KAZAKHSTAN

Financial Markets

Kazakh Stock Market: Boom or Doom?

By Damir Seisebayev, Managing Director, Member of the Management Board, ORKEN Invest JSC
A TYPICAL EMERGING MARKET
Despite more than 10 years of history,
Kazakhstans stock market remains in
early stages of development. Since its
emergence, the market has experienced
good growth and development. The
number of stock issues reached 90 (65
issuers) - up from only 17 in 1999 - with
the total market capitalisation of USD
46.8 billion. However, the choice of
financial instruments available remains
limited and not sufficient to meet the
market needs, which became more
complex as a result of growing liquidity
and high rates of economic growth.
Kazakhstans GDP demonstrated 7%
growth in 2010 and increased by 7%
from January to September 2011.
Though the liquidity is difficult to
assess, we can safely assume that it is
high. According to the National Banks
estimates, excessive liquidity held by
banks is more than USD10 billion.
Kazakh stocks at the Kazakhstan Stock
Exchange (KASE) are classified under
three categories with each category
having its own listing requirements for
stock issuers (free-float, shareholders
equity, net income, disclosure of
information and other requirements).
The best that the KASE can offer
to investor is included in the first
category. The most liquid stocks are
included in the KASE Index (currently
7 names, historical maximum of 40).
The market index represents 74% of its
capitalisation or USD34.5 billion, which
indicates that the majority of issues

on the KASE are small and mid-cap

stocks. Six out of seven members of the
KASE index are also traded on foreign
exchanges, mainly on the London Stock
Exchange. Low volumes traded on the
KASE make local stock prices heavily
dependent on international investor
sentiment. For example, over the past
twelve month Kazakhmys stock volume
traded on the LSE was 1138 times
higher than the volume traded on the
KASE. Therefore, it is not surprising
that key price determinant for the KASE
Index is the movements of its members
stock prices on the London Stock
Exchange.
If we look at the most liquid stocks on
the KASE over the last 12 months we
see that only three out of eighty three
stocks not included in the KASE Index
were the most traded ones. Thus, the
market is dominated by a small number
of blue chips, though there are very few
stocks that would fit the true definition
of a blue chip stock.
Foreign investors may find trading on
the KASE inconvenient and inefficient
due to the low trading volumes, high
bid/ask spreads and the lack of hedging
instruments. No short selling is allowed
on the KASE.

MARKET IS UNABLE TO MEET

INVESTORS NEEDS
As of 1 October 2011, there are 73
brokerage firms, 14 pension asset
management companies, 34 asset

KASE vs LSE: Kazakh stock volume traded (12 months)

Source: Bloomberg, ORKEN Invest JSC

60

management companies in Kazakhstan.

Much of the investor base is represented
by 11 pension funds, 39 second-tier
banks, 38 insurance companies, 152
mutual funds and 32 equity funds with
total assets of USD111 billion. Since
the beginning of the financial crisis the
number of market participants has been
gradually diminishing.
Pension funds and banks are the main
investors in Kazakhstans market. As of
October 1 2011, the securities portfolio
of pension funds amounted to USD16
billion (growth of 12.2% Y-o-Y) with
USD1 billion invested in local shares
(6.4% of portfolio). The securities
portfolio of banks amounted to USD10.7
billion (negative growth of -7.3% Y-o-Y)
with USD0.3 billion invested in local
shares (1.73% of portfolio). Activities
pension funds and banks are subject to
strict regulation. For instance, pension
funds must hold at least 30% of their
assets in government securities (the
current share is 51.5%), and banks
at least 20% (the current share is
70.5%). These and other requirements
discourage main investors from
buying risky assets. As a result of high
volatility on the global markets and
fears of recession in the US and the
Eurozone, investors have significantly
reduced their holdings in stocks.
Pension funds have large amounts of
assets under management, and, taking
into consideration the regulatory
requirements have nowhere to invest,
except for the government securities

KASE Index

Source: Bloomberg

December 2011 WORLD FINANCE REVIEW

Financial Markets
and quasi-sovereign bonds. Therefore,
they are receiving decreasingly lower
returns on their investments. In the last
twelve months the average return of
pension fund was 4.46 percent with the
annual inflation rate of 8%.

THE PEOPLES IPO PROGRAM:

EXPANSION HOPES
The Peoples IPO program caused
massive debates among the experts in
Kazakhstan. There are many opponents
to partial privatisation, who believe
that the program will not achieve
its main goals of increasing social
welfare, improving financial literacy of
the population and reviving the stock
market. So far, the program is under
development and is scheduled to start
in 2012. The implementation of the
program is planned to take several years
with many national companies taking
part. It is expected that the national
oil transporter Kaztransoil JSC and the
national grid operator KEGOC will start
floating their shares under the program
in 2012, Kazmortransflot, Samruk
Energy and Kaztrangas are to follow in
2013, and Kazakhstan TemirZholy and
KazTemirTrans in 2014-2015.
Pension funds are expected to be
among the key investors. At present, it
is difficult to predict what impact the
program will have on the stock market,
but given the stable macroeconomic
environment, high quality of issuers
and high levels of liquidity we can
assume that the demand from both the
local and international investors will be
high sufficient to determine the success
of the program. Institutional investors
may start consolidating shares after
they are offered to the public.

INVESTMENT ATTRACTIVENESS
In 2009, the Kazakh stocks market,
having recovering from the losses
sustained during the global financial
crisis, delivered impressive returns.
Over that year the KASE Index grew
by 80%, recovering 47% of the previous
years losses and outperforming many
emerging markets indices. Such a
positive dynamics was justified by
the growing oil and metal prices. The
European debt crisis was the main
reason of market weakening in 2010,
when the KASE index lost 2.9 percent.
Until 2006, the KASE Index
performance was dependent entirely on
internal factors. The most impressive
performance the market demonstrated
in 2005-2006 as a result of the countrys
strong economic growth fuelled by
cheap loans: the KASE index grew by
incredible 203% in 2005 and by 274% in
2006.
In 2006 several Kazakh issuers
conducted IPOs outside their home
market. As the result, during five
following years, Kazakhstans stock
market has been experiencing liquidity
shortages. The Peoples IPO program
may change the situation significantly
and is hoped to bring international
investors back to the country. So far, the
market is limited to seven most liquid
stocks that, in our view, have significant
upside potential. After suffering large
losses in 2011, mainly as a result of
concerns over the sovereign debt
problem in Europe and the US, Kazakh
stocks are traded near 2-year low
and look extremely cheap. Since the
beginning of 2011 the KASE index has
fallen 30.9%, experiencing the largest

KAZAKHSTAN

losses among its peers, which leaves the

KASE stocks more room to grow. With
the global economy recovering and the
oil price holding above $100 per barrel,
in our opinion Kazakh stocks present
good risk-reward opportunities for
investors.

VALUATIONS
The KASE differs from other exchanges:
no technical analysis can be applied
to predict stock price movements due
to its short trading history and low
volumes. Economic data and earnings
announcements usually have neutral
effect on stock prices. KASE index has
few comparable peers. In comparison
with other CIS countries, Kazakh stocks
look undervalued with forward-looking
P/E of 4.84 compared to 5.35 in Russia
and 7.15 in Ukraine. Most banks shares
are traded with P/B of less than 1.
We believe that it is a good time to
consider long-term investment in
Kazakh shares; we expect the stock
market to rebound from losses as a
result of successful resolution of the
European debt crisis and improved
global economic sentiment. Strong
macroeconomic performance should
support stocks in the upcoming years.
Kazakhstans gross domestic product is
forecast to grow by 7% this year and by
6.9% in 2012. We expect the exchange
rate to be stable in the remaining 2011
and 2012. We believe the Peoples IPO
program will give strong impetus to
the development of the Kazakh stock
market.
Therefore, our recommendation to
investors is to implement buy-andhold strategies on Kazakhstans stock
market.

The most liquid shares on the KASE in the last 12 months

Name

Number of
deals

Turnover,
USD mln

Number of
shares

Price per share

(31.10.11), KZT

Change in %,
Y-o-Y

KMG EP, preferred

3530

89.02

744 191

13 942.45

-7.64

Kazakhtelecom, common

1255

30.86

247 206

17 700.00

13.09

Bank CenterCredit, common

916

27.61

7 123 774

317.36

-46.12

Halyk Bank of Kazakhstan, common

1193

13.71

5 980 799

221.15

-31.95

BTA Bank, common

1227

2.94

95 847 015

1.15

-87.53

Kazakhmys, common

996

9.43

451 878

2 260.77

-25.58

KMG EP, common

662

10.20

89 669

14 609.09

-5.14

Kazkommertsbank, common

741

5.81

2 163 857

250.08

-39.74

ENRC, common

508

2.57

195 018

1 649.00

-21.51

Kazakhetlecom, common

301

4.51

71 651

11 500.00

45.57

Source: KASE

WORLD FINANCE REVIEW December 2011

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