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Silk Road Intelligencer: Buying into Kazakhstan's Booming Stock Market

Jul 27, 2007

Buying into Kazakhstan's Booming Stock Market

As the equity markets around the world keep on delivering double-digit returns, investors venture further and further out into the periphery of emerging markets to find untapped sources of alpha. "Established" emerging markets like South Korea, Turkey or Taiwan are part of portfolio investors' mainstream nowadays, and markets like Vietnam or Azerbaijan that nobody would touch with a pole just a few years ago become all the rage for adventurous investors seeking high returns. Kazakhstan, after five years of double-digit growth, appears to be profiting from the increased appetite for risk as well. Several specialized equity funds have been launched in the last year that focus on Kazakhstan and have ridden the wave of interest in this Central Asian country.

While the Kazakhstan Stock Exchange (KASE) remains small and illiquid and its listings are largely nominal, a growing number of Kazakh companies seek financing in the West and register their shares as GDR's on exchanges in Frankfurt or London. Kazakhmys, the Kazakh copper mining company, even listed its primary shares on the LSE and is a constituent of the FTSE 100 share index. The Vienna stock exchange Wiener Boerse launched an investable Kazakh Traded Index (KTX) last month that includes the most actively traded stocks and Global Depositary Receipts (GDRs) of companies with their principal business activities in Kazakhstan and listed on the London Stock Exchange: Kazkommerzbank, Kazakhmys, KazMunaiGas Exploration Production, Halyk Savings Bank and KazakhGold Group. These recent developments have allowed investors to cash in on Kazakhstan’s booming oil economy without having to go through the KASE.

In the last year, several high-profile launches of hedge funds focusing on Kazakhstan and Central Asia have made headlines. One was the launch of the Sturgeon Fund by former Permal analyst Clemente Capello. The fund is a Cayman Islands-based vehicle which primarily invests in fixed-income and equities of the Central Asian countries of Azerbaijan and Kazakhstan. The other was May’s launch of Tau Capital, a joint venture between British Spencer House Capital Management and Kazakh Compass Asset Management. The fund, which is traded as a closed end fund on London’s AIM, raised $250 million against an earlier target of $200 million. Later the same month, Compass with Capital Partners Securities floated the Compass Kazakhstan Fund on the Irish Stock Exchange. In addition to these two products, Compass is looking to launch a third fund, Compass Kazakhstan Ltd., at the end of September. Minimum value of one stake in Compass Kazakhstan Ltd. is set at $2 ml, Tau Capital - $100,000, Kazakh Compass Fund - $10,000.

The funds invest in both public equities of companies focusing on Kazakhstan traded as GDR’s on western stock exchanges and the KASE (at least 50 percent of the fund) and private companies in various stages (up to 50 percent). Furthermore, the fund may invest on companies operating in other Central Asia countries, equity derivatives and commodity futures, and real estate projects. The fund will operate as a long/short portfolio with up to 50 percent leverage. Compass Asset Management has been running three other mutual funds marketed in Kazakhstan since 2005 with considerable success, their annual returns range from 26.19% to 38.01% with Sharpe rations ranging between 1.20 and 1.77.

While Compass as a domestic investment company with cleverly structured partnerships may be the leader in portfolio investment in Kazakhstan, the country has received much attention from other fund groups as well. Many Russian focused investment managers add Kazakh holdings to their portfolios, and even start their own Kazakhstan-focused funds.

Investors with a very healthy appetite for risk wanting to expand their portfolios to cover Kazakhstan have many options that did not exist as recently as three or four years ago. But it is wise to remember that investing in Kazakhstan comes with serious risk, as the latest, rather disappointing Kazakh debut on the LSE has shown.

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