Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkmenistan and Uzbekistan don’t tend to come to mind when searching for safety. Nor do Armenia, Azerbaijan and Georgia in the Caucasus region. Yet there’s increasing merit to taking the road less travelled, literally and figuratively.

“Amid global market volatility and sell-offs, frontier markets generally, and in Eurasia in particular, are holding their ground well," Djumanov, managing partner at Singapore-based Eurasia Capital Management, told me recently in Ulaanbaatar, Mongolia. “This Eurasia region isn’t for everyone, but those who come won’t regret it."

Eurasia Capital manages about $200 million (Rs950crore) in hedge funds across Central Asia and plans to sell shares in a Mongolia private equity fund in Singapore in the first half of 2009.

Anyone who thinks Djumanov, 36, deserves a gold medal for understatement for noting that Central Asia isn’t for everyone should consider a few things.

First off, how safe did Lehman Brothers Holdings Inc. end up being? How happy are those who invested two years ago in Merrill Lynch and Co. or General Motors Corp.? The Nikkei 225 Stock Average is down 28% this year, the Hang Seng Index is down 36%, the Standard and Poor’s 500 Index is down 24%, and the MSCI Emerging Markets Index is down 39%.

Strong fundamentals

Djumanov says those seeking “strong economic fundamentals" will find them in Central Asia and the Caucasus, where seven of the 20 fastest growing economies are located. Much of that growth reflects the region’s endowment of vast natural resources. Its riches are in great demand among nations including the so-called Brics—Brazil, Russia, India and China. That, Djumanov argues, bodes well for Eurasian stocks. “Economies in the region are set to continue to grow rapidly in coming years," he says.

Annual increases in property prices in the Eurasia region have been 30%-35% in recent years. While those increases may seem bubble-like, property markets are starting from an extremely low base and may reflect perfectly rational demand.

Take Mongolia. “So many Mongolians live in substandard housing, and they want to change that," says Randolph Koppa, chief executive officer of the Trade and Development Bank of Mongolia. “Incomes are going up, and that means more spending on housing and other needs."

The Eurasia region’s equity and bond markets are in their infancy. Djumanov estimates that total market capitalization of the region’s stock markets is about $100 billion, or one-seventh what the US government is mulling throwing at its credit crisis. It’s not just that Eurasian economies and markets are starting from a low base. What’s more important is that the so-called frontier economies on which Djumanov is focused are undergoing pro-market changes to increase the independence and strength of the private sector. Governments are generally working to privatize state-owned enterprises and attract more foreign direct investment.

Djumanov thinks the best returns will be found through private equity investments. Eurasia Capital expects to sell shares on London’s Alternative Investment Market or Deutsche Boerse AG by next June to start other private equity and property funds and to expand in Central Asia.

Silk road

Investors like Djumanov are enthused by efforts to recreate the “Silk Road", the centuries-old, 8,000km link between Asia and Europe that was used to carry silks and spices. Organizations such as the Asian Development Bank are involved in an almost $20 billion plan to invest in roads, railways and ferry routes to boost trade in a resource-rich region with vast economic potential. As those trade connections strengthen, investors could reap huge benefits.

The region isn’t for the weak-kneed. Valid concerns about corruption, transparency, geopolitics, economic policy missteps and progress towards democracy will scare most away. Here, two things are worth noting.

One, events in the US are rapidly redefining the meaning of investment risk. US authorities are investigating Fannie Mae, Freddie Mac, Lehman and American International Group Inc. as part of a probe into the collapse of the subprime mortgage market. It’s a reminder than even the biggest, most developed and most trusted economies have major transparency deficiencies.

Two, it’s all about potential. Now that Brics have been truly discovered, investors are looking for the next emerging market stars such as Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. The Eurasia region also is worth a look. “Clearly, the global economic turmoil will present major challenges for frontier markets," Djumanov says. “But I am confident that in Eurasian countries undergoing sustainable economic growth, investors can find significant investment opportunities as these markets are going through the process of discovery."

As these economies are in fact discovered, those who got there first may be happy they took the road less travelled. It’s not like Wall Street looks a whole lot safer these days.

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