by Alexander Klimkin, Senior Portfolio Manager, Sigma Global Management Group, Wolfline Capital Group of Companies
Published in Invest Invest Foresight, a business magazine
December 21, 2021, 10:30
Should an investor consider investing in such local exchange markets as Polish, Kazakh, or Ukrainian? The answer to this question is contingent on the amount of capital an investor is prepared to allocate for investment and an investor's level of qualification.
If we are talking about a retail investor with little capital and little understanding of how these local markets work, then there is no point in investing in these markets without professional consultants’ advice. The risks of losses here are more likely to be greater than the potential gains.
It is quite common for investors to be interested in exploring new markets that they do not know as well as the markets back home. However, any investment must be assessed in terms of potential risks vs. returns. Local exchange markets do not just expand on their own, they follow the S&P 500 and the billions of printed dollars that have already been invested in everything possible around the world: in America, other developed countries, and emerging markets while searching for promising and undervalued assets. Therefore, there is practically no chance for retail investors to make money in these local emerging markets.
On the other hand, one of the qualified investor’s top priorities is investment portfolio diversification. If, for example, a qualified investor has a chance to enter the Warsaw market or, in particular, the Kazakhstan market, then these markets certainly look attractive.
The Kazakh market is now gaining momentum. Kazakhstan has embarked on attracting investments by implementing some sound and effective reforms such as government accountability and a decrease of the state control of the economy. In Kazakhstan, for example, there is a growing number of private equity funds that attract investments directly in the economy of this country, in its business. I think that a professional investor who is interested in diversification and has the appropriate level of capital and knowledge will definitely be able to lower his risks and increase his options of generating higher returns by allocating a part of his portfolio investments in this developing market.
Investing in the secondary stock market also makes sense. Nevertheless, it is especially important to understand the specifics of this market, its ins and outs, and risks.
To summarize the above, a retail investor should not consider investing in these local emerging markets, whereas a qualified investor definitely should. Also, regarding the specifics of understanding local emerging markets, I would like to point out that The Financial Times publishes a ranking of the countries with the most undervalued assets in Eastern Europe.
It is noteworthy that quite recently the Ukrainian private equity investment market ranked third in this rating, and it is one of the most attractive markets in Europe in terms of its undervaluation. The market has a lot of peculiarities that only a qualified investor can grasp. On the other hand, with proper qualifications and taking into account political, economic, and other risks, an investor can get significant gains on investment returns in this market.