KARACHI, May 12: Foreign investors may finally be ready to take a look at stock markets now that tensions in the region have eased.

Although the KSE was the world’s best performer in percentage terms last year, foreigners largely stayed away, scared off first by a US-led attack on Afghanistan in late 2001 and then by a confrontation between Pakistan and India.

But that may be about change, according to some analysts.

Asif Qureshi, head of research at Karachi-based Elixir Securities, said he sees renewed foreign interest in Pakistan. Qureshi has recently returned from the UK, where he and his colleagues met with 12 fund managers to promote investment in equities in Pakistan.

“There were concerns about the political situation here, but the impression I got was nobody wants to miss a second rally here,” Qureshi said. Last year, the Karachi Stock Exchange’s benchmark KSE-100 share index soared 112pc. The gains were powered by local financial institutions and retail investors, who bought into a market characterized by falling interest rates and a surplus of liquidity as foreign-exchange remittances from overseas Pakistanis flooded the banking sector.

And the market has continued to move ahead in 2003, inspired by an end to the war in Iraq and prospects of peace talks between India and Pakistan. The index has risen 10pc so far this year, closing at 2972.42 Friday, and is headed toward the psychologically important record of 3000. “The valuations are still strong. The market still has a 10pc dividend yield and a 10pc earnings growth in 2003 so there’s still scope to gain 20pc this year,” Qureshi said.

He said foreign investors are likely to look for growth stocks, particularly in the banking and energy sectors. But foreigners may not jump into the market right away, said Mohammad Sohail, research head at Investcap Securities. He said the index already is at an “inflated level” and that foreign funds are likely to wait for a correction.

“When foreigners came into our market in the 1990s they were looking for 15pc-20pc dividend yield. Now our market is offering 10pc-12pc which isn’t that attractive,” Sohail said.

However, he said foreigners may target the shares of Pakistan’s biggest companies like Pakistan Telecommunications Co, Hub Power Co and Pakistan State Oil.

The shares of these three doubled in value in 2002, although they have given up some of these gains since the beginning of the year.

Sohail said he sees Hubco’s shares advancing to Rs39 a share in 2003, up from a closing price Friday of Rs35.15.

Foreign interest in Pakistan’s stock market also could get a boost if flights are allowed to resume between Pakistan and India. Flights were banned in January last year at the height of tensions between the two countries.

“Foreign fund managers who used to visit India were prevented from visiting Pakistan because of the ban on flights and travel advisories,” Qureshi said. But the ban is expected to be lifted as the two neighbours move to normalize relations.

“Most fund managers who are expected to come to India in July and August might take a peak at Pakistan,” said Qureshi.

Pakistan’s stock market capitalization has risen to $11.5 billion from just $6.5 billion at the beginning of 2002, but it is still one of Asia’s smallest markets.

So while liquidity alone may not be enough to lure foreign investors, said Aqib Elahi Mehboob, research head at AKD Securities, there are other attractions. He pointed to the commitment shown by policy makers to bolster economic growth and speed up the privatization and listing of state-run companies.

“We believe the stellar market performance is set to continue over the medium term with an immediate index target of 3362 points over the next six months,” Elahi said.—Dow Jones Newswires