Delving into pivotal shifts of Uzbekistan's capital market throughout 2023, Odil Musaev, managing director at investment banking boutique Alkes Research, offers some insights.

Path to progress: Uzbekistan stock market in 2023
The past year has left a notable mark on the trajectory of Uzbekistan's stock market. In 2023, the market witnessed pivotal events, encompassing public offerings, remarkable shifts in retail investor dynamics and transformative regulatory and infrastructural changes.

Retail investment boom
Despite the high deposit interest rates offered by banks in Uzbekistan, reaching up to 27% annually, one of the most noteworthy phenomena of 2023 was the influx of tens of thousands of new retail investors. These individuals, entering the stock market for the first time, invested their funds in securities and became shareholders. This has had a strong impact on the overall dynamics of the stock market and has been reflected in the increased transaction volume on the Tashkent Stock Exchange.

Due to a sharp increase in retail liquidity, the number of exchange transactions surged fivefold (!) compared to 2022. In the past year, the stock exchange witnessed 411,900 securities transactions totalling 2.7 trillion som (~$215mn), with the value down by almost half versus 2022 given reduced activity in major privatisation and M&A deals.

The remarkable surge in retail investor numbers is chiefly attributed to the rapid growth of fintech, notably with the introduction of the mobile investment service Jett.uz. This innovation has allowed people from all over the country to access the purchase of securities through various mobile apps.

Despite the fact that the total trading volume through Jett amounted to just 15.59bn som (~$1.3mn), the number of transactions on the secondary stock exchange through the service exceeded 320,000, representing over 80% of all operations on the Tashkent Stock Exchange. This vividly illustrates the heightened interest of the population in securities.

Prices became more attractive
In 2023, the widely followed EQRE Blue index of liquid stocks declined by 5%, despite the UCI stock exchange index rising by 82%.

By the end of the year, the majority of blue-chip stocks found themselves in the red zone, despite the earlier growth observed in many shares during the spring-summer dividend rally. This once again confirms the emergence of seasonal trends in the local market.

The only sector that demonstrated positive dynamics was the banking sector: shares of the private bank Hamkorbank (HMKB) surged by over 90%, marking the second consecutive year as the best investment. Additionally, common shares of Ipotekabank (IPTB) increased by 8% due to the acquisition of a majority stake by the Hungarian OTP Bank for $324mn, nearly 50% above the market price.

The construction industry exhibited the most negative results, represented by the stocks of the glass plant Kvarts (KVTS), privatised last year, and the stocks of leading cement producers, namely Kizilkumcement (QZSM) and Kuvasaycement (KSCM). Additionally, shares of the leading black metallurgy player, Uzmetkombinat (UZMK), were influenced by adverse trends, despite offering the market's maximum dividend yield at 14%.

Investors were also pleased with substantial dividend payouts from the Uzbek Commodity Exchange (URTS) at 11%, and the automaker UzAuto Motors (UZMT), which went public in 2023, providing a yield of 5%.

More blue chips
Privatisation in Uzbekistan is gaining momentum, including through “People's IPOs”. For the first time, three public offerings took place within a year: the UzAuto Motors IPO concluded early in the year, raising approximately 57bn som (~$5mn); and towards the end of the year, investors witnessed the success of two additional public offerings. One involved the largest telecom operator, Uzbektelecom, raising 33.25bn som (~$2.7mn), and the other featured the state insurance company, Uzbekinvest, placing preferred shares amounting to 14.11bn som (~$1.2mn).

The recognition of issuers, effective marketing campaigns by underwriters, and the integration of modern Invest-Tech solutions collectively facilitated the attraction of over 10,000 new investors. This ultimately had a positive impact on market liquidity, with shares being traded in relatively robust volumes in the initial weeks of trading.

Mysterious debt
The debt market is notably less active, despite witnessing an almost sevenfold increase in the number of transactions over the year, primarily attributable to retail investors. As of the end of 2023, the central depository records corporate bonds issued by 33 entities, with a cumulative nominal value of 1063.4bn som. Among these, 26 companies, in the form of limited liability companies, have issued bonds totalling 669.19bn som, which became possible in Uzbekistan a couple of years ago – previously, only companies structured as joint stock companies could issue corporate bonds.

The average coupon yield on bonds is 22-27%, and the maturity 18-36 months. The highest yields are offered by several microfinance organisations, which were allowed to raise funds through bond issues.

However, fixed-income instruments are not currently attractive to retail investors due to high competition with guaranteed bank deposits. Nevertheless, they may be of interest to institutional investors or commercial organisations looking to “park” excess liquidity. Additionally, at present, thanks to ongoing reforms in the country's capital market development, bond yields are not subject to taxation.

Arguably, the most significant event in the domestic debt market was the country's inaugural issuance of “green” bonds amounting to 50bn som ($~4 million) with a maturity of five years. The issuance was conducted by the holding company Saipro Group with the support of the Uzbekistan Direct Investment Fund and verification from the AIFC Green Finance Centre.

This transaction marks a crucial milestone in shaping the domestic market for GSS+ (Green, Social and Sustainability) instruments and serves as another testament to Uzbekistan's consistent transition towards a green economy and sustainable development.

New regulator, new opportunities
The ongoing administrative reforms have also impacted Uzbekistan's financial market, with the National Agency of Prospective Projects (NAPP) appointed as the new regulator of the capital and insurance markets.

The new roadmap for capital market development has received a positive reaction from professional market participants. Major infrastructure and regulatory transformations are anticipated, including the establishment of a bridge between global depositories Clearstream and Euroclear, the adoption of a unified capital market law, advancements in corporate governance, the introduction of new financial instruments and much more.

Substantial reforms are currently under way – the end of the year witnessed several pivotal events for the market: the central depository has been transferred to the central bank, the national clearing centre has been established, a new trading board for large transactions has been launched on the Tashkent Stock Exchange, and the main resource of corporate information, Openinfo.uz, has undergone comprehensive updates.

Moreover, it is important to note that, for the first time in the securities market sphere, a “regulatory sandbox” is being launched. Similar special regimes have proven successful in various countries, including Uzbekistan in the cryptocurrency market, serving as a truly effective mechanism for refining regulation.

London welcomes Uzbekistan again
In 2023, Uzbekistan made significant strides in the international capital market. Eurobonds worth $660mn and the first “green” bonds issue worth 4.25 trillion som (~$340mn) were successfully placed on the London Stock Exchange (LSE). The deal with “green” bonds can rightly be called historical – it is the first such sovereign issuance among the CIS countries.

Due to the high demand for GSS+ bonds from institutional investors and the meticulous groundwork by the Ministry of Economy and Finance (MoEF), the central bank and transaction consultants, the yield on the 3-year UZS-denominated international “green” bonds was successfully reduced from the expected 18% to a competitive 16.25%. This rate is notably favourable, particularly when compared to the ~17.5% rate at which domestic government bonds were issued at that time. Regarding the 5-year eurobonds with a maturity of five years and a yield of 8.125% (7.85% coupon), the issuance was oversubscribed by almost three times.

Placing these bonds on the LSE under such favourable conditions, considering the global market situation, reflects the optimistic view of the global investment community toward Uzbekistan's dynamically developing economy.

Looking ahead
In 2024, reforms in the development of the capital market, particularly the stock market, are set to continue. Several IPOs of state-owned companies are expected, along with bond issuances focusing on sustainability.

It can be confidently stated that, thanks to modern technologies and the emergence of new blue chip companies, the number of retail investors will rapidly increase, positively impacting market liquidity. This trend will be further supported by active government initiatives, including tax incentives for investors, the development of employee stock ownership programs (ESOP) and the expanding admission of foreign investors to the local exchange.

Certainly, the Uzbekistan stock exchange is characterised as a “thin market”, which is typical for frontier markets. However, this particular feature creates attractive opportunities for institutional investors interested in developing countries, offering the potential for high returns.

The gradual establishment of a favourable investment environment and positive forecasts from international development institutions regarding economic growth will also contribute to strengthening the positions of the Uzbekistan stock market in the eyes of foreign investors.