ISLAMABAD - The investors are heading to Pakistan to benefit from a newly elected business-friendly government that is rolling out an economic programme to aid the struggling economy, the Wall Street Journal reported.

In its report published, the American daily said the benchmark index traded in the financial capital Karachi jumped 49.4pc last year, ranking as one of the world’s top performers. The market jumped another 2.8pc Thursday, the first trading day of 2014. The report said the rally is also part of a broad move by money managers, willing to take on high risks in frontier markets across the globe on hopes of juicy returns that beat traditional emerging markets. That bet paid off handsomely in 2013 with countries including Argentina, Venezuela and Vietnam also scoring big gains although they also have a history of volatile movements and sudden declines.

The report observed that the catalyst in Pakistan was the election in May of the Pakistan Muslim League-Nawaz led by Nawaz Sharif, a business-friendly politician. It is the first time in the nation’s history an elected government has handed over power to another, raising expectations for improved political stability.

Flows from foreign investors into Pakistan reached $283 million from the beginning of May, the month of the election, to the end of 2013, according to the National Clearing Company of Pakistan. Global investors have also snapped up Pakistani government bonds with yields, which move inversely to prices, falling to 7.54pc recently from as high as 11.69pc in April on the 10-year bond.

In a further sign of growing confidence, the government said last month it is also aiming to sell billions of rupee debt aimed at the Pakistani diaspora. A spokesman for the finance ministry said there is currently no specific timeframe on the issuance of the bonds.

It said that the optimism stems from the government paying off $5 billion in debt that was weighing on the energy sector, freeing up funds at fuel importers and power producers and distributors. The country also agreed to a long-term bailout loan of at least $6.6 billion from the International Monetary Fund to avoid a potential balance of payments crisis. The government has in addition announced a far reaching privatization programme which will include the national airline and electricity producers. The energy move was important given the country is plagued by electricity shortages, while the oil and gas sector accounts for nearly a third of the benchmark index in Karachi. The largest company on the index, energy firm Oil and Gas Development Co. rose 43.5% last year. “Given that the general impression of the new government has been corporate friendly that is a very strong factor that made people more optimistic about Pakistan,” said Mattias Martinsson, chief investment officer and partner at fund company Tundra Fonder in Stockholm, which runs a $30 million Pakistan fund.

For all the gains however, the market is small with the market capitalization of the companies listed in Karachi at around $52 billion, according to securities firm Foundation Securities research. That compares to neighboring India where the companies on the Bombay Stock Exchange are valued at around $1.1 trillion.

“Pakistan as a market has very many companies that are trading below their fair value, but as it goes you get distracted by other more important markets,” said Arnout van Rijn, chief investment officer at Robeco Asia Pacific in Hong Kong, who manages the $1.2 billion Robeco Asia-Pacific Equities fund.

The market has been up since the end of 2008 however, with shares soaring 329pc to the end of 2013 - despite the country being hit by terrorism, the economy nose-diving and Karachi suffering law and order situation during that period.

Some investors say that those companies that survive both a weak economy and regular violence throughout the country are well run, resilient and especially appealing. Unilever Pakistan Foods Ltd, a unit of the consumer goods giant, shot up 116pc last year. “When you have to deal in this kind of environment, I think you have to be extremely good as management to deal with it and survive,” said Thomas Vester, fund manager at Lloyd George Management, who runs the firm’s frontier market investments, and manages assets worth $656 million as of Oct. 31.

And the relative political stability now is encouraging more investors to focus on the country whose population of around 180 million makes it the sixth most populous country in the world and a potential draw for those betting on rising incomes and more consumer spending. The market remains cheap even after the strong run-up earlier this year - currently trading at over nine times trailing 12 month earnings - a common valuation measure used by stock analysts. “Pakistan has a fairly diverse economy with a large and young population that needs to be fed and supplied basic infrastructure such as electricity,” said Caglar Somek, global portfolio manager at Caravel Management in New York, which manages around $650 million.

“If you find the companies that supply those basic needs, growing at double digit with high profitability, you can buy them at valuations that are on average 30pc to 40pc cheaper than their emerging market peers,” said Mr. Somek.