Famous hedge fund manager Ray Dalio of Bridgewater Associates in Connecticut likes to say that either you’re being paid for earnings or you’re being paid for yield. With earnings growth and yield shrinking in many of the advanced economies (negative in parts of Europe), investors are forced to look far from home. That’s not taking them to the usual places like Brazil, where interest rates aren’t what they used to be.

Emerging-market specialists are looking at liquid alternatives in the rough and tumbling world of frontier economies. Within that world, there are only a handful of countries doing well. Central Asia’s Kazakhstan is arguably the biggest and the best.

The only country that might compete with it in terms of scale and liquidity is Pakistan. But Pakistan is a junk bond, and it has much higher political risk. It is also officially an emerging market.

Within the frontier space, big-picture investors love talking about Vietnam. The U.S. trade war with China is bringing some companies there. But Vietnam is also a junk bond credit, and all investors are getting for taking on that risk is 3.7%.

Then there is the big and quiet Kazakhstan. They are investment grade at BBB-. (Pakistan, the other favorite ‘Stan for yield hungry investors, is B-.) Kazakhstan yields over 9% on some of their local currency bonds, which means investors have to be comfortable holding the Kazakh tenge. It’s down around 2.3% against the dollar this year. Compare that to the Argentina peso, a bond market on the verge of default again.

“Top Macro Story In The Region”

Almost half of frontier market countries are either at high risk of default or are already hitting the skids, according to the International Monetary Fund. The number of frontier markets like Kazakhstan that are in financial distress was zero in 2013 and 2014. It’s now closer to 50, including another ’Stan-Tajikistan, an impoverished, drug-ridden country on the border of Afghanistan.

Most of the distressed debt is occurring in African countries, which have all suffered from weak commodities markets, IMF analyst Dimitris Drakopoulous wrote in the IMF’s Global Financial Stability report. The Financial Times wrote about the distress levels in frontier markets based on that report in an article published on Wednesday.

Kazakhstan is also a commodity-heavy economy. It’s basically an oil, gas and mining play, although the government is pushing an economic diversification program.

What has kept the country interesting has been a roughly two-year push to liberalize its securities market with an expanding Astana International Exchange and the new sci-fi looking building that houses the Astana International Finance Center (AIFC). Both of these projects, brainchild of the first president of Kazakhstan, Nursultan Nazarbayev, are now a little over a year old and have brought in corporate investments from Goldman Sachs and, of course, the Chinese, who consider Kazakhstan one of their truck stops on their new Silk Road. This is one of the rare platforms where Americans and the Chinese play nice in the sandbox.

In building up their capital market, Kazakhstan has made itself a standout in frontier markets.

Renaissance Capital says Kazakhstan is “the top macro story in the region.”

“We are keeping our recommendation to being overweight Kazakhstan,” says Sofya Donets, an economist for Russia and the CIS at RenCap in Moscow. They recently upgraded their recommendation from market-weight. “We even think there is potential for a credit rating upgrade,” she says.

Renaissance Capital held their Kazakhstan in Focus Day together with the Astana International Exchange on October 24 in London.

New political leadership is in line with the political vision of ex-leader Nazarbayev, now deemed by the establishment there as the founder of modern Kazakhstan. The new president, Kassym-Jomart Tokayev, who was elected in June 2019, isn’t making any sweeping changes to the AIFC. The AIFC uses British Common Law for all companies “in the zone.” Or better yet, “under the dome.” The centerpiece structure of the AIFC is an Epcot-looking sphere surrounded by corporate offices.

The first IPO at the AIX, Kazatomprom, was a joint listing on the London Stock Exchange. Since then, there’s been two secondary share offerings for Kazatomprom and one for Halyk Bank.

Year-to-date ending September 30 saw some $11.2 billion in securities transactions in Kazakhstan, up 4.8% from the same period a year ago. So far this year, corporations issued $5.6 billion in new debt, up from $3.8 billion a year ago over the same time frame, according to the Kazakhstan Stock Exchange in Almaty.

They have a long way to go. Volume is slim, and despite numerous securities being listed, only six stocks have any trading volume.

Outside of the securities market, Kazakhstan is trying to be a serious, regional transit hub for China’s Belt and Road Initiative, especially through dry ports on the Chinese border shipping goods all the way to the Black Sea. The China Development Bank and China Construction Bank are both set up in Kazakhstan now because of it, with China Construction Bank getting chartered to issue local currency loans. Chinese brokers work at the AIX. A renminbi clearing platform is under development.

Unlike other frontier markets slipping into debt and disarray, Kazakhstan is less gun-shy about privatizing state assets. Plans to bring the state’s share in the economy to 15% are still valid, Donets from RenCap wrote in a report to clients dated October 16.

According to the privatization program approved by the government in 2016, Kazakhstan wants to reduce the level of the government in the economy from around 40% at the beginning of 2016 to 15% of GDP by 2021. To do it, they need to sell larger positions in 170 companies by next year, some of them to be listed on the AIX. To meet that goal, they need to hurry up.

Six major state-owned companies are supposed to sell more shares within the next 12 months, including Kazatomprom again, Air Astana, Kazakhtelecom, KazMunayGas, Kazpost and Samruk-Energy.

This year, Kazakhtelecom and mobile operator Kcell decided to postpone a secondary share offering because they said the market was offering them too low a price at the time. Emerging market investors have often heard the same story from Russia.

In September, 3.8% of Kazakhtelecom was sold to investors. It was supposed to be 10%. The remaining 6.2% is expected to be offered by April 2020.

“We think 2020 may be the year of a revitalization of Kazakh IPOs and SPOs,” says Donets.

Kazakhstan’s economy is also in better shape than the 40-something frontier countries the IMF says are at high risk of becoming distressed assets. GDP growth is over 4% over the last 9 months, beating the regional average. The new government is not threatening the central bank’s independence. Pension reform and strong investment (25% of GDP) are helping to improve the growth outlook and investor sentiment.

Foreign investment in Kazakhstan is balancing between China and the West, led by the U.S.

Gross inflow of foreign direct investment from China rose 21% year over year ending in the first half (June 2019?). FDI from the U.S. rose 7%. Russia, once the commandante of Kazakhstan-saw a 20% annualized drop in investment. China accounts for 5% of overall FDI into Kazakhstan, excluding the 3% from Hong Kong. China’s share is growing, but the U.S. tops the list at 23% thanks largely to the oil and gas industry.

President Tokayev has managed to maintain a good balance of the old-guard’s economic agenda necessary to keep the elite and the public happy, while remaining committed to market liberalization.

Despite weaker oil prices, pro-market policies have kept Kazakhstan on an even keel. It’s less risky than other frontier markets.

“(Tokayev’s) overseeing a smooth political transition was positive for business confidence and consumer expectations,” says Donets. The challenge is to keep political stability while implementing the needed reforms.

This has made Kazakhstan popular with the Europeans, too.

Last quarter, Kazakhstan sold $1.15 billion in new Eurobonds maturing in 2026 and 2034. The demand for the seven-year bond was so high it’s yield collapsed, and the bond pays less than half a percent. The 2034s pay just 1.48% in euros.

With yield that low, the market is saying there is no sign of distress in Kazakhstan. Given all the uprisings in places as diverse as Chile, Iraq, Hong Kong, and Lebanon, investors will keep their fingers crossed that nothing comes unglued in Central Asia’s most promising market.