“…Much like BRIC rival Russia, Pakistan has an image as global troublemaker. The country veers regularly between weak civilian and military governments, none of them particularly confidence-inspiring. It has threatened to use its nuclear arsenal against India and, until recently, was selling these secrets to North Korea, Iran and Libya. Outside of major cities like Islamabad, Karachi and Lahore, most of the country is in chaos. The Pakistani army is bogged down waging war against the militant fundamentalist Taliban in the tribal areas bordering Afghanistan. Baluchistan, a province that makes up almost half of Pakistan’s land mass, is home to yet another insurgency. Meanwhile, thousands of young men are training for jihad at radical Islamic schools that dot the country — all in support of Pakistan’s most famous (likely) resident, Osama bin Laden.

Yet, much like Russia, Pakistan also has been one of the top-performing stock markets over the past decade. Had you been able to invest in the Karachi Stock Exchange at the turn of the millennium, you’d be sitting on a much bigger pile of profits than, say, if you had invested in the “China miracle.” Pakistan offers yet another lesson in how gleaming skyscrapers offer little guidance in predicting future stock market performance.

Investing in Pakistan: Surprisingly Big

Teeming with 169 million souls, Pakistan is the world’s sixth-largest country by population. That makes it smaller than Brazil , but larger that Russia, as well as the “Next BRIC” candidates, Turkey, Mexico, South Korea and Egypt. Bordered by Afghanistan and Iran in the West, India in the East and China in the far Northeast, Pakistan is just about the size of France and the United Kingdom combined.

Pakistan’s real per capita GDP of about $1,250 makes your average Pakistani slightly poorer than his counterpart in India — and far behind the average in booming China. One third of Pakistan’s population lives in poverty, and only half of the population is literate. Yet, Standard Chartered bank estimates that Pakistan has a middle class of 30 million that now earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan’s per capita GDP approaches $3,000 per head. But take away that bit of economic affirmative action, and Pakistan’s economy drops from the size of New Jersey’s down to that of Alabama.

Investing in Pakistan: Edgy Relations with Uncle Sam

In the bad old days of the Soviet Union, Pakistan was a major U.S. ally. That relationship soured after the United States imposed sanctions on Pakistan after it refused to abandon its nuclear program. The “War on Terror” changed all that. After Pakistan ended its support of the Taliban regime in Kabul, American economic and military aid to Pakistan soared to more than $4 billion within three years of the 9/11 attacks. Indeed, American aid has played no small part in helping Pakistan’s economy flourish over the past decade or so.

But as with most forms of handouts, gratitude is the least heartfelt of emotions. Anti-Americanism in Pakistan’s free media is just about as virulent as neighboring Iran. The Wall Street Journal’s Pakistan correspondent was ejected from the country after being charged with spying for the United States and Israel. The U.S. State Department advises U.S. citizens not to visit the country and has forbidden the families of its diplomats in Pakistan to visit since 2002.

Investing in Pakistan: A Solid Start to the Millennium

Economically, the first decade of the 21st century has been good to Pakistan. Thanks to economic reforms introduced in 2000 by the former Musharraf government, Pakistan has privatized $5-billion worth of assets, simplified its tax system and attracted large amounts of foreign direct investment (FDI) compared to its GDP. By mid-2005, the Pakistani economy was growing by 8.6%, and the World Bank named Pakistan as the top reformer in its region and among the top 10 reformers globally.

That changed abruptly with the onset of the “Great Recession.” Pakistan’s ensuing balance-of-payments crisis and runaway inflation forced the IMF to step in, and offer a $7.6-billion emergency financing package in late 2008. To its credit, the Pakistani government kept its side of the bargain, maintaining its foreign exchange reserves above target and its fiscal deficit below. The Pakistani economic crisis has eased substantially, and in 2010, the economy is expected to grow at least 4%.

Investing in Pakistan: Limited Access for U.S. Investors

There are all sorts of reasons why U.S. investors are unlikely ever to go gaga over investment opportunities in Pakistan. But surprisingly, other investors have. The stock market index in Karachi has risen by more than 1,000% since 1999. And in 2002, Pakistan was the top-performing stock market in the world.

But even if you develop a rare appetite for Pakistani stocks, they are not easy to access, even by frontier market standards. There are a handful of Pakistani stocks that are traded over the counter in the United States. And Pakistan Telecom has been a core holding in many emerging-market funds for many years. Claymore’s BNY Mellon Frontier Markets ETF ( FRN ) has an allocation of only 0.5% to Pakistan. The most recent addition to the Pakistani investment palate is Global X Management’s announcement that it intends to launch a Pakistani ETF in the near future.

Bottom line? Pakistan has a long way to go. The Commission on Growth and Development once estimated that Pakistan needs 159 years to catch up with industrialized nations. But two years ago, Merrill Lynch’s Chief Asia Strategist picked Pakistan as his top investment prospect among the world’s frontier markets. And as the performance of Pakistan over the past decade has shown, big investment profits can lie in the most unlikely of places.”