A Beginner’s Guide to the “Stans”

This is part two of our discussion with Clemente Cappello from Sturgeon Capital… We’re discussing Central Asia.

Yesterday Clemente shared the 3 Things you Need to Know About Central Asian Frontier Markets with us. Today we’ll talk more about banking, business and liquidity flows in Frontier Markets, like Kazakhstan.


Chris: What is the banking system like? Give me an overview (of course there are lots of different countries so let’s pick one country and we’ll delve into others later on.)

Clemente: You’re right the story is different across the region. In general, the more sophisticated banking markets suffered significantly from the effects of the 2008/09 early stages of the current global financial crisis. The less sophisticated escaped largely unscathed.

The Kazakh banking sector is the most mature, developed and sophisticated banking sector of the region. The sector is still recovering from the heavy losses sustained by one if its biggest banks, BTA, which has undergone two substantial re-structurings, seeing the government inject several billion dollars into BTA and other casualties in the sector.

There are two points to note here:

  1. In general, the governments/sovereign wealth funds/central banks are all well capitalized. For example, both Kazakhstan and Azerbaijan have strong GDP growth, increasing revenues from oil and gas exports and Debt/GDP levels of 15% and 5% respectively. Both relatively young Sovereign Wealth Funds have between 30 and 40 billion dollars, and are growing fast;
  2. As the fundamentals of the economies of the region continue to improve and recover post-2008, the banking sector benefits. For example, non-performing loans (NPL’s) have been reduced by the strong and continued GDP growth in the region, and real estate prices have stabilised and in some parts of the region, such as Kazakhstan’s “regional business capital” of Almaty, have even begun to show signs of modest growth.

Chris: What is liquidity like and how do you deal with that?

Clemente: As an investor we like to start from a macro view so we always have our research looking both outward and inward when we’re looking at Central Asian markets. From this perspective, we see that liquidity is low in general, both globally and locally, when it comes to equity markets. It is something we tend to look at quite closely. There are two sides to the listed equity space for the region as we view it: you have the Central Asian listed companies, so companies listed in Georgia, Kazakhstan, Uzbekistan, Mongolia, etc. These are, with a few exceptions, relatively illiquid stocks. Then you have the mid-large cap, developed market listed, multi-billion dollar companies such as ENRC, Uranium One, Dragon Oil, Kazakhmys, etc. These are companies which still have good liquidity, and which have seen their share price hammered by a lack of good coverage by analysts/investors, leading to most Central Asia-related stocks being homogenously categorized into the first “sell” of a “risk off” mentality.

For this reason, these are the stocks that we’re focusing on right now. Our view as regards listed equity right now is this: why take additional local market liquidity, counterparty, currency, etc. risks when multi-billion dollar developed market listings that are from or substantially related to the area are trading at such attractive prices?

Chris: How cheap? PE? Dividend yields?

Clemente: Just as an example, using what we view as the most mature listed local market in the region, Kazakhstan, the above chart shows the KASE trading at 2012 and 2013 PE ratios that are half that of the MSCI Frontier and Emerging Market indices, and even at a discount to Russia. This data is from 24 April 2012, so the valuations are even more compelling today.

Regarding dividend yield, KazMunaiGas currently has a dividend yield of around 7.8%. So yields are similar to Russia but the companies have a much stronger growth profile, and benefit from stronger corporate governance and a stable political environment.

Chris: Do you focus mainly on the resource sector or do you look to capitalize on GDP growth in the region in general.

Clemente: We’re not focused on the resource sector per se, but given that we’re investing in frontier and emerging economies, there is naturally a greater weighting across the entire investable universe towards industrials and the resource sector, and on top of that Central Asian growth is currently driven by natural resource and oil and gas exports. Having said that, our default position is a preference to capitalize on GDP growth in the region in general. We like to go where the oil and resource wealth is headed, so to financials, consumer, manufacturing, agriculture, etc. rather than only focus on one particular sector.

Chris: What are the biggest impediments to doing business in this region

Clemente: I suppose practically one of the biggest impediments for new comers is that there is still a lot of Soviet-era bureaucracy when it comes to brokerage accounts, licenses, business registrations, etc. Although, most notably Georgia, and increasingly Azerbaijan and Kazakhstan have implemented significant changes to remove or substantially improve these processes. For example, Georgia was recently ranked as the world’s top reformer in a World Bank survey.

Chris: You’ve been involved in the region since 2006 or so, can you give me a little colour as to what you’ve seen evolving during this time.

Clemente: In a word, the region has become much more internationalised. Particularly Azerbaijan, Georgia, Kazakhstan and Mongolia. Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan are still relatively more closed and/or less well known, but since 2006 that is also something that we have seen gradually begin to change and this change has gained momentum lately with interest from the Middle East and Emerging Asia investors.

The oil and gas revenues in Kazakhstan and Azerbaijan, the natural resource wealth that has begun to be exploited in Mongolia and the substantial reforms undertaken in Georgia have all attracted positive investor and general attention from the developed world. Sovereign wealth from the Middle East and Asia, obviously China and India, and big corporates from the US and Europe have all become substantial investors in one or more of the Central Asian economies.

Chris: The money flow is undeniable. As a large sovereign operating in the same neighborhood, more or less, how could you not deploy some capital in these places. It’s where the growth is coming from right now.


More again tomorrow, as this is just gettin’ good!

– Chris

“Kazakhstan has to restore its historical role and become a major business transit hub of the Central Asian region and a bridge between Europe and Asia.” – Kazakhstan President, Nursultan Nazarbayev


This Post Has One Comment

  1. Naresh

    When it comes to Chris & Mark being interviewed themselves they are pretty modest. To take a look inside their minds go to Kung Fu Finance Girl’s website where Chris & Mark got interviewed. I learned something out of that, perhaps the collective wisdom of people whom they learned from, and now they’re passing it onto us.

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