(Bloomberg) -- Pakistan’s red-hot stock rally is getting a fresh leg up from a return of foreign investors amid signs of stability.

The benchmark KSE-100 Index has gained 50% since a late-June trough, making it the world’s second-best market in that span, behind only Argentina. That’s attracted overseas traders, who have purchased $26.3 million of Pakistani stocks so far in November on a net basis, on track for the highest monthly total in more than four years, according to exchange data compiled by Bloomberg.

Pakistan is set for national elections in February after the South Asian nation avoided a default by securing a loan agreement with the International Monetary Fund in July. In another positive sign, inflation has shown signs of cooling from elevated levels, giving the central bank some breathing room after hiking interest rates over the past two years.

“Foreign investors are pricing in decreasing political and economic uncertainty,” said Mattias Martinsson, chief investment officer at Stockholm-based frontier market investor Tundra Fonder AB. “What they see now is that there appears to have come into place a sort of political stability, at the same time as economic indicators are improving and there is a strong likelihood of significant cuts in the policy rate during 2024.”

Bulls think the stock rally still has legs. Compared with other emerging markets, Pakistan stands out as a bargain, and foreign cash should continue to flow in, according to Ali Khalpey, head of equity capital markets at EFG Hermes in Dubai.

Overseas traders are “now becoming constructive as the macro picture becomes clearer,” he said. Lucky Cement Ltd., United Bank Ltd. and Habib Bank Ltd. are examples of cheap, high-quality stocks with high dividend yields that should be attractive to foreign investors, Khalpey said.

Meanwhile, Pakistan’s sovereign dollar bonds also handed investors one of the best returns in emerging markets this month, with total returns approaching 15%. On Wednesday, the notes were some of the top performers among developing-nation peers.

--With assistance from Ronojoy Mazumdar.

(Adds dollar-bond performance at the end)

©2023 Bloomberg L.P.