"Kazakhstan's stock market must become much healthier"

Vice-President of the Kazakh Stock Exchange (KASE), Andrey Tsalyuk sums up the results of the stock market development in 2011 and proposes a forecast for 2012 in an interview with Vestnik Kavkaza.

- What did 2011 mean for the Kazakh stock market?


- It was less successful than we expected in the sphere of exchange trading in securities. The exchange turnover fell by 20% as a result of the year. The market of government's bonds and stocks, which was reduced by 20.8% and 43.2% respectively, suffered the most.
The decline in trading in government securities is largely due to the changes now taking place in the pension system. First, from January 1, 2012 new regulations limiting the investment risk of APF came into effect. I must say that pension funds had previously been severely restricted in the choice of tools for investing the assets, and in anticipation of the introduction of new regulations they were forced to convert an even greater portion of their portfolio in government securities. Second, since the beginning of this year, all pension funds have been switching to a multi-portfolio system (each investor has to choose in which portfolio he wants to keep his retirement savings between the ordinary and conservative portfolio). At the same time savings of near retirement age investors are automatically converted into a conservative portfolio, consisting almost entirely of government bonds. As a result, the demand for government securities at the primary market is growing without reaching the secondary market. This results in a decrease in the volume of exchange trading.
With regard to the activity of the share market, there were three main factors. First, a poor diversification of the KASE index, which has lost 35.7% during the year. Our index is calculated based on the prices on shares of only seven denominations, the rest of shares do not meet the liquidity criteria. At the same time last year the shares only of one denomination - common shares of the "Kazakhtelecom", increased in value. The securities of steel companies fell together with world prices on metals. Bank shares fell with the overall drop in global equity indices (last year the Kazakh banking sector has lost more than 30% of its market capitalization at the KASE). KMG, the only oil company listed in the KASE index representative list, experienced problems associated with strikes.
That is why the KASE index, on the one hand, reflects the structure of our economy but on the other hand, contains stocks in its basket that were mostly subjected to falling in the world. And since the market is judged by the behavior of its main composite indexes, our stock market did not make the best impression on investors in 2011. In the ranking of countries with the highest drop of stock index Kazakhstan was among the top five out of 100 in 2011.
Secondly, Kazakhstan does not use tools that allow earning on falling market shares. This leads to an outflow of investors' money to other markets against the background of a protracted decline of the KASE index. As a result, an already low stock liquidity become even lower which increases risks of being unable to overcome the situation. Traders do not like such risks.
Third, an alarming situation in the world can always negatively affect our market. In the fall of investors' optimism Western hedge funds begin to get rid of any shares of emerging market companies including our own. And this is immediately reflected on the situation at the domestic market.
It should also be noted that in previous years, a significant proportion of KASE turnover accounted for the so-called big deals of irregular nature. The stock exchange conducted them for various reasons, one of the most important of which was the tax optimization. Changes in the basics of KASE in 2011 did not contribute to the increase in such transactions, and it influenced the performance of market activity shares.

The corporate bond market has increased by 8.9% as a result of the 2011. Most reliable large borrowers felt themselves rather confident in this domain. Their bonds secured on the one hand, the intensification of the KASE market capitalization and on the other - the minimum liquidity at the secondary market. At the "second tier" the market recovery after the crisis defaults is very slow.

- What is your forecast for 2012? How will the implementation of the "People's IPO" program influence the market?

- When people ask about the development of the market, they usually mean for some reason, the growth of trading volume. I think that in 2012, there will be no significant growth in securities trading at the KASE. In my opinion, the market development lies elsewhere - in the improvement of its legal, technical and technological bases, emergence of new tools and services. In any case, it is more important for our market at the moment. Last year much more was done in this sphere as compared with previous years. In particular, a project on the radical reduction of the rate allowing not to follow up on deals concluded with securities. I am talking about the so-called T+0 settlement system with a pre-delivery of securities and money. A fixed-gate has been put into operation. It will allow Internet traders from different countries to follow the KASE index on their terminals and bid on our exchange through their terminals. This project is fundamentally important for attracting foreign investors to the Kazakh market.
We made considerable progress in ensuring the reliability of real-time market data delivery to global providers.
Dealing with several strategic projects, not only the stock exchange, but the entire market, including the regulator, made serious progress in becoming more aware of risks and problems associated with, say, providing a direct access to KASE trading to foreign companies or introducing the third day payment after the date of the transaction (T+3 scheme) with the use of a central counter party and a modern system of risk management. We reevaluated our trading system by examining the proposals of almost all the major auction organizers in the world in this field.
The building if a civilized market, fight against manipulation and fraud as well as development of a legal framework, which will make securities fraud extremely hard to accomplish, is a separate issue. In my opinion, 2011 was very fruitful in this sphere, since the stock exchange now has a specific opinion on many issues and is facilitating a legislative work at the moment.

All that I have mentioned allows us to know exactly in what direction to develop in the coming years.
We understand that measures on risk elimination and long-term development do not contribute to the growth of trading volume (and hence stock exchange fees). However, they create the foundation for the development of a new Kazakh market of securities, which might be smaller but much healthier than it is today. Unfortunately all these measures are taken when the market is already weak, and generates very little money. In fact, we cannot afford the luxury of contra-cyclical regulation yet.


These processes have intensified in anticipation of the "People's IPO." But in terms of impact on the volume of stock trades, we are not inclined to overestimate this program. I think that the trade will intensify at the first issue and then again when in the event of an increase in prices the holders will start selling their shares. It is difficult to image what the turnover of these securities at the secondary market would be in the future. But there are more important issues. Certain groups of the population will receive an experience in investing and trading at the stock market. Of course, for many this will be a one-off event. However some will remain at the market, and we appreciate every investor. In addition, the free float of shares will guarantee the emergence of much more high-quality issuers. It is hard to overestimate the significance of this fact for the development of our stock market

Interview by Elena Dudka, exclusively for VK