REVIEW

The Right Liquidity

The local markets have been tested by their first major economic crisis, and plans are now afoot to increase liquidity levels and the number of companies traded to create a hub for Central Asia’s capital markets.

The Kazakhstan Stock Exchange (KASE) has shaken off its foundations as an inter-bank currency exchange in 1993, and is now looking to broaden its instruments and increase the availability of liquidity to local—and potentially regional—companies. Following the global economic crisis, the KASE has undergone a period of restructuring, as corporate debt and company listings have come under the regulatory microscope. However, with the government looking to transform Kazakhstan’s capital markets into a more regional player, liquidity levels may soon be on the way up. Discussions on conducting a “People’s IPO” of assets owned by Kazakhstan’s sovereign wealth fund, Samruk-Kazyna, are ongoing, with a report on the local assets due for release to the market in September 2011.

Of the 83 members that make up the exchange, 34 have currency market status, 75 have stock market status, while a further 15 have derivatives market status. The largest shareholder in the KASE is the Regional Financial Center of Almaty JSC (RFCA), which is charged with highlighting the role Almaty’s burgeoning financial markets can play in the regional and global economy.

ON THE BOARDS

In terms of trading volumes, the market is still very much steeped in its foundations as a currency exchange. Over 1H2011, 54.8% ($53.98 billion) of all volumes were devoted to currency trades, with repo on government securities coming in second at 39.2%, or $38.61 billion. Government securities were the next most traded instrument, at 3.7% ($3.68 billion) of trading volumes, followed by corporate bonds (1.2% or $1.19 billion), shares (0.8% or $811.5 million), and repo on corporate securities (0.2% or $196.6 million).

Over 2011, the bourse has been on the repair. The market peaked in 2008, with trading volumes of $263.2 billion, before slumping to $155.7 billion in 2009, then staging a recovery to reach $206.5 billion for 2010. With 1H2011 figures estimated by the KASE at $98.5 billion, indications hint that the market could well surpass 2010 trading volume levels, though will still fall shy of the high point reached in 2008. While government bonds remain popular with investors, the lack of liquidity in other parts of the market indicates the need to improve liquidity levels. “The only thing missing is a liquid, efficient, and active stock market,” Angelo Morganti, Managing Director of Renaissance Capital, told TBY. “There is a large pension system that is investing in government bonds. This needs to move to investments in the corporate sector,” he said.

Indications are that the government may be looking to revitalize the equities market by staging a “People’s IPO” of selected companies in Samruk-Kazyna’s portfolio, and trading volumes could receive a welcome shot in the arm in 4Q2011. As for the KASE, its President and CEO, Kadyrzhan Damitov, told TBY that, “All our efforts are concentrated toward accelerating and increasing the amount of liquidity in the stock exchange.”

As of end-1H2011, the total market cap for listed stocks was some $55.7 billion spread over 66 listed companies, well down on the high-water market of near $98 billion spread over 85 listed companies recorded in mid-2008, though well up on the low point of near $25 billion recorded during the depths of the global financial crisis in 2009. The most widely traded stocks in 1H2011 had a strong financials focus, with KazMunayGas, Kazakhtelecom, Halyk Bank, BTA Bank, and Bank Center Credit rounding out the top five. In terms of shares by capitalization, listed companies show a good correlation to the present structure of the economy. The materials sector makes up 52.2% of all listed companies, with energy (23.5%) and financials (19.3%) mopping up the lion’s share of the rest. Telecoms makes up only 2.7% of shares by capitalization, despite the heavy trading seen in Kazakhtelecom shares. Another feature of the market is the presence of dual listings by some of Kazakhstan’s leading stocks on major foreign stock exchanges. KazMunayGas, Kazkhmys, and ENRC all have listings on the London Stock Exchange, and as Timur Kunanbayev, Executive Director of J.P. Morgan in Kazakhstan sees it, “This creates a very positive background for investment banking in the country.”

The corporate bond market has also seen a revival with some 70 corporate bonds being traded, down on the 101 traded in 2008, though up in terms of capitalization at $39.8 billion at end-1H2011, well above the $12 billion or so seen in 2009. The corporate bond market is heavily dominated by financials, with 67.7% of all bonds, though the energy sector is making major inroads into this dominance, at 26% of all bonds by capitalization. Some see the corporate bond side as being a more mature market in terms of development. The Chief Executive of Centras Securities, Eldar Abdrazakov, explained to TBY that, “The expertise here is growing on the lending side rather than on the securities side, whereas in Russia there is a lack of expertise on the lending side.”

NEW DIRECTIONS

In terms of investment banking, the Kazakhstani market is also beginning to mature, with many of the main international players finding a place at the table, especially for some of the large energy deals. Also growing is Kazakhstan’s own investment banking community. One example, Visor Capital, grew out of the need for local Kazakhstani financial institutions to get a larger slice of the deal pie. As for the future, as the CEO of Visor Capital, Michael C. Carter, Jr. told TBY, “The real opportunity for Kazakhstan should be for a more unified market throughout Central Asia and its Caspian neighbors.” In that vein, the company is looking to broaden its reach to Mongolia.

It should be remembered that the KASE itself is still young, only being established in 2007. After undergoing its first major crisis, the market is beginning to find its place in the global market, and is looking to become a full member of the World Federation of Exchanges within the coming three years, according to KASE CEO and President Kadyrzhan Damitov. All eyes will be on the government’s plans to launch the “People’s IPO”. If increased public involvement, as well as pension fund activity, in the stock market occurs, the beginnings of a regional force in the emerging market economies may well be on the cards.