Last week Uzbek President Shavkat Mirziyoyev launched a new push to develop the Uzbek capital markets with a new decree that brings in sweeping reforms. It does not represent the first attempt to get the Tashkent Stock Exchange (TSE) moving, but it is the most ambitious so far.  

Since it was set up in 1994, not much has happened on the bourse. The total market capitalisation of the market stands at around $6bn or 11% of GDP, but the vast majority of listed companies are state-owned and they are only listed because they had to have shares as part of the reorganisation of the economy following the collapse of the Soviet Union. It's not like Uzbekistan is home to a lot of equity investors or investment banks.  

However, in recent years that has started to change. There is trading on the exchange and a small group of around 7,000 retail investors that have started to play the market account for something around 40% of its daily turnover of about $2mn per month.  

Bekhruzbek Ochilov is one person trying to push market development. He works for Freedom Finance, the largest brokerage in the country with an approximate 75% market share of the active retail equity investors.  

Indices and research  

He is also the founder of EquityResearch.uz, which is the first attempt to gather research on publicly traded companies by local analysts and track performance – a basic tool for a would-be trader.  

“We have done many things to help develop the market. We have bought illiquid shares and sold them again to improve liquidity – a de facto SPO,” Ochilov told bne IntelliNews in an interview from Tashkent. “We have created an index of all the liquid stocks. The problem is that 90% of the main index is illiquid. We made an index of just the liquid stocks and update it every day on site. It's also a research platform. In the US you can find many sites like that where you can get all the information and financials. For the TSE there is none of that.”  

There is now. Ochilov called all the brokers and invited them to contribute their research to the EquityResearch.uz project and most of them did. It's a pie-growing exercise: the more information there is available, the more confident the investors will be, so the more they will trade and the more business there is for the brokerages. The site now offers company research, macroeconomic results, brokerage assessments and commentary, as well as some “How to” articles with step-by-step explanations on how to open a brokerage account for both local retail investors and international investors. For the meantime, the site is just in Russian, but there are plans to do an English version too.  

A decent index is a first requirement for traders. As bne IntelliNews reported, the Uzbek market just experienced its first big “pump and dump” incident where the shares in insurance company Universal Sugurta soared 2,000-fold in just a few weeks in February only to crash back in March. Actions like this make index results meaningless.  

“It's the same with [the national pipeline operator] Uztransgas,” says Ochilov. “A few months ago there were some big trades and the price was swinging up and down. It just shows we need a decent index to assess the performance of the market.”  

Ochilov adds that he also plans to include analysts' historical predictions compared to what then actually happened so that investors can start to work out who the best analysts are. In short, Ochilov is trying to set up a UzBloomberg of sorts.  

Tiny market as stocks locked in limbo

Saying that it is early days for the Uzbek capital markets is probably an understatement. The market remains tiny. While the total market cap is worth over $2bn, the trading volumes for any one name are of the order of $10,000-$20,000 per day, says Ochilov.  

“The market cap is a few percent of GDP but the free float is tiny. It's a huge problem,” says Ochilov.

One source of stock to trade should come from all the company employees that were given shares in their companies during the privatisation rounds in the 90s. Shares in companies were distributed to workers, most of which still have them, but they have never done anything with these shares.  

“People know they have their shares but they do nothing with them. If they wanted to sell them they would have to open a brokerage account. There were lots more tools for these investors to work with and the first privatisation funds, but today these have turned into joint stock companies and there are less tools to work with,” says Ochilov.  

The market mechanics of what needs to be done to transfer the ownership of these privatisation shares have proved to be an obstacle to freeing them up.  

In Russia many bankers got rich by going into the regions and going door to door to offer the workers of big companies bottles of vodka and gifts of cash to take ownership of their privatisation vouchers. They would fly back to Moscow and convert the vouchers to shares and take big positions in some of the most important companies in the country, making millions of dollars along the way.  

In theory, the same scheme could be carried out in Uzbekistan, but no one has tried; Ochilov says that you would have to bribe the depository to get the list of owners but even then it is not as straightforward as the company being listed on the TSE, as most of them are; transferring the ownership of a share without a broker is not possible.  

Cleaning up the market  

A lot of work has already been done to clean up the market. There were a total of some 500 stocks traded on the TSE, all OTC, but after the rules were tightened that number has been reduced to 135. And Ochilov says that if those that are still listed were asked to reapply half would fail to meet the new critieria.  

As the quality of listed stocks in the liquid part of the market improves, retail investors are being sucked in as the best stocks are performing well and starting to produce decent returns.  

Two cement companies have attracted particular attention as their stocks are liquid and they pay decent dividends. Kizilkumcement has seen its shares rise from about UZS1,500 a year ago to UZS6,000 today. Kuvasaycement has a very similar story and is another investor darling.  

The only true blue chip on the TSE is the Uzbek Commodity Exchange. It has likewise seen its share price rise from about UZS10,000 a year ago to an all-time high of UZS15,000 ($1.42). 

Ironically, the very illiquid nature of the market has also created willing parties on both sides of the deal, but a key part of the trade is if a company pays dividends – almost all the liquid stocks pay decent dividends.  

“If the shares of a company rise then some investors see that as an opportunity to finally exit and sell,” says Ochilov. “But if the stock pays dividends and the share price is going up then there are those that want to get in and buy. So that is the basis of the market and creates the liquidity."  

The dividend yields in Uzbekistan for the stocks that pay dividends are a fairly generous 15-20%, but are denominated in local currency, which reduces their appeal due to high inflation. The focus on dividend stocks also causes the stock’s price to rise as the date of record approaches when the dividend payments come due, and the price falls off again immediately afterwards before building up again slowly a few months later.  

Freedom Finance has been selling its brokerage services to regular Uzbeks and Ochilov estimates the firm has some 7,000 people who are actively investing in the market, which represents about three quarters of the total retail investment base in the country.  

In other frontier markets, international investors set up shop and basically track the index and then sell products like exchange-traded funds (ETFs) to their international clients. However, until a year ago foreign investors were not allowed to invest into Uzbek shares unless they formed a partnership with a local partner bank. Those rules have already been relaxed.  

Capital market reforms  

The president’s decree on the capital market reforms is a bid to improve the conditions on the market; at the heart of the decree is a goal to increase the free float on the market to 5% of GDP – a huge increase from now. The way to achieve this will be to list some of the biggest and sexiest companies on the TSE as a way of privatising them.  

One of the measures already in place is a ban on Uzbekistan’s biggest and best companies from listing overseas before they have a local listing. Typcially in a resource-rich country like Uzbekistan there are a few gigantic cash cows, usually natural resource companies, that are already big enough for a listing in London, Warsaw, Toronto or one of the other big international markets. But the government is hoping to use these blue chip stocks to attract domestic investors to the local market before allowing the company to raise hundreds of millions of dollars on a foreign exchange.  

As bne IntelliNews reported, Uzbekistan’s privatisation drive has been re-launched and the list includes almost all of the country’s biggest and best companies. However, few are ready. Banking shares have already been liberalised and foreigners can now buy up to 5% of a bank's stock, making them some of the most liquid shares on the exchange.

“There are more banks on the list and they may be ready this year,” says Ochilov. “But many of the others are still in the process of being prepared. [The national oil and gas company] Uzbekneftegaz is still merging all its production assets and having its non-core assets cut away. But there is a problem, as the state wants to turn the common stock of the subsidies into a preferred stock that pays very little dividend yield if any, and the shareholders are resisting. [Mining giant] Navoi is still dividing its gold and uranium mining assets, as the gold part will be privatised but the uranium will remain in state control. And Uzbekistan Airways will also not be ready until, say, 2022.”

There's clearly a lot of work to do, but the government looks increasingly serious about getting it done. Part of the president’s decree dissolved the Capital Markets Development Agency (CMDA) and transferred the authority to push the reforms to the Ministry of Finance.  

“The CMDA had a lot of good ideas and worked hard, but it was decided that it wasn't going fast enough,” says Ochilov. “But now with the weight of the Ministry of Finance behind the reforms, I'm sure they will be able to push them through.”