The KASE of the missing trades

Is the Kazakhstan Stock Exchange getting any better?

Though it bills itself as the second-largest in the Commonwealth of Independent States, the Kazakhstan Stock Exchange (KASE) suffers from thin trading. While the volume of trade doubled in the stock market over 2011, other KASE markets were less fortunate. The trade in the two largest – for foreign exchange and overnight loans (“repos”) – barely grew. The market for government securities shrank by a fourth. Overall, trade at KASE grew by less than 3% in the first nine months of 2011, less than half the rate of growth of the national economy.

The stock market at KASE illustrates its main problem. Stock purchases are large, few and far between. Consequently, prices are volatile. On August 19 alone, the KASE Index fell by nearly 5%. In a press statement, the Exchange blamed turbulence in global markets. The share price of copper mining alone fell more than 10% that day.

Such tailspins scare off risk-averse investors: Thin trading gets thinner. The volatility may also hinder the national economy. A sudden fall in stock prices reduces wealth and thus national spending. A steep rise may mislead stockholders into thinking that they are rich. Conceivably, they may try to buy more goods than producers can provide. Prices will rise throughout the economy. Hello, inflation.

KASE may seem too small to damage the macroeconomy. In terms of capitalization (the value of stock shares offered), the New York Stock Exchange is 325 times larger. But the volume of trade at KASE in 2011 exceeded the value of Kazakhstani production that year (gross domestic product). While fewer than 10,000 Kazakhstanis may trade at KASE, they include rich citizens who hold a disproportionate share of national private wealth.

Although its listings have been declining since 2009, KASE is in better shape now than in the late 1990s, when it had to suspend trading for a year or longer in government securities and currency futures (essentially bets upon the value of currency on a given date). One of its new rules, however, may handicap it. A firm that wants to list on KASE must offer at least a fifth of its shares there before going to foreign exchanges. This restriction cuts the rate of return to offering stocks. It may lead firms to prefer debt to equity more strongly than before, or perhaps to sell all shares on foreign exchanges rather than mess around with KASE. The Exchange’s trading may diminish again.



Brisk risk



Another reform may have ambivalent effects on KASE. Originally, KASE granted one vote for each share owned by the Exchange’s shareholders. When KASE went commercial in 2007, its general meeting decided to give each shareholder one vote regardless of his number of shares. Indeed, no shareholder can hold more than a fifth of KASE shares, reported Wikipedia. Had these rules not taken effect, a few large shareholders – like the pension funds – could have dominated KASE policy. Now a diverse group may influence what the Exchange does, but most of the decision-makers have too little at stake in KASE to want to gather much information about it. In effect, the new rules empower the management.

More auspicious for KASE is the People’s IPO (initial public offering), in which the government is selling off portions – ranging from 5% to 15% -- of its enterprises. Air Astana and KazTransOil may go public this year. The government estimates that Kazakhstani citizens may demand $100 million to $200 million of state-held shares. Kazakhstani pension funds, already major players in KASE, may snap up $200 million to $300 million of shares.

Now all we need is a People’s Exchange. KASE is caught in an infernal loop: Its lack of investors leads to price volatility, which in turn discourages potential investors. To attract them, KASE needs some relatively safe products, despite their small payoffs. The economic justification for this is the widely-accepted idea that an additional dollar of spending adds less satisfaction than did the dollar before it. A dollar means more to a pauper than to a millionaire because he needs it to survive. Given this assumption, an investor will turn down a “fair bet” – say, a financial investment with a 50% chance of gaining $1,000 and a 50% chance of losing $1,000 – because he likes the gain less than he dislikes the equivalent loss. A major stock that drops 10% in a day does not exactly commend itself to the risk-averse investor. – Leon Taylor, tayloralmaty@gmail.com





Good reading

Michael Quinn. Is the Kazakhstan Stock Exchange efficient? MBA thesis, KIMEP University, 2012.



References

Interfax-Kazakhstan. JSC Kazakhstan Stock Exchange President Kadyrzhan Damitov: New defaults possible. July 2011. Online. Yet another cheerleader interview with KASE’s president, retold in mangled English.

Wikipedia. Kazakhstan Stock Exchange. Online.

World Finance Review. Kazakhstan Stock Exchange: Better years ahead. December 2011. Online. Full of softball questions and grammatical gaffes.