Clare Nuttall in Almaty -

The range of publicly traded equities for Kazakhstan-focused funds to invest in has so far been limited mainly to the commodity and banking sectors. But the planned "People's IPO" programme is set to change that, ushering in an age of exchange-traded funds.

The timing of the People's IPOs, which will see shares in some of Kazakhstan's largest state-owned companies sold to the population at a discount, is now due to start in 2012. International advisers for the process were appointed earlier this year, and a draft privatisation plan is currently being considered by the government, to be presented to the president in September.

Until now, Kazakh-focused companies that are listed internationally, most of them in London or Toronto, are largely commodity producers, together with a handful of the country's largest banks. Despite a four-year effort to stimulate activity, the Kazakhstan Stock Exchange (KASE) remains relatively illiquid, with the exception of a handful of blue-chip companies. Again, almost all of these are commodity companies and banks. "International investors are keen to invest on local stock market, but some of its infrastructure issues need to be resolved," says Talgat Kamarov, managing director of Almaty-based fund manager Centras Securities.

He points to issues such as the slow transition away from T+0 settlement, and the fact that stocks and bonds on the KASE are traded only in the local currency. But these are gradually being addressed, and Kazakhstan has already amended legislation on pension funds, which Komarov forecasts will lead to an increase in trading volume on the KASE.

The People's IPO programme is also intended to stimulate the local exchange. "The so-called 'People's IPOs' will play an important role for the local market development in the next two to three years," Komarov tells bne. "It will boost the market with the entry of a huge number of individuals, new public issuers and a good level of liquidity."

Debuts on the KASE are expected to include power companies Kegoc and Samruk-Energo, Kazakhstan's main oil transportation company KazTransOil, railway company Kazakhstan Temir Zholy, national carrier Air Astana and telecommunications incumbent Kazakhtelecom.

New money, new products

For now, fund managers with exposure to Kazakhstan - among them Centras, Compass Asset Management, Eurasia Capital and Sturgeon Capital - tend to invest in a mix of public and private equity in order to diversify their portfolios. But the People's IPOs should also help create new investment vehicles, with fund managers say they are considering new tools for investors to invest in Kazakshtan and the region as a whole.

Mathias Wickberg, head of public markets at fund manager Compass Asset Management, says that his investment firm has a very good investor base and could start raising a new fund as soon as 2012. Meanwhile, other fund managers are considering exchange-traded funds (ETFs), which have mushroomed over the past few years to become one of the most important new tools for bringing in new investment. US-based Global-X has already filed plans for a Central Asian ETF with the Securities and Exchange Commission, and Centras' Komarov says that the launch of an ETF would be a good response to the growth of the local stock market.

With global markets currently in turmoil, the near-term prospects for new money and new products are uncertain. The extreme volatility in commodity prices has had an impact on Kazakhstan along with other emerging markets. The main KASE Index has fallen 29.7% since the beginning of 2011, and dropped 4.8% on August 19 alone. "Whatever happens globally will affect Kazakhstan," Komarov says. "The markets are very volatile, and we are seeing extreme movements up and down. We think the volatility will last in the foreseeable future as well. However, we still feel positive about commodity prices, which are the key driver for Kazakhstan-focused stocks."

Another driving force for Kazakhstan is China. While China's growth is expected to slow somewhat, it is still expected to be a respectable 5% or thereabouts, meaning Chinese demand for commodities from Kazakhstan and other Central Asian countries will remain strong.

Fund managers in Kazakhstan point out that Kazakh and other Central Asian equities remain significantly undervalued compared with their emerging markets peers, including within the CIS. Valuations today are considerably cheaper than in 2008. "Kazakhstan stands out as one of the cheapest frontier markets," says Wikberg. "This is because the Kazakhstan investment universe is limited to commodities and banks, both of which are cheap globally at the moment. But there is also a Kazakhstan discount is due to the lack of liquidity and concerns about corporate governance in some cases."