Sept. 13 (Bloomberg) -- Peruvian stocks became the world's best performers this year as metals prices soared. A slump in silver, gold, copper and zinc, whose producers account for half the trading on the Lima exchange, may end the five-year rally.

The country, the largest silver and tin producer, also ranks fourth globally in copper production, fifth in gold and third in zinc. Prices of those commodities have dropped in recent months.

The declines may weigh on shares of mining companies such as Southern Copper Corp., Volcan Cia. Minera, Cia. de Minas Buenaventura SA, Minsur SA and Cia. Minera Milpo. They are five of the 10 biggest companies in Peru by market value.

``A large part of market performance is based on metals prices, and they've clearly hit their ceiling,'' said Jorge Luis Rodriguez, chief economist at SAB Centura, a Lima-based brokerage. ``The short-term vision of some investors means there's overshooting in some stocks.''

The Lima general stock index has risen 126 percent in dollar terms this year, the biggest gain among 80 benchmarks tracked by Bloomberg. Morgan Stanley Capital International's Latin America Index has risen 12 percent. Peru's index hasn't posted an annual loss since 2001, climbing an average of 42 percent a year.

Shares of Southern, the world's fifth-largest copper miner, have gained 32 percent this year. Volcan has soared more than sixfold and Milpo has more than quadrupled. Both companies are zinc producers. Minsur, the world's No. 1 tin producer, has climbed 30 percent.

Falling Prices

This week's commodity slide has interrupted the trend. The Lima index on Sept. 11 fell 1.5 percent, its biggest loss in almost two months, as commodity prices slumped. Southern shares lost 5.5 percent. Silver futures in New York have slid 15 percent in the past week. Copper has lost 15 percent from its May peak. Gold this week fell below $600 an ounce for the first time in 10 weeks.

The index rose for the first day in three today, gaining 54.04, or 0.5 percent, to 10,299.44.

Peru, with a population of 28 million people, has a stock market valued at $42 billion, according to data compiled by Bloomberg. The market is Latin America's fifth biggest, behind Brazil, Mexico, Chile and Argentina and ahead of Colombia and Venezuela.

It would take more listed companies and more active daily share trading to bring in more foreign investors, said Geoffrey Dennis, Latin American strategist for Citigroup Inc. in New York.

``Peru needs some more issuance to diminish its heavy dependence on the mining industry,'' Dennis said in a phone interview. ``You need to give investors more choice.''

Institutional Appeal

Only five Peruvian companies -- Southern, Buenaventura, Volcan, Minsur and Credicorp Ltd., which owns banks and insurers -- qualify for inclusion in indexes compiled by Morgan Stanley Capital International, compared with 54 Brazilian stocks. The firm says it chooses stocks that institutional investors can easily buy. About $3 trillion is benchmarked to MSCI indexes.

To be sure, the world's economy is still growing, and countries such as China and India are consuming commodities. That indicates to money manager Jaime Caceres that Peruvian stocks won't plunge.

``With the continual demand for minerals, there's still room for growth,'' said Caceres, president of AFP Integra, Peru's largest private pension fund. ``It's difficult to foresee anything that could derail the stock market in the medium term.''

Caceres, who manages $3.7 billion, increased his stock holdings by 40 percent to $1.47 billion through July 31 from $1.05 billion a year ago, according to Peru's Banking & Insurance Superintendency. He was lured by record earnings.

Budget Surplus

Peru also has used the growth provided by metals to put its finances in order. The country posted average annual growth of 5 percent from 2001 to 2005, led by copper, gold, natural gas and fishmeal, said Michael Hood, chief Latin America economist with Barclays Capital Inc. in New York.

During the five-year mandate of former President Alejandro Toledo, the government cut its debt to 38 percent of gross domestic product from 48 percent in 2001 and paid $1.55 billion of Paris Club debt to governments early.

Inflation was running at an annual rate of 1.9 percent through August, the lowest in Latin America. The Finance Ministry forecast a 0.6 percent fiscal surplus this year on an expected 30 percent surge in exports, and a $7 billion trade surplus.

Fitch Ratings last month raised Peru's foreign-currency debt rating to BB+, one level below investment grade, the same as Panama and Guatemala, citing sustained export growth and the likelihood of a government budget surplus this year. Alan Garcia succeeded Toledo as president in July.

Still, the stock market now is overpriced, according to Alejandro Baez-Sacasa, who invests in Latin America for New York- based Neon Capital Ltd.

``At some point, commodity prices are going to come down, and that's going to affect the market,'' said Baez-Sacasa, who sold the firm's Peruvian stocks in 2002. ``When it does, there's going to be an opportunity for us. This isn't the time to invest.''

To contact the reporter on this story: Alex Emery in Lima at at aemery1@bloomberg.net

Last Updated: September 13, 2006 17:32 EDT