05.02.2008

The sell-off on the global equity markets did not leave the Central Asianequities unaffected, thus, proving that the region’s equities are notisolated from the events on the global markets. The major links between theCentral Asian markets and global equity markets in our opinion are: attitudetowards risky assets, commodity prices, and access to financing.

Ideas on sectors

Banking sector

 Overall, while Kazakh banks have strongly suffered from the globalliquidity crunch, we believe that Kazakh government has the necessary funds andinstruments to mitigate the current problems in the banking and constructionsectors. The CEO of BTA estimates that to ensure an average asset growth of9–10% in 2008, the banks need additional USD4bn support from the government(without attracting additional external debt). This does not seem too much for acountry with about USD17.4 in international reserves and USD21bn in NationalOil Fund.

 Over the recent weeks we have seen some slight improvements in the Kazakhbanking sector (and investor attitude towards the banks). This week the KoreanKookmin bank confirmed that it was holding negotiations regarding acquisition ofa stake in Kazakhstan’s sixth largest bank Bank CenterCredit. The acquisitionwould be positive both for BCC directly (access to funding), as well as for theKazakh banking sector as a whole. Some smaller Kazakh banks like Temir Bank,Bank Caspian and Tsesna bank are also seen as interesting acquisition targetsfor an international player willing to get exposure to Kazakhstan (e.g.Raiffaisen, VTB). During the same time, two Asian players announced theirintention to open branches in Kazakhstan, which might mean easer access tofinancing for the Kazakh corporate sector.

Extraction sectors

 Extraction sectors (oil and gas, metals and mining) are rather stronglycorrelated with the global financial markets. The main link is: global commodityprices. Precious metals producers should fare relatively well, given the strongprice expectations.

 A positive factor for the region is that most of the companies have astrong production growth potential, which partly works as a cushion againstweaker commodity prices.

 Internal issues – especially politics play an important role in theprice dynamics.

 We are very positive on the sectors that are supporting the oil and gassector (e.g.oil field services, infrastructure). These companies have solidlong-term growth stories driven by the large capital (and people) inflows in thesector (e.g. Kashagan alone should see more than USD120bn investments), andevents on the global markets leave a limited impact on the fundamentals of thesecompanies.

Domestic demand driven sectors (ex. banking and construction)

 Domestic demand driven sectors should be the least exposed to globalmarkets problems (only via access to financing). However, currently there is arather limited choice of such companies in the region.

Quantitative approach

 The table below indicates that the WIOF Central Asia Equity fund hasrelatively low historic correlations with global developed markets. Forinstance, the correlation between the Fund and S&P 500 is 0.17, while thecorrelation between MSCI EM index and S&P 500 over the same periodwas 0.60.

 The Fund has the highest correlation with RTS2 index (0.72), MSCI EM andMSCI EM Asia indices (about 0.67).

 The Fund has a relatively low correlation with Kazakhstan’s localshare index KASE. The main reasons for this, in our opinion are: first, the factthat the Fund does not invest in the local equities; second, the relatively lowliquidity of the local shares.

Edgars Makarovs Portfolio Manager Parex Asset Management