How to Invest in Kazakhstan?
Kazakhstan has had a terrible few years. The equity market is down -36.1% YTD, and the Tenge is down by more than -51% since last year, and shows no indications of turning course any time soon. The heavily energy dependent economy is reeling from the fall in energy prices that we have experienced over the past year.
Kazakhstan, since independence from the Soviet Union in 1991 has been run by one man, Nursultan Nazarbayev; a stereotypical dictator who started off as a proactive idealist and gradually descended to corrupt megalomaniac. That being said, Nursultan has given Kazakhstan one important ingredient for growth; tremendous stability. Do not mess with him or his family, make sure you pay him and his cronies and your business can thrive.
You may assume that we are very negative on the country; we are not. Unlike many places in the world, Kazakhstan enjoys a set of benefits that should enable it to do reasonably well in any environment. See the factbox below for a brief overview of the country.
Similar to most post-Communist countries, Kazakhstan enjoys an exceptionally high literacy rate along with a relatively high standard of living. Kazakhstan is in the middle of the Central Asian steppes; a terrain that makes its people hardy. We do not actually thing this implies anything, but we thought it would be good to say, in a way that Sir Richard Attenborough would be proud of. Kazakhstan has one of the most developed space programs in the world as well as a strong industrial base. Check out Kazakhstan’s exports in the chart below.
The country needs to diversify and it knows this. We believe the country’s single most significant risk is political, but unlike its neighbours, we believe Kazakhstan’s population is wealthier, more educated and thus less likely to engage in acts that would permanently retard the country’s development. The second most significant risk is ethnic tension between Kazakhs and Russians. Russians constitute approximately a quarter of the country and naturally exhibit loyalty to Russia. Kazakhstan however needs to move out of the shadow of Russia and that is a tall order. If the first risk occurs, one could envision a Ukraine-like scenario. Russia using its links with the Russian population as justification to invade the country. We think this risk is fairly remote, but something to consider. Kazakhstan’s growth and equity returns are shown in the table below; it isn’t pretty.
Kazakhstan’s legal system was partially inherited by the Soviet Union and is partly revolutionary from Kazakhstan’s founding in 1991. The important thing to note is that that it is based on civil law (not common law). As such, there is no establishment of precedents from previous law. This increases the prevalence of corruption. The actual laws are not objectionable, but the unwritten law as mentioned is to not impede or compete with the President, his interests, or his associates. A great overview of Kazakh law is provided here.
Corporate governance is quite poor, and in terms of rankings, Kazakhstan is one of the lowest-ranked middle income countries in terms of corruption and transparency. The rules of the stock exchange however, are actually up to international standard. The exchange is certainly aiming for internationally-accepted standards; however, what is more important in Kazakhstan is the degree of compliance. This varies wildly from company to company. The end result, is a high degree of scrutiny needs to be paid to company corporate governance, as this would be the major determinant of corporate governance in absence of tight government legislation that mitigates corruption and conflicts of interest.
For an overview of the Kazakhstan Stock Exchange’s (KASE) rules, check this link here.
The Stock Market
The stock market was approved for trading in 1993. In typical, post-Communist fashion, significant actual tradinb began in July 2000. The market has been operating for over 15 years. An overview of the market can be seen in the table below.
As you may surmise, the market has limited liquidity and a small number of members (53). The P/E ratio (trailing) makes the market interesting, but the dearth of companies with a market cap over $50mm dampens that enthusiasm. The market cap of $7.9bn however does make it a fair bit larger than other markets in similar countries. This market cap is at a significantly discounted valuation, post-Kazakh market crash.
There are 8 companies with a market cap above $50mm; 4 banks, 2 energy companies and 1 telecom. Not quite diversified, but then again not all that different from a developed market like Canada’s, just less companies. The table below highlights these companies and their respective characteristics in USD terms.
With a collective market cap of $7.6bn and over $10bn in sales, these companies dominate the others listed companies in Kazakhstan. We would expect/hope to see an increasing number of companies join the exchange as well as join this list of $50mm+ companies in Kazakhstan.
Can Foreigners Invest?
Yes! Foreigners constitute about 14% of total market activity. There is a deliberate effort on the part of the government and the stock exchange to woo foreign investors. This includes a fairly friction-less process as well as a relatively low tax rate.
If you would like to open an account; contact a registered broker, found on the KASE website. We have found Freedom Financial to be the most supportive and helpful. As usual, if you have an account with a large global bank such as JP Morgan, Citi, or HSBC then feel free to try and set up an account for trading with these banks directly.
You will have to send the usual forms and passport copies to the Broker. Online trading is officially available for foreign investors, but you may or may not be able to get online access. Absent online access, brokers would take orders via e-mail or phone and send you monthly holdings reports or as desired.
The main items have been noted; the government carries political risk, and you do not benefit from common law or any form of law that is similar to the gold standard; English Common Law. We firmly believe that the energy sector will recover to some steady-state, which is not at $40 or $50 per barrel. If this thesis does not pan out, then it will take a lot longer for Kazakhstan to move from middle income country to high income country.
As always, if you have questions, please let us know. If you have any advice for others, please feel free to leave it in the comments below. Happy investing.