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Erik van Dijk
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Hi! I am Erik L. van Dijk, principal at LMG Emerge. LMG Emerge is an internationally-operating institutional investment consultant with offices in the Netherlands and at Mauritius. Our clients are pension plans and other institutional investors, family offices and HNW individuals. In close... More
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Asset Pricing and Risk in Emerging and Frontier Markets
  • Kazakhstan and the Neglected Country Effect 0 comments
    Aug 14, 2011 9:12 AM | about stocks: KAZAY, KZMYF, KZMYY, KZHXY

    Introduction

    Yesterday we added a piece about Andrew Lo's Adaptive Markets Hypothesis. The AMH allows people to make mistake, even for a prolonged period of time. This in turn leads to arbitrage opportunities that are not immediately eaten away, like in the Efficient Markets Hypothesis that still dominates financial market theory and even - to a certain extent - practice.

     

    The AMH is directly linked to psychological and neuro-physiological theories about the evolutionary development of the brain. And our brain does play quite a few tricks on us. Overconfidence, Loss Aversion, Overreaction, the Carol Effect or Syndrome, Herding Behavior, an unhealthy demand for details that in turn blur our analysis, and there are many more negative phenomenons that we all suffer from.

     

    Geographical Misperception - We all suffer from it!

     

    Even the way in which we look at the world seems to be sensitive to this. We do see the world in big blocs. In the Developed World the USA, EU and Japan are the leaders. This does already lead to an underestimation of what is going on in countries like Canada or Australia. They are geographically at the outskirts and somehow they do end there economically as well. But OK, with them culturally belonging to the same group of nations as USA and EU we can manage.

     

    Now that Asia is developing rapidly with India and China leading developments there, we often translate growth of the Emerging Markets bloc into 'Asian Growth' with Asia meaning India and China. Singapore and Hong Kong, hubs that share an Asian background with acquaintance to the Western culture (due to their history), are therefore chosen as pivotal centers in our quest for a piece of the action there.

    China, Japan, India....giants in Asia that are relatively commodity-poor, with especially a huge demand for energy-related commodities (oil, gas, coal etc). But the industrialization of China and India does rapidly increase the nead for other industrial commodities as well. And somehow we translate this demand into an interest in the Middle East, that tricky politically-dangerous area that we do know for its total energy dependence. But then again: for the next 5-10 years that dependence is definitely not a sign of weakness but a sign of market power. 

     

    Those of us who know the world a bit better, will suggest that Russia is a nice alternative. First, it has far more natural resources in a diversified mix. Second, it is politically far more stable than the Middle East.

     

    Central Asia: The Forgotten Region

    But somehow most of us always seem to forget about the region in the middle. The one surrounded by the others: Central Asia. And when talking to people it always seems as if they believe it is a rounding error. But hey: any idea how large the region is? Normally when telling people that Kazakhstan is one of the 10 largest countries in the world, 4 times larger than Texas, they find it hard to believe. That big? 

     

     


    And when they learn about the economic development and availability of resources it is clear that it is a forgotten gem stone for many, especially if you do believe in a world in which Emerging Markets are here to stay. Just take our World in the average map and change the often-seen Europe-centered presentation (with Europe in the middle, US on the left-hand side and Asia on the right) for one where the center is reserved for the fastest growing area economically. Yep, with Asia in the middle you can clearly see that Kazakhstan is not just commodity-rich, but also neatly centered between Russia and China on the one hand and India and the Middle East in the South and another growth pearl (Turkey) in the West.


    A clear example of 'We never went there, never thought about it, so gosh...didn't really know about it'. Maybe I am biased. My first visit to Kazakhstan was already back in 1981, when it had a magical sound because of the Medeo Ice Rink in Almaty (back then called Alma Ata) where people set records that were always mistrusted in the West. And that kind of thinking was part of the same mental bias that led to the neglected country effect we are witnessing now.

     

    Medeo Ice Rink - Miracle World Records in the 80s

     


    Turkey is determined to do more in Central Asia and some kind of collaboration there might have looked relatively unimportant a few years ago, but taking into account the economic growth in those nations and relatively healthy economies without huge debt loads, the world has changed. It is important now, especially when taking into account that Russia, China and Iran might like to see - and be involved in - a stronger Central Asia. If only for the sake of ensuring that lawlessness and terrorism are better controlled by forces in or close to the region.


    Kazakhstan

    Within the region Kazakhstan was already a favorite for quite a few years. But only discovered by those of you who were not afraid of Frontier Markets. The Global Financial Crisis and its aftermath led to a bit of stagnation. But the economic figures that Kazakhstan posts are still nothing but good.

    Therefore: better to take a closer look. And sure: the Nazarbayev family, led by Nursultan himself, has a tight control of the country and the economy. But the same holds for the Communist Party in China. All in all the political situation is reasonably stable and the business climate not too bad, and corruption does exist. But it is not really that much worse than in comparable nations where we are doing business. In other words: those factors are often used as excuse for us having forgotten the opportunity. And besides: Kazakhstan is too rich and interesting to be hurt by some kind of embargo. If you want to make a difference, then the only way to do so is to help the country develop further. Result will be growing wealth for the country and the investor, and most probably reduced inequality and corruption. Only when the relative power of foreigners vis-a-vis ruling elite changes from within, will things change.

     

    Nursultan Nazarbayev - Tight control, but getting older

     


    And it is a good sign that Kazakhstan is not fighting that. On the contrary, the country tries to open up to foreign investors. Our feeling is that - and that fits neatly with the cultural and religious background of the population - the Nazarbayev family understands that increased wealth will imply less direct political control. However, it might lead to more risks from their perspective, but when ensuring that the family has stakes in different industries in the country the end result could be that heirs of Nursultan Nazabayev don't really care about political power anymore but focus on their businesses instead. That seems a reasonably likely scenario.


    But bottom-line: Kazakhstan the Forgotten is more than Borat or cyclist Vinokourov who those of you who follow the Tour de France might now. The Astana cyclist team is a clear indication of Kazakhstan wanting to be discovered, but neglect and opportunities are still there.

     

    Astana, capital and second city of Kazakhstan

     


    The videos that we added to this report were shot in 2007, before the Global Financal Crisis, and under guidance of the government. So of course, they are biased. But so are government sponsored videos in most countries of the world, including our own. We therefore also added a link to the latest CIA Factbook report on Kazakhstan. All in all, it is clear that it is an interest story with according to us the following top-5 pluses and minuses:


    Kazakhstan YES

    1 Since 2000 average GDP growth rates of 7% (ie doubling of the economy every 10 years); and with commodity strength no reason to believe that this will change

    2 Government handled the GFC well and started to diversify the economy and current debt levels around or below 20 percent of GDP

    3 Investment Grade Credit Rating since 2002; and reasonably well developed banking system for a Frontier Economy

    4 Vast resources, both energy- and non-energy related

    5 Strategic and Economic Importance for BRIC giants Russia and China


    Kazakhstan NO

    1 Environmental and pollution issues related to former defense industries (Soviet times) and today's agricultural and industrial activities

    2 Young population, but still questionable demographics (net migration negative)

    3 Infrastructure needs enormous upgrading, because of export orientation of economy

    4 Economy still relatively small (GDP USD 200 billion)

    5 Political uncertainty? What will happen after Nursultan Nazarbayev?


    All in all we believe that the pluses outweigh the minuses, especially because some of the minuses will be mitigated because of some of the pluses. The joint interest of Russia, China and Turkey in a strong Kazakhstan are helpful as well.


    Therefore: don't forget about Central Asia and get your geography and economic math right!


    Links:


    CIA Factbook - Kazakhstan


    Video Kazakhstan Part 1 (2007)


    Video Kazakhstan Part 2 (2007)


    Video Kazakhstan Part 3 (2007)


    Video Kazakhstan Part 4 (2007)

    For more about Central Asia and other regions (news and music) see also our You Tube Channel

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