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Portfolio Highlights

Country Snapshot:
Pakistan

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Portfolio Highlights

In August, Leopard Asia Frontier Fund (LAFF) USD A-shares saw an increase of 0.9% (after fees), achieving comparable growth to relevant indices such as the MSCI Frontier Markets Asia Index (+2.6%). Despite these gains, growth of LAFF and frontier markets at large were unable to keep pace with developed markets, which have experienced strong growth over the last several months - the MSCI World Index is up 8.6% since May of this year. However, we anticipate growth in Asian frontier markets to quickly catch up to that of developed markets due to the overall promising macro-economic outlook and abundance of companies with attractive valuations in these markets.

Furthermore, we anticipate increasingly optimistic outlooks in developed economies, particularly the United States and Europe, to serve as a boon to Asian frontier markets. Two of the U.S.'s largest indices, the Dow Jones Industrial Average and Standard and Poor's 500 Index, grew to its highest level since December 2007 in early September in spite of a sluggish jobs report. And it appears the European Sovereign Debt Crises has been abated with the decision of the European Central Bank (ECB) to provide much-needed liquidity to selected economies (particularly Italy and Spain) through the purchase of government bonds. These developments will only prove beneficial to Asian frontier economies, which depend on Europe and the United States for foreign direct investment (FDI) and as export markets.

During the month, the four best performing stocks within LAFF were all from Pakistan (12% portfolio weight), with double-digit earnings from companies within the consumer staple, cement and power sectors. Pakistani portfolio companies benefited from  solid company results and positive re-ratings, and robust growth within the stock market and overall economy. In August, the Karachi 100 Index increased by 5.6% as inflation declined to single-digits (9.1%) for the first time in five years.

Our stock selection of Vietnamese companies was particularly successful considering the dismal performance of the Ho Chi Minh Stock Exchange, which decreased by 4.5% and was the second worst performing country index within our investment universe. The benchmark Vietnam Index plummeted in late August following the arrest of two senior officials from Asia Commercial Bank, one of the country's largest banks. Prior to the arrests, the VN-Index had returned 18.4% this year through the end of July. Additional portfolio positions held in Vietnam are within the consumer-related industries.

In August, top-performing indexes within the Leopard Asia Frontier Universe (in local currency) were Bangladesh (+6.9%) and Pakistan  (+5.6%). The Mongolian index (MSE Top 20 Index) continued to underperform (-8.3%), as the bourse struggled with illiquidity issues, the fallout from a failed take-over of SouthGobi Resources Ltd. by the Chinese mining aluminum producer Chalco, and a slow start to trading after implementing a new electronic trading system established with assistance from the London Stock Exchange (LSE).

In August, the fund manager visited Ho Chi Minh City, Vietnam to tour several companies operating within the agribusiness, foodstuffs, beverage and extractive industries, among others. The Fund Manager's main conclusion is that Vietnam's property market has potentially bottomed out, though it is currently too early to begin investing in banks due to the high rate of non-performing loans still on their books. In September, the fund manager will travel to Papua New Guinea to visit portfolio companies and explore potential investment opportunities.

As of August 31, the portfolio was invested in 72 shares, 1 closed-ended fund (with 49.3% discount to NAV), 1 GDR (with a 56% discount) and held 3.7% in cash. During the reporting month, 7 new stocks were bought in Vietnam and 2 stocks were purchased in both Pakistan and Sri Lanka. One Pakistani automobile wholesaler/assembler was sold with a profit of 6% (the stock now trades considerably lower). The stocks we hold are listed on the stock exchanges in Bangladesh, Hong Kong, Laos, London, Mongolia, Pakistan, Papua New Guinea, Singapore, Sri Lanka and Vietnam. The two biggest stock positions were both from Laos:  a power producer (5.9%) and a commercial bank (5.6%). The countries with the largest asset allocation included Sri Lanka (18.4%), Bangladesh (16.5%), and Vietnam (16.0%). The sectors with the largest allocation of assets included consumer goods (36%) and financials (17.8%).

Factsheets highlighting the fund's performance as of 31 August 2012 are available here:

Country Snapshot: Pakistan

Every month we highlight economic developments in one country within the Leopard Asia Frontier Universe.

Pakistan: Attractive Valuations Amidst an Unstable Backdrop

When discussing investment opportunities in South Asia, Pakistan is generally not considered a hub for lucrative deal making. The country is perhaps most recognized for its political instability and violent extremists operating along its border with Afghanistan. However, scratch the surface and Pakistan's economy reveals a prime destination for bargain hunters seeking compelling valuations.

From a macro perspective, Pakistan has the potential to become the region's next hotspot for foreign direct investment. For one, Pakistan is endowed with natural resources, including large swaths of arable land, oil, and natural gas. (Pakistan has 42.9 billion cu m of natural gas, the 21nd largest reserve in the world.) Pakistan also has a large work-age population of 60 million people working at globally competitive salaries. And remittances averaging approximately US$1 billion a month ensure steady purchasing power and liquidity within its domestic consumer market. Furthermore, a quarter of Pakistan's GDP is attributable to the manufacturing sector, which is heavily focused on producing textiles and apparel, processed foods, pharmaceuticals, construction material and fertilizer - all of which are well-positioned to see an increase in demand as developed markets, such as the U.S. and Euro-zone, rebound and traditional emerging markets in the region achieve middle and upper-middle income status.

In addition to these structural attributes, near-term indicators portend continued growth. Inflation has decreased to single digits for the first time in 5 years, down to 9.1% (YoY) in part due to lower fuel and gas prices. And in August, the Karachi 100 Index gained 5.6% with corporate results and dividend payouts exceeding expectations.

The Karachi Stock Exchange's (KSE) strong performance has been credited to a handful of triggers. In August, the Oil and Gas Development Company (OGDC), the flagship oil and gas exploration and production (E&P) company of Pakistan, subscribed to over US$ 860 million of term finance certificates (TFC), which is expected to reduce the circular debt balance within the energy chain. In addition, recently initiated policies have helped increase trade volume and liquidity. Capital gains taxes have been streamlined into a single flat rate, and the National Clearing Company of Pakistan (NCCP) now provides special tax services, including the calculation of capital gains for retail investors, which has encouraged them to increase their trading in the markets.

Fiscal policies implemented on behalf of the State Bank of Pakistan (SBP) have also played a hand in the recent surge. SBP reduced deposit rates by 200 bps in 2H 2011 and further downgraded them 150 bps to 10.5% last month (exceeding forecasts). In addition, the decrease of Export Refining Rates (ERF) by 150 bps and the national fuel gas tax by 50% have helped provide greater liquidity to markets.

Despite these recent gains, Pakistan's long-term economic growth will be contingent upon consistent inflows of FDI. Coordinated efforts toward continued improvements to its tax codes and banking sector, greater stability within its political system, and improved relations with foreign partners are the best approaches to achieve this. Recent policy initiatives have certainly provided a shot to the arm of Pakistan's economy, but policy makers must continue their precarious balancing act of increasing liquidity to the markets through reductions in interest rates, all while ensuring inflation remains on a downward trajectory. And although Pakistan is the beneficiary of large sums of development aid - the World Bank provided a US$200 million loan to improve its gas pipeline network - committed capital is not necessarily guaranteed. Payments of up to US$1.1 billion by the U.S. military for border access into Afghanistan by NATO supply trucks were just recently resumed in July after a seven-month suspension following the accidental death of Pakistani troops by U.S. drone strikes. In short, Pakistan has a lot on its plate. Pakistan will have to juggle recent economic growth with internal politics (general elections are expected in 2013) and complex diplomatic relations if the economy is to maintain its current course.

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Emerging Frontiers Blog

We invite you to stay updated with daily investment news and analyses within Asian frontier markets by visiting Leopard Capital's free Emerging Frontiers Blog. Emerging Frontiers now includes news and analysis from all countries within the Leopard Asia Frontier Fund universe.

Kind Regards,

Thomas Hugger
Fund Manager

Disclaimer:

This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.

The representative of the Fund in Switzerland is Hugo Fund Services SA, 6 Cours de Rive, 1204 Geneva. The distribution of Shares in Switzerland must exclusively be made to qualified investors. The place of performance and jurisdiction for Shares in the Fund distributed in Switzerland are at the registered office of the Representative.

By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.

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