The Risks of (Not) Investing in Frontier Markets – Central Asia

Today we’ll conclude our conversation about Central Asia with Clemente Cappello from Sturgeon Capital.

Corporate governance, transparency and management are three things you need to focus on when doing your due diligence, but that’s just the beginning.


Chris: Corporate governance is always an issue in frontier markets. How do you deal with this?

Clemente: The short answer is research. You really need to know who you’re dealing with and who you’re investing alongside in these markets. We spend around half of our time there and have teams on the ground in Azerbaijan, Georgia and Uzbekistan (Kazakhstan and Mongolia soon to follow) that maintain our information edge. This keeps our finger on the pulse, and gives us, hopefully, a more rounded combined macro and micro view.

Not everything that you read in the mainstream financial press regarding companies from the region provides the unbiased “full picture” (shocking, I know), but similarly to be in these markets 100% of the time can lead to a rose tinted view. It’s important to step back and take a realistic view of these companies.

Not only do you need to know the company that you’re investing in, but also the companies with which that company contracts and does business. There is a lot of cross-ownership in these markets as many of the dominant companies have grown out of a relatively small group of early conglomerates.

There may be some cases where the CEO of a company we’re looking at is also a shareholder in a major supplier to that company. That doesn’t mean that we’re never going to invest, we just want to know this, have the conversation with the CEO, and be comfortable that as shareholders our interests are aligned and prioritised as we would expect them to be.

To help us with this, we also sometimes use business intelligence companies to get a real three dimensional picture of the company and its ownership and management structures and relationships.

Chris: I’m not going to argue that Kazakhstan is the epitome of safety, good corporate governance and superior political structure but I’ll buy most anything at the right price. When looking at Kazakhstan the market as a whole trades around 4.5 price to earnings. When I look at India it trades at about 15.

Now the question really is this: Is Kazakhstan 3 times more risky for my capital? The second question relates to the upside? Does India provide me with more, the same or less upside potential than Kazakhstan? What are your thoughts on that?

Clemente: Again, I’ll refer to our old friend Warren Buffett in taking the view that when it comes to pricing, buying with a margin of safety reduces risk. On the other hand, Kazakhstan could go to zero, and this is not something that is without precedent historically. Our view is that if the world does not fall apart, regardless of double-dip, austerity in Europe, Grexit, China hard landing/soft landing, etc. then Kazakhstan and the Central Asian region in general will do very well.

The Kazakh, and eventually other regional stock markets, should compound this as (a) companies grow substantially and (b) valuations catch up with, at the very least, the frontier markets average and possible more if we see the region become “trendy” (as we saw with the BRIC countries in the early 2000’s).

Chris: Which is your favourite market in the region? I spoke to Paul Henderson and he has lived in Azerbaijan for several years previously. This market has been growing like a weed on steroids. What’s happening over there?

Clemente: Today, my favourite market, and the easiest to invest in in our experience, is Kazakhstan. The country has a relatively developed local stock market and several attractively priced mid-large cap companies listed in developed markets. Local business and finance infrastructure and services providers are good, and importantly, corporate governance is of a high standard compared to other frontier market economies, and certainly compared to Russia.

For the future, we continue to keep an eye on less developed capital markets such as Azerbaijan. There a number of private equity and fixed income opportunities there, but the stock market is still in the very early stages of development.

One of the most interesting markets is Uzbekistan. The local listed market is quite vibrant (versus others in the region) and the private equity opportunities we are seeing are very promising. There are some issues with currency controls and repatriation of profits, as well as the usual bureaucracy issues of an emerging post-soviet economy.

We have invested in infrastructure for the future, acquiring 33% of a leading independent investment banking and brokerage business there, and have recently made our first investment via the Sturgeon Central Asia Fund as well. Uzbekistan, and its neighbour Turkmenistan, are ones to watch, although we’re probably 3 – 5 years early (where we like to be).


Its literally impossible for an investor to be everywhere, what is possible though is to hone in on particularly profitable areas, dedicate a lot of time and energy to them and invest accordingly. Precisely what Clemente is doing.

We’ll likely be jamming this region into our schedule this year, as more than one of our friends have been bringing this to our attention as of late… people we take very seriously.

Have a great weekend!

– Chris

“Right now I own shares of companies in 28 countries.” – Jim Rogers


This Post Has One Comment

  1. Pete

    Thank you guys for addressing the investment risk management strategies for these countries.

    I sense that these “outposts” MAY become “trendy” IF global capital changes its long held negative stereotype about undeveloped/frontier markets. Especially after mainstream individuals and institutions finally realize they are not going to get rich by “staying safe” in zero yield and negative real return Western/developed markets.

    It also seems to me that the leaders/elite of these long banished places are beginning to see the light – look at the generals in Myanmar. I have a feeling they might now be thinking they can maintain power/increase wealth/stay alive by opening up rather than trying to control all the pieces……It could turn into a game of one upmanship amongst these guys if their egos get connected to this idea (that sense of competition could be “floated” in meetings with them or their cronies, at the right time).

    Perhaps the smaller, nimble investors who have stakes in the ground and people in place in front of this shift/influx will ride along. Of course it isn’t without significant risk but as with most things in life, timing is everything. And the will to execute when one senses the timing is right.

Leave a Reply