double the 3.3 percent average in Asia, Bloomberg data show.

“When corporate profitability is good, investors tend to ignore factors such as political instability and violence in the city,” said Chauhan, who’s based in Karachi, the commercial hub that generates more than half of the country’s tax revenue.

Foreign investors have purchased a net $153 million of Pakistan shares since the beginning of July, according to data from the Karachi Stock Exchange. Overseas holdings amount to about 20 percent of the bourse’s free float, or shares available for trading, according to Adnan Katchi, the head of international equity sales at Arif Habib Ltd.

Debt Rally

Bond investors are also growing more confident. Pakistan’s international debt, rated Caa1 at Moody’s Investors Service, or seven levels below investment grade, has returned 32 percent this year, according to JPMorgan Chase & Co.’s Next Generation Markets Index. Yields hit a two-year low of 8.5 percent on Oct. 26.

“There has been a consistent flow into the market,” Muhammad Asim, the head of equities at Arif Habib Investments Ltd., which oversees about $365 million, said in an Oct. 22 phone interview from Karachi.

Relatively low trading volumes on the Karachi Stock Exchange may make it difficult for investors to sell their holdings should volatility increase. About $41 million of shares in the KSE 100 changed hands daily on average during the past year, compared with $1.3 billion for stocks in Russia’s Micex Index (INDEXCF) and $10 billion for the Shanghai Composite Index in China, the largest emerging market, data compiled by Bloomberg show.

Karachi Violence

Regulators imposed emergency trading limits in an attempt to halt a tumble in stocks during the global financial crisis in 2008. While the curbs prevented the KSE 100 index (KSE100) from falling for almost four months, the gauge plunged 48 percent in less than two months after the restrictions were lifted.

Pakistan’s economic growth has been restrained by terrorism, lawlessness, power cuts and political instability.

A 14-year-old female Pakistani activist in the Swat Valley was shot in the head by Taliban gunmen on Oct. 9, while a police investigator and four other people were killed in a suicide attack in the northwestern city of Peshawar this month.

Violence and extortion in Karachi have spurred more than 30,000 merchants to leave the city in the past two years, according to Atiq Mir, chairman of All Karachi Traders’ Alliance, which has 650,000 members. Power blackouts lasting as long as 18 hours a day have caused textile factories to shut.

Ashfaq Parvez Kayani, Pakistan’s army chief, clashed with Zardari’s administration this year over claims the government sought U.S. help to prevent a coup following bin Laden’s death. Zardari’s predecessor, Pervez Musharraf, seized control of Pakistan in 1999. The former general stepped down as president in 2008 to avoid impeachment charges.

Volatile Politics

“People will turn their focus towards political triggers,” Sajjad Anwar, who oversees about $520 million as the chief investment officer at NBP Fullerton Asset Management Ltd., said in an Oct. 22 phone interview from Karachi. “I am expecting a correction, and some of the big players are on the selling side. Investors will rethink after the earnings season ends.”

Pakistani companies have found ways to cope with instability. TRG Pakistan (TRG), which manages call centers in the country’s three biggest cities, splits up teams of employees working for a single client across several locations, Nadeem Elahi, the firm’s country head, said in an interview on Nov. 13.

That allows the company to maintain operations if unrest or transport strikes in one part of the nation prevent workers from reaching the office, he said. TRG shares have gained 248 percent in Karachi trading this year.

Unilever, Colgate

Engro Foods, which has climbed 243 percent, monitors the movement of delivery trucks with electronic trackers and insures inventory against looting and theft, Afnan Ahsan, the company’s chief executive officer, wrote in an e-mailed response to questions on Nov. 14.

“As a home-grown Pakistani company we continue to maintain a positive outlook on the growth potential of the country and its markets,” Ahsan wrote. “To guard against security concerns our teams continuously monitor on-ground developments.”

Consumer-related companies are leading gains on Pakistan’s stock market. National Foods Ltd. (NATF), whose products include snack foods and fruit preserves, jumped 362 percent this year. Unilever Pakistan has returned 81 percent and Colgate-Palmolive Pakistan Ltd. (COLG), a unit of the world’s largest toothpaste maker, climbed 145 percent.

Unilever and Colgate-Palmolive said last year they are sending sales representatives into rural areas, where higher crop prices have lifted the incomes of farmers and money transfers from Pakistanis overseas have boosted consumers’ spending power.

Crop Boost

The S&P GSCI Agriculture Spot Index has increased 37 percent during the past three years, amid surging prices for wheat, Pakistan’s biggest food crop. Remittances from Pakistan’s 6.3 million citizens living overseas jumped 34 percent in October from a year earlier to a record $1.4 billion, government figures show. Private consumption makes up about 75 percent of Pakistan’s gross domestic product, according to the nation’s annual economic survey.

The country is luring more of the world’s biggest consumer brands as spending increases. Debenhams Plc (DEB), the U.K.’s second- largest department-store chain, and Nine West Group Inc., a seller of women’s shoes and handbags owned by New York-based Jones Group Inc. (JNY:US), opened their first Pakistan outlets this year.

Lucky Cement

“Companies can make excellent returns in particularly hard to operate in markets with limited competition,” Slim Feriani, who oversees about $800 million as the chief investment officer of Advance Emerging Capital in London, said in e-mailed comments on Oct. 25. The firm’s London-listed Advance Frontier Markets Fund (AFMF) has investments in Pakistan, Feriani said.

Stocks outside consumer industries are also rallying. Oil & Gas Development Co. (OGDC), Pakistan’s biggest company by market value, has jumped 28 percent this year after output rose and the energy shortage spurred the state-owned producer to step up exploration efforts.

Lucky Cement Ltd. (LUCK), the nation’s biggest producer, has advanced 99 percent as the Karachi-based company’s annual profit climbed to a record and construction increased in the wake of flooding this year that left more than 280,000 people in relief camps.

Policy makers have taken steps to boost economic growth and support the equity market. Pakistan’s central bank lowered borrowing costs twice since August, cutting the benchmark interest rate to 10 percent from 12 percent as inflation eased to a three-year low in October. Regulators relaxed rules tied to the nation’s capital-gains tax in January.

Relative Value

The government is targeting growth of 4.3 percent this financial year through June, compared with 3.7 percent for the previous year.

“Companies are doing well so ultimately the economy prospects will get better,” Muhammad Abdul Samad, the chief investment officer of Atlas Asset Management, which oversees about $90 million, said in a telephone interview in Karachi on Nov. 5.

Even after its rally, the KSE 100 index is valued at 8 times reported 12-month earnings, a 25 percent discount versus its five-year average.

The gauge is less expensive than equity indexes in every major Asian market. Russia’s Micex index, the cheapest stock measure among major markets worldwide, is valued at 5.9 times profits.

Shares of Islamabad-based Oil & Gas Development trade for 8 times profit, compared with 11 times for the MSCI All-Country World Energy Index (MXWD0EN), according to data compiled by Bloomberg. Even after more than quadrupling this year, National Foods is valued at 21 times earnings, less than the average multiple of 28 for global peers.

“We don’t think Pakistan stands out as having had too strong a move,” said Brudenell, the fund manager at HSBC Global Asset Management. “There is upside from these levels.”

To contact the reporters on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net; Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net; Naween A. Mangi at nmangi1@bloomberg.net


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