May 10 (Bloomberg) -- Pakistani stocks are extending their biggest-ever rally as the fastest earnings growth in Asia and prospects for a successful transfer of power between civilian governments help fuel demand from international investors.
The KSE 100 Index has surged 18 percent this year, as higher commodity prices and consumer spending boosted earnings from Lucky Cement Ltd. to Pakistan Petroleum Ltd. Record profit has lured $190 million of stock purchases from overseas investors since Dec. 31, the most since the same period in 2010, data compiled by Bloomberg show. Earnings of companies in the benchmark gauge rose 43 percent in the past 12 months, the largest increase among 17 Asian equity indexes, the data show.
Rising profits and the slowest inflation since at least 2009 have overshadowed violence before tomorrow’s elections, which mark the first time in Pakistan’s history that a civilian government has completed a full five-year term. Earnings will continue to climb and spur more gains in the $50 billion equity market, said Andrew Brudenell, a London-based fund manager at HSBC Global Asset Management Ltd.
“I still see upside and am a buyer as although the market has performed well, the companies have grown earnings strongly too and there is more growth to come,” Brudenell said in an e-mail interview May 9. “We are encouraged by the country reaching the milestone of a civilian party completing a full term in office for the first time.”
Brudenell’s HSBC Frontier Markets Fund has returned 15 percent in 2013, beating 97 percent of peers tracked by Bloomberg.
At least 118 people have been killed and 494 injured in election-related violence. Pakistan has been ruled by the army for half its history since partition from India in 1947, with civilian governments ousted by generals following allegations of corruption and misrule.
The coalition government led by President Asif Ali Zardari’s Pakistan Peoples Party is the first elected administration to complete its five-year term and prepare to transfer power through a vote.
“Like everyone, we are hopeful for a peaceful and democratic election process resulting in a government that can take the country forward economically,” HSBC Global’s Brudenell said.
Recent opinion polls indicate no party will get more than 50 percent of the total in the national parliamentary ballot. In a Gallup Pakistan survey in March, two-time Prime Minister Nawaz Sharif’s Muslim League received 37 percent support, double that of Zardari’s Peoples Party and cricket icon Imran Khan’s Tehreek-e-Insaf group.
The KSE 100 Index rose 1.3 percent to 19,916.27 at the close, the most in Asia excluding Japan. The gauge is forecast to reach 21,000 by the end of the year, according to Nihal Cassim, chief executive officer of Safeway Fund Ltd., whose Safeway Mutual Fund has beaten peers by an average 16 percentage points in 2013.
“Earnings are relevant and rank above the political situation in terms of triggers” for the market, Cassim said in an April 25 interview in Karachi.
This year’s rally has driven the KSE 100 to trade at 7.8 times estimated earnings, the most expensive level in 22 months, according to data compiled by Bloomberg. The last time the gauge traded at this level -- in June 29, 2011 -- the measure slumped 15 percent in two months. The current valuation is still 45 percent below the MSCI Asia-Pacific Index’s 14.2 multiple.
While there is unlikely to be a drop in the index, the formation of a weak government would be a “risk factor,” Arif Habib, chairman of Arif Habib Corp., which operates stockbroking and financial services units, said in an interview in Karachi May 9. He expects the KSE 100 to rise to 22,000 by year-end.
KSE 100 profits are projected to rise 17 percent this year, compared with a 16 percent gain for the MSCI Asia Pacific Index, data compiled by Bloomberg show.
Lucky Cement, Pakistan’s biggest exporter of the building material, posted a 59 percent jump in third-quarter net income, according to an exchange filing last month. Pakistan Petroleum’s profit in the year to June 2012 rose 30 percent from the year earlier to a record, according to data compiled by Bloomberg. Shares of the two Karachi-based companies have gained at least 16 percent this year.
“Corporate earnings have been phenomenal,” Mir Muhammad Ali, chief executive officer of UBL Fund Managers Ltd., an asset management company which manages 35 billion rupees ($356 million), said in Karachi May 2. “The stock market should give a return of at least 20 percent in the next two to three years.”
Consumer companies are benefiting from purchases by the nation’s 190 million people, while oil and gas stocks are gaining from higher commodity prices, said Mir.
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. Oil on the New York Mercantile Exchange has advanced about 5 percent this year.
Stocks have also risen on optimism lower borrowing costs will help bolster an economy that grew 3.7 percent in the 12 months through June 2012, less than the government’s 4.2 percent goal.
The nation’s central bank left the discount rate at 9.5 percent last month, the lowest level in five years, as consumer prices rose 6.57 percent in March, the slowest pace since Bloomberg started tracking the data in 2009.
“Foreign inflows will definitely continue,” UBL’s Mir said. “Once the new government is installed, there will be less uncertainty, and we will see investments coming in from all over the place.”
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