Clare Nuttall in Almaty -

The darling of the emerging markets only a year ago, Kazakhstan's young stock market is proving unable to withstand the global tide of selling as emerging market investors turn tail and flee.

The country's leading index, the KASE Index, fell by 102.72 points, or 6.1%, on Tuesday, September 16 as news of the bankruptcy of US investment bank Lehman Brothers caused panic across the world, bringing the index's fall to 26.6% in the last 30 days. The following day on Wednesday, as markets around the world continued to plunge despite the news the US government had bailed out the giant insurer American International Group, it fell another 2.0% to 1,556.11.

Renaissance Capital's Rencasia Index for Central Asia, which is dominated by Kazakh equities, is down 21.68% in the week to Tuesday, and 31.76% in the last month. According to Gairat Salimov, Renaissance Capital's head of research for Central Asia, Kazakh equities are declining very much in correlation with the Russian blue chips. "There is no decoupling right now between Russian and Kazakh indexes, because a significant part of the investor base is funds with CIS or CEE mandates, who start to reduce their Kazakh holdings when they see significant problems in Russia," says Salimov. "This happens even though the economic dynamics and growth prospects in Kazakhstan and Russia are very different."

Like Ukraine's equity market - also in freefall - the majority of Kazakh stocks listed on the KASE are very illiquid, which multiplies the effect of sales orders. But there have also been significant declines in the valuations of the largest and most liquid stocks in the mining, oil and gas, and banking sectors, some of which are listed in London.

Analysts continue to argue that at these prices Kazakh stocks look cheap. The Rencasia index as a whole is trading at a price/earnings ratio of 5.5 times, despite a 35% increase in earnings this year. KazMunaiGas E&P, the country's largest and most liquid oil and gas stock, is being traded at just over 4 times P/E for this year. Salimov points out that, "around 40% of its market cap is represented by cash, so it's very cheap at current valuation levels."

In the current fear-saturated atmosphere, sentiment is trumping fundamentals. While the fundamentals in the Kazakh market are strong, there is a significant market risk in the current environment, Salimov says. "The risk to investors is that stocks will be valued cheaper tomorrow, which has prevented a significant inflow of funds to push up low valuations."

Send comments to The Editor