2016 In Review Part 3: How Did Europe and Central Asia Perform?


Welcome to our year-end review of how equities in Frontier Markets performed around the world in 2016.  We covered Latin America and Asia in Part 1, which can be found here and Africa and the Middle East in Part 2, which can be found here.

In part 3, we turn over to Europe and Central Asia.

Central Asia

Central Asia, which is really only two markets; Kazakhstan and Mongolia were mixed, Kazakhstan had a sharp recovery from a terrible 2015, while Mongolia’s troubles continued into 2016.

Best Performing Market: Kazakhstan

Kazakhstan went through a flurry of change in 2016.  In September, Kazakhstan released a budget and forecast on the basis of $35 crude; with crude at $55 current economic conditions are materially better than expectations suggest.  However, the currency remains at 335 after its unceremonious collapse in 2015.  The equity market is up 40% since July but remains -45% below its 2014 peak levels in USD terms.  The Kashagan basin restarted in November and outlook remains strong for Kazakhstan being able to produce 2mm barrels per day in 2017.   This would make Kazakhstan a larger producer than Norway, and the 14th largest oil producer in the world.  In addition, Chevron and Exxon Mobil have committed to a $37bn plan to develop the Tengiz field as well.  Investment in a down-market for energy is indicative of the appeal of Kazakhstan’s natural resources.

Companies to watch:  KazTransOil

KazTransOil is the major pipeline company in Kazakhstan and has a large footprint for all oil-related infrastructure in the country.  The stock has rallied 70% in USD terms, outperforming the index whilst being a large component of the KASE.  Oil infrastructure companies are always appealing due to the resiliency of their earnings through market cycles, but in particular in Kazakhstan where the infrastructure is growing to accommodate larger output, while you make bond-like yields from energy tolls.  It also does not hurt that the company is closely affiliated with the government.

Worst Performing Market: Mongolia

Mongolia’s stock market fell -26% in 2016 aided by continued weakness in the Mongolian Tugrik (MNT).  In the last two years, the market is down -40% in USD terms.  However, all is not lost.  Since its low in November, the market is up 13% in USD terms.

Mongolia’s listed companies are mining-centred and in particular metallurgical coal and copper-focused.  Despite the very strong recovery in coal prices (+380% in the past year) and copper (+17% in the past year), Mongolian equities as a whole have not responded in-kind.  This is despite met coal companies as a whole rallying on average by 300% over the year.  A large part of this has been Mongolia’s deteriorating relationship with China; consumer of 80% of the world’s copper production and 75% of the world’s met coal production.  In fact, over 90% of Mongolia’s exports are destined for China, this level of dependence is challenging when the cultures and perspectives of both countries are fundamentally different.  This was made apparent in November when the Mongolian government thought it was a good idea to invite the Dalai Lama for a state visit.

There persistently remains this risk, as Mongolia does not have the population to support itself and it resents its more powerful neighbors, Russia and China.  In more recent years, it has attempted to court India, but India has been ineffective in having any global influence due to its refusal to comment or involve itself in foreign matters that do not directly impact the country.  However, India is Mongolia’s best hope.  They have given $1bn to develop oil refineries and are potentially the largest consumer of Mongolia’s met coal.  However, this is all conceptual now and we remain skeptical.

The stock exchange has struggled as markets have fallen, but the government is looking to list a number of public companies to help build turnover and liquidity within the Mongolian Stock Exchange.  A good, recent overview can be seen here.  However, it should also be noted that many investors are irate with the management of the exchange and regulator; firms like Asia Frontier Capital have had their investments frozen for 2 months, unable to buy or sell.  Mongolia’s reputation is in tatters relative to what it was just two years ago.

Company to watch: APU

APU JSC is down only -3% for the year, relative to the market which is down -26%.  The company is your classic counter-cyclical stock, which will perform in all economies.  The food giant continues to grow sales as Mongolians move away from traditional diets to packaged goods diets.  This trend is unabated and will remain strong for the foreseeable future.  The company is well-run relative to others and should be expected to remain on the vanguard of changes in operating practices in Mongolia.


Europe was completely mixed in terms of equity returns.  Frontier Markets in Europe continue to reel from poor economic growth, uncertainty due to Brexit and continued tensions between NATO and Russian-aligned countries.  All of this results in poor economic prospects.  This is unlikely to change in 2017, as the impact of Brexit is considered to be lessened Italy is in the potential throes of a political crisis and Germany goes to the polls next year.

Best Performing Market: Bulgaria

Bulgaria is in an unenviable position where political instability and continued disparity between its 28 regions continues to support depopulation of major parts of the country, as Bulgarians head to Sofia or even outside the country to EU countries in search of a better life.  19 of the 28 regions in Bulgaria have a lower GDP output and lower household income than in 2008.

However, the equity market did terrifically well in 2016, supported by extremely low valuations, which our interview with Radoslava Maslarska of ELENA Trading in late 2015 highlighted.

Companies to watch: Chimimport

Think of Chimimport as a poorly-named Bulgarian equivalent of Berkshire Hathaway.  Chimimport invests across a variety of verticals and tries to make companies it invests in more efficient, be it through process improvement, staffing changes, or financial restructuring.  As one may imagine, in a former communist country there is a lot of opportunities to thrive in this area.  Over the past year, shares have appreciated +30%.  It did have its start as a government entity, but it has evolved into a savvy player within Bulgaria.

Insiders own about 75% of the company, and minority shareholders include many of the major institutional investors in the world (BlackRock, Russell, Barclays etc.).  The largest asset is the bank which has seen material growth in the past year.  Bulgarian remain underserved by financial services (commercial/retail banking and insurance) and Chimimport is well-positioned to capitalize on this growth.  We see the company as a long-term hold in the Bulgarian market, despite near-term potential weakness.

Worst Performing Market: Bosnia and Herzegovina

Outlook for Bosnia and Herzegovina are improving for 2017, with expectations of 3% GDP growth and potentially 1% inflation.  This would be welcomed for a country with anemic sub-2% economic growth over the past year.

The country suffers from a bloated government that represents 70% of the economy, and one which is consumption-led rather than production-led.  Financial inflows of aid and remittances constitute about 20% of the GDP.  Social benefits tend to be spread equally rather than targeting those with lower household incomes; this inefficient use of capital results in other areas of government expenditure being overlooked.

Companies to watch: Bosnalijek

Bosnalijek is one of the largest companies in the country.  It is a generic pharmaceutical manufacturer that has a strong record of producing quality products, something has become rarer over the past few years.  The company has a market cap of approximately $50mm and is up 20% over the past year in a market that has done considerably worse.  This company exports the majority of its production and is far less sensitive to domestic issues than the majority of companies listed on the Sarajevo exchange.

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