Pakistan is handing equity investors the world’s best risk-adjusted returns as terrorist attacks, power blackouts and a war with Taliban insurgents fail to curb gains in consumer spending that sent profits to a record high.

The KSE 100 Index, the benchmark for Pakistan’s $43 billion equity market, rose 7.3 percent in the past three years when adjusted for price swings, the top gain among 72 markets worldwide, according to the RISKLESS RETURN RANKING.

Pakistan had lower stock volatility than 82 percent of the nations including the U.S. (SPX) Over five years, Pakistan’s risk- adjusted returns ranked eighth.

The country’s 190 million people are boosting purchases three times faster than Asian peers as higher rural incomes and record remittances outweigh fighting on the Afghan border, violence in Karachi that led to at least 2,100 deaths this year and power outages that sparked rioting.

The region’s fastestearnings growth may increase economic stability, according to Karachi-based Atlas Asset Management Ltd. Foreign investors added to holdings for five straight months, lured by Asia’s lowest valuations and biggest dividend yields.

“Stocks are very cheap and there are some very good businesses in Pakistan,” said Andrew Brudenell, whose HSBC Frontier Markets Fund has returned 18 percent this year, beating 92 percent of peers tracked by Bloomberg, and holds more shares in the country than are represented in benchmark indexes. “We still think there’s some positive growth to come from the markets.”

Record High

The KSE 100 returned 52 percent this year through November. The gauge climbed 49 percent since al-Qaeda leader Osama bin Laden was killed by U.S. commandos during a raid on his compound in Abbottabad 18 months ago. It increased less than 0.1 percent to a record close of 16,256.97 today.

Dividends in Pakistan have also climbed at the fastest pace in the region. Payouts increased 49 percent in the past 12 months, giving the KSE 100 index a dividend yield of 6.6 percent, double the 3.3 percent average in Asia, Bloomberg data show.

Equity volatility is low in Pakistan partly because investors are no longer surprised by violence in the country, according to Muhammad Umair Chauhan, who oversees the equivalent of $127 million as the chief investment officer at Lakson Investments Ltd. in Karachi. Terror attacks have killed more than 40,000 people in Pakistan, President Asif Ali Zardari said in a speech in Tehran in August, without giving a time frame.

Earnings in the KSE 100 index advanced 45 percent during the past year, the largest gain among 17 Asian equity indexes, and this month hit the highest level since Bloomberg began tracking the data in 2005.

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. While the growth in Pakistan may slow to 6.6 percent in 2012, it will still exceed the 5.3 percent pace in Asia, according to Euromonitor estimates.

Unilever, Colgate, Lucky Cement, Engro-foods

• Engro Foods, which has climbed 243 percent, monitors the movement of delivery trucks with electronic trackers and insures inventory against looting and theft, Afnan Ahsan, the company’s chief executive officer, wrote in an e-mailed response to questions on Nov. 14.

• Consumer-related companies are leading gains on Pakistan’s stock market. National Foods Ltd. (NATF), whose products include snack foods and fruit preserves, jumped 362 percent this year. Unilever Pakistan has returned 81 percent and Colgate-Palmolive Pakistan Ltd. (COLG), a unit of the world’s largest toothpaste maker, climbed 145 percent.

• Unilever and Colgate-Palmolive said last year they are sending sales representatives into rural areas, where higher crop prices have lifted the incomes of farmers and money transfers from Pakistanis overseas have boosted consumers’ spending power.

Pakistan’s biggest company by market value, has jumped 28 percent this year after output rose and the energy shortage spurred the state-owned producer to step up exploration efforts.

• Lucky Cement Ltd. (LUCK), the nation’s biggest producer, has advanced 99 percent as the Karachi-based company’s annual profit climbed to a record and construction increased in the wake of flooding this year that left more than 280,000 people in relief camps.

The government is targeting growth of 4.3 percent this financial year through June, compared with 3.7 percent for the previous year.

Shares of Islamabad-based Oil & Gas Development trade for 8 times profit, compared with 11 times for the MSCI All-Country World Energy Index (MXWD0EN), according to data compiled by Bloomberg. Even after more than quadrupling this year, National Foods is valued at 21 times earnings, less than the average multiple of 28 for global peers. (Monitoring desk)