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It’s safe to say that Uzbekistan - a large producer of commodities, namely gold, copper, silver, and uranium - is diversifying its economy by pushing for tech, agricultural, and services exports, which is transforming the country into Central Asia’s largest and most important economy.
Back to our investment tour, the meeting most valuable for us was with the CEO of the Tashkent Stock Exchange, George Paresishvili, as we received several important updates on the capital markets infrastructure being put in place. This is something we have talked about extensively in previous newsletters, but it is now in the final stages of being brought to fruition and should lead to increased foreign and local investor participation which will, in due course, enable the government to begin its program of IPOs of Uzbekistan’s state-owned “crown jewel” companies.
In our September 2023 update, we discussed that President Mirziyoyev had signed Presidential Decree #291 “On additional measures of development of capital markets”. Of specific interest in this decree was the announced sandbox regime, which would be introduced for operations with international clearing companies (like Clearstream, for example), nominees, and brokers.
In our meeting with George, we were told that the Bank of Georgia (BoG) is now set up in the “sandbox” and will offer custodial services soon. BoG is working with the regulator and other government parties, including the Central Bank of Uzbekistan, to facilitate access to the Currency Exchange where government bonds are traded, as well as enabling Clearstream access to the Central Securities Depository (CSD), with further plans this summer to merge the CSD of the Currency Exchange with the CSD of the Tashkent Stock Exchange which will enable foreign investors to have a single custody account to trade all Uzbek securities.
Once these links are finalised, expected in the second half of this year, foreign investors will be able to begin trading government bonds, which should attract prominent Western foreign financial institutions to the Uzbek market. Of course, the government’s priority is opening the government bond market to foreign investors as it seeks funding for the budget deficit. Still, as investors begin allocating capital, it will only be a matter of time before there is spillover into the corporate bond and equity markets, which are both traded at the Tashkent Stock Exchange.
After many, many fits and starts, and likely more to follow as this infrastructure is effectively being constructed from scratch, our conversation with George makes it look like we are closer to the end than the beginning of the requisite buildout of capital markets infrastructure.
Equally encouraging is another item from Presidential Decree #291 signed in September 2023, which is a government scheme, copied from Russia, which will allow for up to 100x the minimum wage (~USD 8,100) of an Uzbek’s salary to be exempted from taxes if they invest into Uzbekistan’s capital markets (government bonds, corporate bonds, or equities) and hold the position for a minimum of one year. It is an absolute no-brainer to invest up to USD 8,100 of one’s salary in the capital markets in lieu of paying the equivalent amount to the government in the form of salary tax.
The capital markets regulator is currently drafting legislation around this scheme, which is hoped to be completed this year. This will be preceded by Uzbek nationals (as well as foreign investors) being able to open brokerage accounts digitally from August onwards. Thus, as the salary investment scheme is implemented, prospective investors won’t have to travel anymore to a major city to open a brokerage account, thereby expediting brokerage account openings, which currently stand at a paltry ~40,000, of which only ~10,000 are active. With our 5+ years of experience in the market, we are convinced that it is not going to take significant inflows of investor capital to radically transform Uzbekistan’s capital markets, which should lead to a strong rebound in the AFC Uzbekistan Fund’s NAV.
A final topic we discussed, which is near to my heart, is the snail’s pace of getting Bloomberg to start hosting Uzbek stock quotations. To give readers some colour, when I visited the country for the second time in October 2018, I introduced the then CEO of the Tashkent Stock Exchange to Bloomberg. We got as far as company descriptions being listed on Bloomberg until everything fell silent. This is something we have pushed for for years because one of the first questions institutional investors ask us is where they can see information on the market, and if you want to drive foreign interest in the market, then getting visibility on Bloomberg is important.
George shared with us that the exchange is actively working with Bloomberg to get live stock quotes on Bloomberg by the end of Q3 2024, and by the end of the year, foreign investors should even be able to trade Uzbek stocks through their Bloomberg terminal. Let’s assume a six to twelve-month delay on this, but it is coming, which is yet another big plus relative to where we started after many years of waiting.
The above developments should give existing and prospective investors further colour on the current situation in Uzbekistan’s capital markets and just how early we are in the proverbial game with the majority of the upside still ahead of us.
At the end of May 2024, the fund was invested in 24 names and held 7.4% cash. The portfolio was allocated to Uzbekistan (92.5%) and Kyrgyzstan (0.1%). The sectors with the largest allocation of assets were financials (48.7%) and materials (25.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.27x, the estimated weighted harmonic average P/B ratio was 0.77x, and the estimated weighted average portfolio dividend yield was 3.60%.
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