Building in the Heart of Asia: Steppe Cement

An Undervalued Local Monopoly

Frontier Investing 101

Frontier investing usually concerns regions that are less than safe for investors. Usually, the average person would fail to put on a map or spell the country’s name properly. Property rights might be shaky and the mere idea of political stability is laughable.

Without a doubt, this makes for risky endeavors.

It can also make for highly profitable investments.

The reason is simple, companies’ stock prices tend to be comically low compared to the company’s fundamentals.

Of course, this is partially justified. High political risk is justifying a discount. The only question that matters is HOW MUCH of a discount.

In my last article, I elaborated on my method to manage geopolitical risk.

Step 1 explained that risk is okay as long as you are being paid for it by low valuation.

Step 2 explained you need diversification between jurisdictions. This is why it is beneficial to manage frontier/Emerging market investments in multiple locations, not just the big ones (China, Brazil, etc…).

This said I think this report will highlight one of the most obscure stocks I ever covered, in a country that most people are definitely not able to spell properly: Kazakhstan.

Photo by Nessi Gileva on Unsplash

Kazakhstan Overview

Kazakhstan is:

• BIG: 9th largest country

• Barely populated: 20 million people

• Together, this gives it the population density of Kansas. A very, very, VERY big Kansas:

  

  Map comparing Kazakhstan (in blue) to Europe

• The population is mostly rural, with 2 urban centers gathering the economic and political power: Astana (the capital, 1,1 million inhabitants) and Almaty (the former capital, 2 million inhabitants).

• Energy-rich: it is the 11th largest reserve of oil & gas in the world. (65% of exports are fossil fuels, the rest being other commodities). Oil production is rather small compared to reserves, with a lot of potential for growth.

• It could also become a green energy hub, with a recent $50B deal signed to build massive hydrogen-producing facilities using the abundant Kazakh resources of steady wind, strong sun comparable to the Mediterranean Coast, and dirt cheap, barely inhabited land.

• Mineral-rich: the world's second largest reserves in uranium, chromium, lead, and zinc, third largest in manganese, and fifth in copper. It also has iron, gold, coal, phosphates, and diamonds.

• Relatively flat (except for the East) and dry but not fully desertic either (grassy steppes) with the Caspian Sea, the Aral Lake, and Balkhash Lake the largest water bodies.

Source: https://freeworldmaps.net

The country has very ancient roots and is the result of the mixing between the Russian semi-nomadic Cossacks (you can notice the name similarities Cossack/Kossak/Kazakh) and native Turkico-Mongol Kazaks herdsmen.

Currently, 15% of the population is Russian ethnic, and 80% are Kazakhs. Russians used to be as numerous as 38%, but most moved back to Russia in the 1990s.

As we will see, the war in Ukraine has recently reversed this trend.

The connections with Russia are many, with maybe the most famous being the Baikonur cosmodrome.

Kazakhstan's GDP is relatively low, with the per capita GDP in PPP (Purchasing Power parity) in line with Bulgaria or Chile. The global picture is not a really poor country, but not rich either. Of course, as expected, a lot of the money is concentrated in the upper echelons of society and cities.

Astana, Kazakhstan's largest city / Photo by Alexander Serzhantov on Unsplash

The country is autocratic and has experienced some serious instability as recently as January 2022.

I could go into more details, but want to keep this report short.

Overall, the point is that Kazakhstan is a resource-rich country, with deep ties with Russia and is relatively rich and urbanizing, even if still for now in development and largely rural.