FT REPORT – FT FUND MANAGEMENT: Look further east for the next big
market
By Fiona Rintoul

Financial Times/UK
Published: Apr 16, 2007

The growth story in central and eastern European (CEE) markets is well
known. Poland, Hungary, the Czech Republic and the Baltic countries all
outperformed western Europe in the run-up to their accession to the EU
and beyond.

Buoyed by rising oil prices and expanding consumer demand, Russia,
though a riskier bet, has also been a top performer.

What goes up must come down, however, or at least slow down, and the
eastern European markets aren’t producing the spectacular returns they
once did. Is it perhaps time, then, to look further east?

The Swedish investment boutique East Capital, a specialist in the CEE
markets, certainly thinks so. No one is writing off the CEE markets or
Russia yet, least of all East Capital, but the Stockholm-based firm
thinks the moment is ripe to mine opportunities in the former Soviet
Central Asian republics.

"The powerful expansion of these economies is very reminiscent of what
we have seen in Russia, though at an early stage," says Aivaras
Abromavicius, manager of the East Capital Bering Central Asia Fund
launched in January this year.

"With over 75m inhabitants, the region has great opportunities in the
banking and finance, consumer goods and telecom sectors, as well as oil
and gas and other raw materials."

In theory, the East Capital fund can invest in 10 of the former Soviet
republics ranging from large countries such as Kazakhstan, which has a
land mass equal to that of western Europe, and Uzbekistan with 26m
inhabitants, to the smaller nations of the Caucasus, such as
Azerbaijan, Georgia and Armenia. In practice, however, until recently
it has been extremely difficult to travel in, for example,
Turkmenistan, much less invest there, and most of the fund’s
investments – up to 90 per cent – will initially be in Kazakhstan, by
far the most developed market.

"Kazakhstan is the beacon country in the region," says Michael Denison,
lecturer in comparative politics at the University of Leeds and central
Asian political analyst for Control Risks Group. "It has the backing of
huge natural reserves in metals as well as oil and gas, and it also has
quite sophisticated banking and pensions systems."

But Kazakhstan is also a story that, to some extent, has already been
told. "Kazakhstan is very well known in the investment community," says
Gregor Holek, fund manager of equities emerging markets at Raiffeissen
Capital Management.

The 16 companies that are quoted locally are also listed on the London
or Toronto stock exchanges. Several of the larger Kazakh companies, for
example the copper mining firm Kazakhmys or leading banks such as
Kazkommertsbank and Halyk Bank, have attracted interest from
institutional investors worldwide. Kazakhmys has been in the FTSE 100
since 2005.

The question, then, really is: what other opportunities exist in the
region? Apart from one investment in Georgia, Mr Holek, who is
investing for Raiffeisen’s Central and Eastern European Fund and its
Eurasian fund, both sold to retail investors, stays away from markets
other than Kazakhstan.

Within Kazakhstan he sticks with stocks listed in London and has
limited exposure – 1 per cent within the Eurasian portfolio.

By contrast East Capital, whose fund is for professional investors and
was one of the first to invest in the Ukraine and the Balkan countries,
likes to go deeper.

The company has already invested $400m in the region through its
Russian and central and eastern European funds, and now wants to offer
investors undiluted exposure.

For Mr Abromavicius, a Lithuanian national who saw the growth in the
Baltic countries unfold, these markets are the next big transition
story and the time to get in is now.

"The window of opportunity closes faster and faster," he says. "In the
early days, you could invest in the Baltics for many years until it
became market saturated and valuations were similar to or even higher
than in neighbouring countries. This window of opportunity closed
substantially faster in the Ukraine and Romania. It will close
relatively faster in central Asia as well because these markets are
developing very quickly."

That may be so – Mr Holek felt Kazakh stocks were already being sold at
a premium before February this year – but these markets remain hugely
risky. Some, such as Tajikistan and Georgia have not yet reached their
former Soviet GDP levels. None has anything resembling a western
concept of free government. Even in Kazakhstan, the jewel in the crown,
the presidential elections did not meet international standards and the
portion of the major companies that isn’t freely floated is usually
controlled by factions related, literally, to President Nursultan
Nazarbayev.

Mr Abromavicius admits that "most of these markets are not yet
investable". But he wants to be in from the start to take advantage of
an expected consumer boom.

Aside from the large listed Kazakh companies, of which more are
expected with several IPOs in the pipeline, and which Mr Abromavicius
says have excellent management, East Capital does its own research to
find its investments.

There are no big foreign investment banks in the region, aside from
Deutsche Bank, and information is limited.

"We travel a lot on our own," says Mr Abromavicius. "We like it that
way."

It is trailblazing stuff and the risks are not to be underestimated.
Then again, with commodity prices looking like they will remain high
for longer, the region’s huge natural resources, focused in Kazakhstan,
Turkmenistan, Azerbaijan and to a lesser extent Uzbekistan, mean it is
most definitely in investors’ sights, even if, as Mr Denison suggests,
"the big players are holding off until the time is right".