Pakistan Attractive as Growth Outweighs Violence, Atlas Says
By Naween A Mangi for Bloomberg
Atlas Asset Management Ltd., manager of Pakistan’s best-performing equity fund, said Asia’s cheapest stock market offers “attractive returns” as the economy grows even with mounting terrorist attacks and political violence.
“I really don’t spend any time worrying about law and order,” said Muhammad Abdul Samad, 40, who oversees $77 million in Pakistani stocks and bonds as chief investment officer at Atlas Asset in Karachi. “If you want to make returns, you have to look at the positives: we have a huge market of 180 million people and the economy is still growing.”
Gains in National Refinery Ltd. (NRL), the second-biggest oil processor, and Attock Petroleum Ltd. (APL), a fuel retailer, boosted Atlas’s top fund in the year ended June, Samad said. For the fiscal year starting July, it’s seeking investments in banks, oil and gas, and fertilizer industries, he said.
Pakistan’s benchmark stock index, which trades at 6.4 times estimated earnings, the lowest in Asia, has fallen 9 percent since the end of June as escalating violence hurt business confidence. Prime Minister Yousuf Raza Gilani’s government aims to boost economic growth to 4.2 percent in the year to June 30, 2012, from 2.4 percent in the previous 12 months.
Turmoil on global stock markets may prompt the fund to change its asset allocation, increasing cash holdings or preferring defensive stocks with higher dividend yields, Samad said on Aug. 5, when the MSCI Asia Pacific Index tumbled more than 4 percent to cap its worst week since October 2008.
“Selling from foreign portfolio investors is affecting the local market,” Samad said.
Last year, global funds bought $344 million worth of Pakistani stocks compared with net sales of $65 million, according to central bank data. More than 35,000 Pakistanis have been killed in terrorist attacks since 2006 as Taliban militants retaliate against military offensives in the northwest, according to the government.
Samad’s 650 million rupee ($7.5 million) Atlas Stock Market Fund outperformed all Pakistan’s 30 equity funds, according to Invest Capital Markets Ltd. The fund returned 40 percent in the 12 months ended June 30 and beat the 29 percent return of the benchmark Karachi Stock Exchange 100 Index.
His top five holdings as of June 30 were Nishat Mills Ltd., MCB Bank Ltd., Pakistan Oilfields Ltd., United Bank Ltd. and Allied Bank Ltd.
“Banks are going to post attractive earnings because if interest rates come down, they will lend more to the private sector and if they don’t, they will invest in high-yielding government securities,” said Samad, adding that the three banks are among his top picks this fiscal year. “Banks are in a comfortable position either way.” Pakistan’s central bank unexpectedly cut the benchmark interest rate to 13.5 percent on July 30, after holding it at 14 percent, one of the world’s highest, for four straight reviews.
In the oil and gas sector, Samad likes Pakistan Oilfields, Pakistan Petroleum Ltd., and Attock Petroleum. Pakistan, which imports 80 percent of its fuel needs, is increasing production to reduce reliance on shipments from overseas. He also favors Fauji Fertilizer Ltd., the biggest urea maker, and Fauji Fertilizer Bin Qasim Ltd. (FFBL), a fertilizer producer.
Samad said investors who “select carefully” can make a return of as much as 30 percent this year because Pakistani stocks are “heavily undervalued.” Samad said he keeps about 4 percent of his fund “active” and may sell if a stock rises by 10 percent to 15 percent.
“We don’t go for speculation or price momentum and we don’t churn the mix too much,” said Samad, who has an MBA from Southeastern University in London and has been at the fund management firm since 2005. “If the company is fundamentally strong, it will definitely outperform the market.”
There are 137 funds in Pakistan overseeing 250 billion rupees as of June 30, up 25 percent from a year ago, according to Invest Capital, equivalent to 4 percent of the 5.9 trillion rupees sitting in the nation’s bank deposits.
“Active fund management, timely investment and divestment, as well as the performance of some stocks like Attock Petroleum were main reasons for Atlas’s outperformance,” said Mazhar Sabir, an analyst at Invest Capital Markets in Karachi.
Samad said Atlas may introduce a government bond fund this year targeting investments of three to five years and is considering a dividend-yield equity fund and a sector-specific stock fund next year.
“In the short run, law and order problems definitely hurt investors,” Samad said. “But in the long run, there’s no impact. And we’re here for the long run.”