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‘Dirt Cheap’ Pakistan Stocks Seen Rallying 15%, BMA Says

BMA Asset Management Co. CIO Farrukh Hussain
Farrukh Hussain, chief investment officer of BMA Asset Management Co. Photographer: Asim Hafeez/Bloomberg

Pakistan’s key stock index, Asia’s second-best performer this year, will probably climb 15 percent by December as energy and housing demand boosts oil and cement producers, according to BMA Asset Management Co.

The Karachi Stock Exchange 100 Index may rally as high as 17,000 this year, Farrukh Hussain, chief investment officer of Karachi-based BMA Asset, Pakistan’s second-biggest private money manager, said in a May 7 interview. That would be the highest level on record. The gauge closed at 14,613.59 yesterday. BMA’s Pakistan Opportunities Fund, the nation’s only offshore, dollar-based fund, returned 23 percent this year, beating 99 percent of its peers, according to data compiled by Bloomberg.

Pakistan’s benchmark stock index has surged 29 percent this year after the government eased rules on a capital-gains tax and demand for energy and building materials bolstered company earnings. The gauge, which slid 5.6 percent in 2011, is trading at 7.3 times estimated earnings, the lowest valuation in Asia, reflecting the country’s struggles to cope with militant attacks and political instability.

“Stocks are dirt cheap compared to regional markets and by any standard of the imagination,” Hussain said. “The change in the capital-gains tax regime provided the much needed impetus but the trigger this year is corporate earnings and market fundamentals.”

Earnings Growth

Company profits in Pakistan will grow an average 20 percent in the year ending June 30, said Hussain, who oversees about $97 million at BMA. Investors should buy fuel explorers, banks and cement stocks, which will have profit growth of 20 to 25 percent, he said.

BMA’s Pakistan Opportunities Fund holds shares in Pakistan Oilfields Ltd., the nation’s third-biggest energy explorer, Engro Corp., a maker of fertilizer, food and plastics, and Lucky Cement Ltd., the country’s biggest producer of the building material, Hussain said.

Pakistan Oilfields has gained 11 percent this year, Lucky Cement 77 percent, and Engro 67 percent. The shares are trading at less than 7 times estimated earnings, according to data compiled by Bloomberg.

“This is the world’s sixth-most populous country and a population of 180 million people who need housing, energy and food,” Muddassar Malik, chief executive officer of BMA, said.

‘Tough Call’

Malik in September 2010 predicted a rally in stocks after Pakistan’s deadliest floods, which caused losses estimated by the government at $7 billion. The Karachi 100 share index jumped 20 percent in the last three months of that year.

National elections scheduled for early next year may increase political risks and limit gains in stocks, Qasim Shah, head of international equity sales at Karachi-based Global Securities Pakistan Ltd., said by e-mail on May 8.

The Supreme Court found Prime Minister Yousuf Raza Gilani guilty of contempt in April for disobeying an order to reopen corruption cases against President Asif Ali Zardari, escalating a legal challenge to the leadership. Opposition parties are pressing for earlier polls.

“It’s a really tough call,” said Shah. “The market might slide in the second half of the year on the back of macroeconomic concerns and political uncertainty.” The Karachi 100 Index may settle at the 14,000 level or even lower by year-end, he said.

Pakistan’s benchmark gauge is the second-best performer among Asian benchmark indexes tracked by Bloomberg this year, only to be eclipsed by Vietnam’s VN Index, which has surged 39 percent.

Difficult Market

The stock gauge’s 5.6 percent drop last year as the country struggled to cope with floods and militant attacks helped drag valuations to 5.73 times estimated earnings on Jan. 13, the lowest level since March 2009. Militants have killed at least 35,000 people since 2006, according to government estimates.

“Pakistan is one of the most difficult markets in the world but whether there’s been war, economic slowdown or political turmoil, there’s double-digit growth in company earnings,” said Malik.

The country’s central bank cut interest rates by 2 percentage points last year to spur growth after floods sapped expansion, before pausing reductions in November. Floods in August forced more than 1 million people from their homes, according to government estimates. The country is also grappling with its worst energy crisis with power blackouts of as long as 18 hours a day in major cities.

Trading volumes have surged since Jan. 21 when Pakistan decided to ease rules on a capital-gains tax, exempting some investors from declaring their source of income. Average daily trading volume for the past three months almost tripled to 172 million shares from 61 million shares a year earlier, according to data compiled by Bloomberg.

“There’s been unprecedented turbulence in Pakistan and we don’t try to hide that,” Malik said. “But it’s also a story that’s yet to be discovered.”

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