Clare Nuttall in Almaty -
Kazakhstan-focused funds suffered big losses over the past year. But even with stock prices now rebounding, it's proving difficult to attract international investors, who remain sceptical about the country's prospects.
The autumn of 2008 saw the Kazakhstan Stock Exchange's index, the KASE Index, fall to under a quarter of its value at the start of the year. Internationally listed companies, mainly in the banking and commodities sectors, also saw their values plummet.
During this period, Kazakhstan-focused funds with flexibility in their asset allocation were best placed to weather the crisis. Atul Patel, CEO of Compass Asset Management, says the firm's funds - Kazakh Compass Fund and Tau Capital - didn't lose as much value as the KASE or Russian stock market indices, because about 25% of their portfolio was short various stocks, with further holdings in cash and private equity. "In the first part of 2009, we maintained a defensive position because we did not believe in the rally when it happened. A significant percentage of our portfolio was flat - for example, we had around 30% invested in private equity, which does not move at all," Patel says. "We were suspicious of the recent rally, and we see a lot more value in special situations and private equity than in public equities. Our strategy will be to look for attractive private equity investments. We plan to do one or two before the end of this year."
By contrast, Seven Rivers Capital, which manages the Hanwha Kazakhstan Fund, a South Korea-based retail investment fund investing in Kazakhstan, Central Asia and Russia, saw a much sharper fall in the value of the fund because it had less flexibility. "We started investing in summer 2007. Since then, our losses have been quite big, because we did not have the right to sell our stocks and hold the funds in cash, which many other funds did at this time. All we could do was decrease the stock portion of the fund to 70%," says Seven Rivers Capital's deputy chairman, Sergey Plissak.
The rally on global markets so far this year, including Kazakhstan's, has allowed funds to improve their positions. As of August 19, the KASE Index had risen 41.8% since the beginning of the year, and was up 20.5% in the month to mid-August. By June, Compass had seen a 3.2% rise in its Kazakh Compass Fund and a 4.3% increase in the Tau Capital fund since the start of the year. Plissak forecasts that the Hanwha Kazakhstan Fund will perform better in the second half of 2009 than the first half.
However, Compass' Patel points out that the recovery of the KASE is not a good indicator of the strength of the Kazakhstan economy, because it's driven by natural resource companies KazMunaiGas E&P and Eurasia Natural Resources Corporation, and reflects commodity prices rather than conditions on the domestic market. "The decline is bottoming out, but economic improvements are not as great as the market is anticipating. The markets may pull back from where they are now. The increase, especially in large liquid stocks, is not justified under current conditions," he says.
While long-term macroeconomic forecasts for the country remain positive, fund managers say that interest from foreign investors in the country remains low. "It is still hard to drum up interest in Kazakhstan," sighs Patel. "The first wave of the recovery in emerging markets involved the areas investors felt very comfortable with, such as China, India, Brazil and Vietnam - all of which are much more developed than Kazakhstan. They are still concerned about the banking sector, as are we. However, the longer oil stays at $60-70 per barrel, the more confidence will return."
Many of Seven Rivers Capital's investors decided to withdraw their money due to the crisis, and in particular in the run-up to the February devaluation of the tenge, which has considerably decreased the firm's assets under management. Plissak agrees that interest in Kazakhstan-focused funds has not yet returned to pre-crisis levels, but he's positive about future prospects. "I believe that at least this year, and probably next year as well, private individuals will not be interested in investing in investment funds," he says. "However, I do believe that we will be able to attract money back from the international investors who invested in our funds before the crisis. We are looking in particular at South Korea where we have good partners, but other countries too."
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