LOS ANGELES, Sept 18: A leading US newspaper, USA Today, has termed Karachi Stock Exchange as one of the best performing bourses in the world with index rising 56pc since Sept 11 terrorist attacks.

Against all odds, Pakistan has the world’s best-performing stock market. The Karachi Stock Exchange index is up 56pc since the Sept 11 terror attacks even as the Standard & Poor’s 500 has fallen 19pc and the Bloomberg European 500 declined about 27pc, it said.

It said one American hedge fund manager invested $30 million immediately after Sept

11 and pocketed a 30pc profit — $9 million — three weeks later.

Although the market’s total capitalization remains 15pc below the December 1997 peak of $8.9 billion — equivalent to one midcap US company — traders say interest from Europe, the Middle East and the US is on the rise.

“Foreign fund managers have two questions,” says Ali Ansari, chief executive of AKD Securities, Pakistan’s largest brokerage, which handles 20pc of the trading volume at the Karachi Stock Exchange. “First, they want to know why” Pakistan’s stock markets are soaring. “Second, they want to know if it’s sustainable.

“9/11 has been a freak thing in our case,” he says. “Without it, we’d still be stuck in the mire.”

“What changed after 9/11 is Pakistan’s overall risk profile,” says Samir Ahmed, chief of the Lahore Stock Exchange. “We went from being a pariah state to a more acceptable member of the world community, even though there are questions about democracy.”

Similar are the views of Khalid Mirza, 56, head of Securities and Exchange Commission of Pakistan (SECP). “It was hopelessly undervalued. It was almost a no-brainer, honestly, to invest in it.”

Mirza, who left a World Bank job in March 2000 to take over one of the world’s most discredited and least regulated securities markets, pushed hard for the independent management now in place at Pakistan’s three stock exchanges — Islamabad, Lahore and Karachi — and he imposed tough new auditing and management policies at the country’s 725 listed companies. He also supports efforts by the exchanges, which list the same shares, to electronically link their trading floors. That should produce more uniform pricing.

However, the newspaper warned of lurking inherent dangers, besides Islamic extremism, faced by the market.

The biggest danger among them is the Badla trading system, a highly leveraged lending system through a peculiar financing mechanism.

Unknown outside of India and Pakistan, badla allows investors to purchase stock with borrowed funds and defer final payment for as long as they pay the daily financing cost. Up to two-thirds of Pakistan stock trades are financed with badla borrowing. Total badla financing, including carryovers from the previous day, often exceeds the value of all shares traded.

In May 2000, several brokers defaulted on badla share purchases after the collapse of a scheme in which they orchestrated trades among themselves to inflate the shares’ value.

Still the best returns: But for believers in market fundamentals, Pakistani stocks feature another trait almost unknown elsewhere in the world. The KSE 100 annual dividend yield of 11.6pc is substantially higher than the 7pc interest-rate yield of government T-bills. Usually, shares appeal to investors because of their appreciation potential, not to match the yields on bonds and savings accounts. In Pakistan, stock investors enjoy both.

Take Hubco, an independent power provider. Battered by a series of past mishaps, Hubco sold for about 25 cents a share in mid-September last year while paying an annual dividend of more than 12 cents a share.

In two years, an investor who purchased shares at the 25-cent price could recoup his cost. Meanwhile, the price of the shares has surged nearly 50pc.

The advances haven’t registered with the Pakistani public yet: Less than 1pc of the 144 million population — with a per capita income of $1.08 a day — own shares. Only 25,000 people trade 100 shares a year.

Until recently, the changes hadn’t registered with global investors, either. But foreign investment is trickling back for the first time in five years, up $13.4 million through July compared with a $32.2 million outflow last September to December.