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Asia Frontier Capital's 2019 Review and Outlook for 2020 for the AFC Asia Frontier Fund

AFC Asia Frontier Fund: 2019 Review and Outlook for 2020

Dear Investors and Newsletter Readers,

Please find below our “2019 Review and Outlook for 2020” for the AFC Asia Frontier Fund.

2019 was a challenging year for Asian frontier markets with a number of headwinds such as the ongoing China-U.S. trade war, domestic policy issues, geopolitical uncertainties and soft investor sentiment towards frontier equity markets. Despite the global and domestic uncertainties in our fund universe, the economic growth and macro environment in a large part of our universe is still very healthy while markets like Pakistan and Sri Lanka have seen a significant improvement in their economic and political situation which is not yet fully reflected in their stock markets.  More importantly, the demographics in our fund universe with a large young population is why we continue to be extremely positive on the long term outlook for Asian frontier markets with Bangladesh, Pakistan and Vietnam having some very good consumption focused themes. Furthermore, the ongoing trade tensions as well as the search for lower cost manufacturing destinations is leading to an increase in foreign direct investments into Bangladesh, Myanmar and Vietnam which is having a positive impact on economic growth, employment and consumption. Economic reforms also continue in Asian frontier markets with Uzbekistan standing out in this area as it goes through a wave of market oriented reforms.

As we enter 2020, we expect global economic growth to have tailwinds through dovish central bank policies and an incremental improvement in trade and geopolitical uncertainties which should lead to better sentiment towards frontier markets. Furthermore, taking a three to five year view, Asian frontier markets are still expected to have amongst the highest economic growth rates relative to other regions which should benefit their stock markets as the negative investor sentiment in frontier markets has made valuations across our fund universe extremely attractive with our AFC Asia Frontier Fund trading at a P/E of 8.1x, its lowest multiple since inception.

In addition to this, Asian frontier markets are under-researched and the negative sentiment has led to more companies being ignored by investors which has also made valuations very attractive. Despite the negative market sentiment, correlations and volatility for the fund have held up with the correlation of the AFC Asia Frontier Fund with the MSCI World Index at 0.32 since inception while annualized volatility since inception stands at only 8.9%, lower than last year’s levels of 0.37 and 9.3% respectively -  this makes the fund a sound diversification tool for investors. Therefore, we believe that attractive valuations, stable to improving earnings growth and a change in sentiment towards frontier markets should lead to a rebound in Asian frontier markets in 2020. We expect the stock market rebounds in Pakistan and Sri Lanka to continue in 2020 while equity markets in  Kazakhstan, Uzbekistan and Vietnam should generate healthy returns next year.

We hope you find the "2019 Review and Outlook for 2020" useful and thank you for your investment and your interest in our monthly newsletters and travel reports. Please let us know if you have any questions about this report or on any of our markets.


2019 Review

Trade tensions between China and the U.S. and geopolitical uncertainties in the Middle East continued to consume most of the headlines in 2019 which hurt investor sentiment, while worries not only about slower global economic growth but also the economic slowdowns in larger emerging markets, like China and India, dampened investor sentiment towards emerging and frontier markets in general.

The trade conflict between China and the U.S. continued with both ups and downs with market participants expecting a partial trade agreement on multiple occasions only to be disappointed with no agreements and at times an escalation between both parties. However, the workings of a phase one trade deal were announced on 13th December 2019 which should lead to more positive market sentiment going forward. The tensions between the U.S. and its trading partners were the major factor for the International Monetary Fund reducing its global economic growth forecast to 3.0%, a 30 basis point reduction from its April 2019 outlook, the lowest global economic growth since the 2008-2009 financial crisis.



(Source: International Monetary Fund)


In addition to trade and geopolitical tensions, many countries across frontier and emerging markets had domestic policy issues to contend with which were unrelated to trade or geopolitical uncertainties. Asian frontier economies like Bangladesh, Pakistan and Sri Lanka and emerging one’s like China and India all had domestic related issues as well, impacting economic growth and investor sentiment in 2019. However, in some markets like Pakistan and Sri Lanka, the tide is turning for the better and we will discuss this further below and in our 2020 outlook.

After increasing interest rates aggressively in 2018, 2019 saw central banks globally go on a loosening spree as worries over economic growth surfaced. The U.S. Fed cut interest rates three times by 25 basis points each, with all three cuts happening in the second half of 2019. Asia also saw almost all major central banks cut rates as the chart below shows.


(Source: Bloomberg)


From an overall macro environment though, Asian frontier countries are either in a strong position or are seeing a big improvement as the higher interest rates and currency weakness of 2018 lowered unnecessary imports and helped to improve current account balances. Bangladesh, Pakistan and Sri Lanka, all of which suffered from widening current account deficits in 2018, witnessed a reduction in their current account deficits – a much needed boost to macroeconomic stability. Vietnam on the other hand continues to post a current account surplus thanks to rising exports.


(Source: International Monetary Fund)


GDP growth in Asian frontier markets is also expected to be bottoming out for countries like Pakistan and Sri Lanka, while economic growth rates remain robust in Bangladesh, Kazakhstan, Mongolia, Myanmar, Uzbekistan and Vietnam. However, despite stable to improving macro-economic indicators, investor sentiment towards frontier and emerging markets was extremely weak in 2019 due to the factors mentioned above, i.e. trade tensions and their impact on global economic growth rates.


(Source: International Monetary Fund)


This is an important point as frontier and emerging equity markets, despite having a stable to improving macro environment and/or stable to improving GDP growth rates, have been underperforming developed stock market indices i.e. the U.S. As the chart below shows, the S&P 500 Index has outperformed frontier and emerging markets by a large margin over the past decade while valuations in frontier markets, and more specifically in Asian frontier markets, have become very attractive relative to expected growth rates. The AFC Asia Frontier Fund now trades at its lowest ever P/E multiple while many of the fund’s markets, as well as stocks, are trading at a big discount to historical valuations.


The S&P 500 has outperformed frontier and emerging markets over the past decade

(Source: Bloomberg, data rebased to 100)


While the valuation gap between frontier and emerging markets versus the S&500 has increased

(Source: Bloomberg)



(Source: Asia Frontier Capital, Bloomberg)


Attractive valuations and stable to improving GDP growth rates in Asian frontier markets are backed by extremely favourable demographics with our universe hosting some of the most populous countries globally. Despite uncertainties about trade, most of the countries in our universe are domestically driven and hence consumption by a large, young population is a stronger longer-term trend relative to ongoing trade tensions. Bangladesh, Kazakhstan, Myanmar, Pakistan, Sri Lanka and Uzbekistan at present do not have a large percentage of their GDP exposed to trade.

Within our universe, Vietnam is the major economy which is highly exposed to global trade with total trade accounting for almost 200% of GDP. But even here, Vietnam is actually benefitting from the trade tensions between China and the U.S. as it sees an increase in foreign direct investments and exports. This is also an important trend in Asian frontier markets as not only Vietnam but also countries such as Bangladesh, Cambodia and Myanmar are expected to gain with wages in China increasing and Asian frontier markets offering lower cost alternatives which are also geographically well positioned.


(Source: United Nations Population Division)



(Source: World Bank)



(Source: Bloomberg, General Statistics Office of Vietnam, Bangladesh Export Promotion Bureau)



(Source: China Statistical Bulletin, Wage Indicator Foundation, Bangladesh Garment Manufacturers & Exporters Association, General Statistics Office of Vietnam)


Despite Asian frontier markets having had a tough year in 2019, correlations of Asian frontier markets with the MSCI World Index sustained their low attractive levels with some markets such as Bangladesh continuing to have a negative correlation with the MSCI World Index. This reflects the sound diversification opportunity that Asian frontier markets offer. Furthermore, the fund’s benchmark agnostic strategy has sustained its low volatility with the annualised volatility of the AFC Asia Frontier Fund at 8.9%, much lower than most indices as shown below.


(Source: Asia Frontier Capital, Bloomberg. Correlations calculated on monthly returns since inception)



(Source: Asia Frontier Capital, Bloomberg.
Annualised volatility calculated on monthly returns since inception)



Importantly, Asian frontier markets remain under-researched and this trend is continuing given the soft sentiment towards frontier markets. The table below shows the number of sell side analysts covering well-established blue-chip companies within our universe relative to larger emerging markets. In the current environment, many of these companies besides being under-researched are also now being ignored by a large set of investors due to the current sentiment towards frontier markets. The result is that there are a number of bargains available. Furthermore, in line with our policy of being on the ground for research, our team conducted visits in 2019 to Bangladesh, Cambodia, Iraq, Jordan, Kazakhstan, Mongolia, Myanmar, Oman, Pakistan, Sri Lanka, Uzbekistan, and Vietnam. Through this, our team carried out close to 200 one-to-one meetings with company management teams.


Asian frontier companies are currently under-researched and ignored

(Source: Bloomberg)


Below we discuss the 2019 performance for our key markets, the stocks we like and the long term trends we observe. The 2019 overview is according to country weights of the fund.


(Source: Asia Frontier Capital)



The macro-economic story of Vietnam remains one of the most superior in frontier markets as it benefits from the trade tension between China and the U.S. This is reflected in rising foreign direct investments (FDI), not only from traditional investors like Japan and South Korea but also from China as manufacturers look to shift production to Vietnam to escape uncertainties over tariffs and higher costs. Exports, manufacturing growth and retail sales were robust in 2019, while tourism arrivals grew strongly as well.


(Source: General Statistics Office of Vietnam)



(Source: General Statistics Office of Vietnam, Vietcapital Securities)


From a stock market perspective, the VN Index gained +7.0% in 2019 but a large part of this performance has come from a few stocks, namely the Vingroup companies, a handful of banks and Petrovietnam Gas JSC (GAS). The strength in the market has not been broad-based across market cap ranges which one usually sees when an economy is doing as strongly as Vietnam’s is. Though the fund does not hold some of these large cap names since it follows a benchmark agnostic approach, and in certain cases cannot buy these names because the foreign ownership limit is full, it has exposure to companies across small, mid and large cap names. Amongst large cap names, the fund owns Airports Corporation of Vietnam (ACV), Vincom Retail (VRE) and Vietnam Engine & Agricultural Machinery Corporation (VEA).


VN Index performance was led by a few large cap names – broader market did not increase as much - VN30 Index and VN70 Midcap Index underperformed the VN Index

(Source: Bloomberg, data rebased to 100)


In last year’s review we wrote that we like the tourism sector in Vietnam because the growth of low-cost carriers in the region is making it cheaper to travel while spending time as a tourist in Vietnam is also very economical. International tourist arrivals have grown by 15.4% in 2019 with the growth being led by Asian tourists which increased by 18.2%. This momentum in international arrivals has helped ACV not only improve its growth rates but also its margins since international passengers provide higher margins. Revenues and net profits in the first nine months of 2019 have grown by 13.0% and 19.3% respectively while gross margins have improved by 110 basis points YoY to 51.8%. Furthermore, higher margin non-aeronautical revenues which also consist of duty-free revenues have grown by 13.4% so far in 2019. At an EV/EBITDA of 11.5x based on 2020 earnings, the stock remains attractively valued against other Asian peers like Airports of Thailand and Shanghai International Airport which trade at an EV/EBITDA of 24.7x and 18.6x respectively.


(Source: General Statistics Office of Vietnam)


Most Asian airports have generated superior returns in the long run



In last year’s review & outlook we also mentioned that we like the auto and modern retail sector. The fund’s auto holding, VEA, which has equity stakes in the local operations of Honda, Toyota and Ford has witnessed a 6% growth in net profits so far in 2019, slightly lower than expected due to certain one-off expenses. However, passenger car and commercial vehicle sales of Honda, Toyota and Ford grew by 36%, 39% and 59% respectively in the first nine months of 2019. With passenger car penetration in Vietnam remaining very low compared to other regional countries, VEA’s growth rates should improve going forward as consumers upgrade from motorbikes to passenger cars. The stock remains very cheap at a trailing 12 months P/E of 9.3x and a dividend yield of 7.8%. The stock is up 24% year to date.


(Source: International Organization of Motor Vehicle Manufacturers
Motorization Rate: Vehicles per 1,000 people. Assumes passenger and commercial vehicles)


In the modern retail sector we initiated a position in Vincom Retail (VRE), the leading mall operator in Vietnam as we believe it is a good proxy to rising consumerism, disposable income and urbanisation. We believe VRE has a strong business model due to its access to a large land bank, anchor tenants and scale which therefore attracts international brands like H&M, Uniqlo and Zara to set up shop in VRE malls. In the first nine months of 2019, its leasing revenues and net profits have grown by 26.2% and 14.7% respectively while expansion plans remain in place to tap the underpenetrated modern retail segment.


(Source: Central Pattana)


We also like the industrial park segment due to increasing FDI coming into the manufacturing sector which has led to more demand for industrial land in manufacturing hubs outside of Hanoi and Ho Chi Minh City. The fund owns Kinh Bac City, one of the leading industrial park developers in Vietnam, whose industrial land sales have increased by 36% this year while net profits have grown by 22%. Furthermore, selling prices per square meter in some of their industrial parks have increased by 34−40% YoY due to greater demand. The stock is up +16% year to date.

We also wrote in last year’s review that we like the logistics segment due to greater industrialisation in Vietnam. The fund’s holding, Petrovietnam Transport has grown its net profits by 32.2% in the first nine months of 2019 on the back of increased transportation volumes of crude oil, refined petroleum products and gas. The stock currently trades at a trailing 12 months P/E of 6.5x with a dividend yield of 6%.

During the year the fund sold its other logistics related holding, Saigon Cargo Services as it could be facing near term headwinds from slower global air freight volumes. The other major holding the fund exited was Masan Group which was sold in March 2019 due to worries over the African Swine Flu impacting its animal feed business while its consumer business was also witnessing slower than expected growth rates.


(Source: Bloomberg, Vietcapital Securities)



The main event in 2019 was the conflict surrounding the “Dubai Agreement” signed by Rio Tinto and the Government of Mongolia in 2015 regarding the execution of phase II (the underground portion) of the gigantic Oyu Tolgoi copper and gold mine. During 2019 the agreement’s legitimacy was contested in the Mongolian Parliament and it became a serious concern among foreign investors as to whether the agreement would be nullified, thereby causing a significant drop in investor confidence and therefore hurting the stock market’s performance. The weakness of the Mongolian stock market has created some great value opportunities, such as the opportunity to buy the local producer of Heineken Beer at a valuation of 11x 2019 earnings.

While in late November 2019 the Government of Mongolia determined the agreement would not be nullified, it still caused a marked decrease in sentiment for foreign investors. Assuming the project can get back on track, with the second mine shaft completed in December 2019, Turquoise Hill Resources and Entrée Resources (two listed companies involved in the project) should undergo a revaluation in their share prices, while broader investor sentiment should improve. Further, it would not be a surprise to see the government eventually swap its 34% equity stake in the project for a royalty, enabling near term revenue generation from the project for the country. Mongolia’s negative market sentiment was the biggest detractor to fund performance in 2019.


Mongolia had a tough year but valuations now attractive

(Source: Bloomberg, data rebased to 100)



There were two main reasons why the Dhaka Stock Exchange Broad Index (DSEX) witnessed a weak 2019 despite the overall macro situation in Bangladesh remaining broadly stable. (1) Grameemphone, the biggest weight in the DSEX with around 14% is currently going through a major legal battle with the telecom regulator regarding disputed taxes. This issue is not new but has heated up in 2019 again which has led to weakness, not only in Grameenphone’s stock price, but also impacted broader investor sentiment. (2) The other dampener on investor sentiment in Bangladesh has been the banking sector which accounts for almost 18% of the index. The government over the past year or so has made decisions which have impacted the funding costs of the banking sector, leading to pressure on net interest margins as well as loan growth. Furthermore, with worries of rising non-performing loans within state run banks, fear and uncertainty has spread across the banking sector which has led to a drop in private sector credit growth. With Grameenphone and the banking sector together accounting for 32% of the index weight, weakness in these names has led to negative sentiment across the market.


The Dhaka Stock Exchange Broad Index (DSEX) was held down by high weights Grameenphone and banking/financial service companies

(Source: Bloomberg, data rebased to 100)


With regulatory concerns expected to be an overhang for Grameenphone, the fund exited the stock in January 2019, while we continue to hold BRAC Bank which has seen a correction in its stock price but stands out in terms of management quality and operating metrics amongst the private sector banks in Bangladesh.

However, despite these roadblocks in the telecom and banking sectors, consumption and GDP growth have remained robust in Bangladesh as consumer and pharmaceutical companies have declared strong earnings growth so far in 2019 and GDP growth is expected to remain in the 7% range. The themes which we like in Bangladesh, consumer appliances and pharmaceuticals, have both delivered good results. Singer Bangladesh, one of the leading consumer appliance company in the country has delivered revenue and net profit growth of 14.6% and 13.2% in the first nine months of 2019 thanks to increased demand for air conditioners, refrigerators and televisions as penetration of such products remain extremely low in Bangladesh. The company was acquired by Turkey’s Arcelik in March 2019 and this should help Singer Bangladesh to launch new products as well as to reduce sourcing costs due to Arcelik’s scale and reach in the region.


(Source: Asia Frontier Capital) 


In the pharmaceutical space, the fund owns Beximco Pharmaceuticals whose FY19 net profits grew by 20% while its 1QFY20 (September 2019) net profits increased by 15.4% YoY. These growth rates over the past year have been better than its larger competitors while the stock continues to trade at a very attractive P/E of 8.0x based on FY20 earnings. The fund holds the London listed GDR of Beximco Pharmaceuticals which currently trades at a 30% discount to the local listing.


(Source: World Bank)


Beximco Pharmaceuticals outperforming larger competitors and trades at a much lower valuation

(Source: Bloomberg, Tellimer)



(Source: Bloomberg)


Despite the DSEX Index correcting by 17.4% in 2019, the fund’s Bangladeshi exposure remained flat due to positive moves in Beximco Pharmaceuticals and British American Tobacco Bangladesh (BAT). This was possible thanks to our sale of Grameenphone early in the year, while the exposure to the problematic banking sector was only via BRAC Bank. In addition to this, the fund also exited its position in Square Pharmaceuticals due to its growth rate lagging that of its peers – this also helped with relative performance against the DSEX Index as Square Pharmaceuticals stock price is down 23% this year.

Broadly, besides the issues with Grameenphone and the banking sector, the macro environment in Bangladesh remains stable relative to other markets. Total debt to GDP as well as external debt to GDP remain low, foreign exchange reserves cover close to 7 months of imports while the current account deficit is expected to contract to 2.0% of GDP in 2019 from 2.7% in 2018. Furthermore, the government remains focussed on infrastructure development which can help improve overall economic growth rates going forward.  


(Source: International Monetary Fund, World Bank)



Uzbekistan’s GDP is projected to have grown by 5.5% in 2019 according to the International Monetary Fund, continuing the trend of robust growth experienced over the past several years. Inflation reached 15.6% as of November 2019 and is expected to decelerate towards the single digits into late 2020 as the Central Bank shifts to an inflation-targeting regime from 1st January 2020. As the government works to lower inflation, it is simultaneously eliminating blanketed subsidies. For example, in October bread flour prices were floated and instead of blanketed subsidies the Ministry of Finance issued targeted subsidies to the most vulnerable part of the population.

With inflation falling and subsidies being eliminated, competition is rising in multiple sectors as the country continues its transformation towards a free-market economy. With credit being a key driver of continued economic growth, on 25th November 2019 state-owned Uzpromstroy Bank issued a USD 300 mln Eurobond. The Eurobond is expected to be followed by several other banks looking to raise capital in order to service the high demand for credit as current consumer credit to GDP currently stands at a low 15%. This reform momentum led to positive stock market sentiment which resulted in the AFC Uzbekistan Fund gaining +7.6% so far in 2019 (the AFC Asia Frontier Fund is invested in the AFC Uzbekistan Fund).

Sri Lanka

Sri Lanka began 2019 with political uncertainties due to the instability that was caused in the last quarter of 2018 when former President, Maithripala Sirisena tried to dissolve parliament and dismiss former Prime Minister Ranil Wickremesinghe. As if things could not get worse, the tragic Easter Sunday attacks in April 2019 further hurt the economy since the tourism sector accounts for 5% of GDP and is the third highest foreign exchange earner for the country. These events and the following stock market weakness made valuations in Sri Lanka very attractive with some companies trading at multiples last seen in 2009 during the civil war.

A divided coalition and question marks over security gave further momentum to the opposition prior to the presidential elections which took place in November 2019. As a result, the opposition, namely the Rajapaksa led Sri Lanka Podujana Peramuna Party (SLPP) witnessed a decisive win for their candidate, Gotabaya Rajapaksa. Due to a high probability of impending political change and very attractive valuations, the fund began increasing its exposure to Sri Lanka in the second half of 2019.

In the second half of 2019, the fund bought the conglomerate John Keells Holdings, two consumer staple names – Ceylon Tobacco and Nestle Lanka – and two banks – Hatton National Bank and Commercial Bank of Ceylon. The Colombo All Share Index has had a much better second half than first half of 2019 with the index gaining 12.7% since the end of June 2019. In the same time period, the fund’s Sri Lankan holdings have returned 27.9% due to not only a broad-based rally but also a 40% gain in Dialog Axiata, the telecom company the fund holds in Sri Lanka.


Sri Lanka is still valued attractively relative to history
With a stable government in power the market can re-rate further

(Source: Bloomberg)


Dialog Axiata – the fund’s biggest position in Sri Lanka – Significant outperformance versus the Colombo All Share Index in 2019

(Source: Bloomberg, data rebased to 100)



Sentiment towards Pakistan remained negative for most of 2019 and the fund rightly had a low weight to the country for most of the year. The Pakistan KSE100 Index had lost −29.5% in USD terms until the end of August 2019. However, this draw down had factored in most of the negatives such as the currency depreciation, higher interest rates and slower economic growth. With the International Monetary Fund (IMF) deal coming through in the summer, sentiment began to change as it gave investors more confidence on anticipated reforms while the weakened currency and high interest rates brought down imports significantly, helping to lead to a large reduction in the current account deficit. In addition to this, on the fiscal side as well the government was able to reduce its primary deficit and the State Bank of Pakistan kept interest rates unchanged in its policy meetings in September and November 2019 after raising rates aggressively since the beginning of 2018.

With an improving macro environment, the fund began increasing its weight to Pakistan from October 2019 onwards as we believe that earnings for most sectors are close to bottoming, if they haven’t already, and the State Bank of Pakistan could begin cutting interest rates from the second quarter of 2020. We therefore believe that cyclical stocks in the auto and cement sectors can do well over the next year as their valuations have corrected significantly over the past two years while their profit margins are also bottoming. The fund has increased its exposure to Pakistani auto and cement companies and this has already helped with performance as the KSE100 Index has rallied by 29% since the end of September 2019 making Pakistan one of the best performing markets globally in the past three months. The fund’s Pakistani holdings have returned 31% in the same time period.

The important point to remember is Pakistan has a population of 200 mln people with very favourable demographics while the stock exchange offers a number of well-established consumption focused names in the auto, consumer staples and pharmaceutical space and more importantly valuations remain very attractive despite the recent run up in the market.


Pakistan’s stock market is still cheap and has lot of room to increase despite the recent rally

(Source: Bloomberg)


Pakistani cyclical names in the auto and cement sectors have outperformed the index and banks in the recent rally – The fund has exposure to both auto and cement companies

(Source: Bloomberg, data rebased to 100)



Despite negative publicity due to the refugee crises, Myanmar is slowly but surely moving in the right direction as the insurance sector has been opened up to foreign investors and foreign banks are now allowed to lend to local businesses. Furthermore, foreign direct investment (FDI) commitments grew by 77% in the first half of 2019 to USD 2.3 bln with most of these investments being committed to the infrastructure and manufacturing sectors.

The biggest event of the year in the country was the 20% stake sale by Yoma Strategic Holdings (Yoma) to Ayala Corporation, a leading conglomerate from the Philippines. This is a big vote of confidence for Yoma’s core businesses in the food & beverage, financial services, real estate and auto sectors as all these industries remain untapped in Myanmar. During the year Yoma also increased its stake in Wave Money to 44%, the leading mobile financial services platform in Myanmar which is a joint venture with Telenor. We believe Yoma offers the best available exposure to Myanmar due to its focus on key growth areas which are all linked to growing consumption in the country.


(Source: Boston Consulting Group)



Performance of the fund’s holding in EDL-Generation, the listed company owning hydropower assets of the Laotian government, saw sizable losses due to growing debt service payments from its bonds issued in 2018 in Thai Baht which continue to drag the company’s profitability. Low water levels in the company’s dams (especially in the Mekong River) exacerbated the issue with less than estimated electricity production. 


In Kazakhstan the fund owns one name, Halyk Bank, and this position has done exceptionally well in 2019 with a total return of +40.6%. Halyk Bank’s earnings increased by 53.3% in the first nine months of 2019 due to loan recoveries and lower provision expenses as the benefits of its acquisition of Kazkommertsbank came through. Fundamentals remain solid with a RoE of 29.7% and a capital adequacy ratio of 23.4%. Based on this, it would not be surprising if the bank increases its dividend pay-out, which it has already guided to in June 2019. Relative to fundamentals and earnings prospects, the stock is valued very attractively at a price to book ratio of 1.2x and a dividend yield of 8.3%.

Another tailwind for Halyk Bank has been the stable macro environment in Kazakhstan. In the first nine months of 2019 GDP growth was 4.3%, the third year of more than 4% growth after the economic slowdown of 2015/16. Growth has been led by the construction sector which grew by 13.5% while industrial production and retail sales increased by 3.3% and 5.5% respectively.


Halyk Bank in Kazakhstan outperformed the Kazakh Index as well as most other leading banks in our universe

(Source: Bloomberg, data rebased to 100)


2020 Outlook for AFC Asia Frontier Fund Universe

As we move into the New Year, broader concerns remain similar to the start of 2019, namely slower global economic growth, trade tensions and geopolitical uncertainties. Though concerns about slower global economic growth remain, the big difference between the start of 2020 and that of 2019 is that most central banks globally have cut interest rates to support growth compared to the beginning of 2019 when interest rates had yet to reverse their hawkish trend. This leaves equity markets in a more comfortable position relative to the start of 2019.


(Source: Bloomberg)


Furthermore, though trade relations between China and the U.S. may remain fickle, the signing of a phase one trade deal between the two parties would give global markets some relief as we begin 2020. In addition to this, the decisive victory for Boris Johnson and the Tories in the recent U.K. general elections reduces market tensions over the Brexit drama. An unknown can be how the geopolitical issues in the Middle East play out, but from recent moves that we have seen, it appears both the U.S. and Saudi Arabia want to avoid a severe escalation of conflict.


(Source: International Monetary Fund)


In 2020, the U.S. will also see the start of a new presidential election cycle which could create some uncertainties in investors’ minds but it seems the current administration would want a strong economy and this is expected to be positive for global investor sentiment.

So how does this impact the outlook for Asian frontier markets in 2020 and beyond?

As mentioned above, the macro and geopolitical uncertainties which took up most of the headlines in 2019 are beginning to ease which is a big positive for investor sentiment. Furthermore, with central banks in Asia becoming more dovish, stable economic growth in most of our markets will be supported by accommodating central bank policies. More importantly, the shift of manufacturing activities from high cost locations into lower cost Asian frontier markets like Bangladesh, Cambodia, Myanmar and Vietnam will likely continue given rising wages in China as well as uncertainties over future tariffs.


(Source: International Monetary Fund)



(Source: Kingmaker Footwear, Yue Yuen, Dream International)


Keeping the above factors in mind and frontier market sentiment having been severely impacted in 2019, frontier markets look ripe for a re-rating as lack of investor interest has made valuations extremely attractive going into 2020 while fundamentals remain broadly stable.


Negative sentiment has made AFC Asia Frontier Fund valuations
attractive while fundamentals are solid

(Source: Asia Frontier Capital)


Below is the 2020 outlook for our fund universe


Improving market sentiment in Bangladesh requires some very simple decisions but is there the political will? GDP growth and overall macro metrics remain stable but until the authorities can resolve the Grameenphone and banking sector issues, which together account for 32% of the index, overall sentiment may remain soft. However, on a bottom up basis we expect pharmaceutical and consumer discretionary companies to do well as consumption demand should remain strong due to under-penetrated markets. More specifically, we expect good earnings growth from Beximco Pharmaceuticals and Singer Bangladesh.

With export growth weakening in the last few months of 2019, we believe that the Bangladeshi Taka (BDT) will depreciate moderately in 2020 to support export growth. However, with monthly import cover of 7 months, we do not expect a sudden devaluation, but a more gradual 3−5% depreciation going forward.

The current negative sentiment has made overall valuations very attractive with the MSCI Bangladesh IMI Index trading at a trailing 12 months P/E of 10.5x. Any positive moves on the policy front regarding Grameenphone or the banking sector can lead to a big re-rating in Bangladesh as the macro fundamentals and earnings growth remain stable.


(Source: International Monetary Fund)



2020 will be a decisive year for Cambodia as the country has benefited from the “Everything But Arms Agreement” with the European Union which has given Cambodian exporters duty-free access to the EU market, worth nearly USD 6 bln. Due to the Cambodian government’s poor human rights record and hosting what was widely regarded as an unfair presidential election in 2018, the EU is undergoing a process of review, whereby in February 2020 the EU may decide to rescind Cambodia’s access to its market on a duty-free basis. This could cause a significant slowdown in the country’s robust 7% odd GDP growth in recent years.


As 2019 draws to a close, the Iraqi equity market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), is likely to end the year down −2.5%, which could mark the end of a brutal multi-year bear market that saw declines of −15.0% in 2018, −11.8% in 2017, −17.3% in 2016, −22.7% in 2015, and −25.4% in 2014.

Banks, being the most leveraged sector to an economic recovery, exhibited signs of a bottoming of fortunes in 2018 as seen from their full year earnings for the year, with some resuming growth in loans and deposits in 2019. Lending support to expectations for an economic recovery were upward revisions to non-Oil GDP by the IMF for 2019/2020 from earlier estimates of +3.0% and +3.9% to +5.4% and +5.0% respectively. Much of this was confirmed by other macro figures which showed a strong recovery in imports in 2018 to satisfy increasing demands for consumer goods, as well as continued growth of broad money, or M2, as a proxy for economic activity.

The current demonstrations pose risks to an economic recovery as the government scrambles to meet the demands of an increasingly skeptical youth movement, and many political developments have yet to happen. The likely near-term effect on the economy would be that the current caretaker government will follow up with implementing the current spending element of the 2019 expansionary budget in the near term extending well into 2020. The most important consequence of this would be the sustainable continuation of the consumer led economic recovery, however lot of uncertainties remain.


Kazakhstan should be able to continue posting steady GDP growth of close to 4.0% and we do not expect any nearterm pressures since the macro-economic metrics of the country remain stable and the government continues to spend on infrastructure. With Uzbekistan opening up, we expect the fund’s Kazakh bank holding, Halyk Bank to take advantage of these growth opportunities as it has already begun operations in Uzbekistan. We expect to continue holding our investment in Halyk Bank.


Kyrgyzstan is projected to grow its GDP by 3.4% in 2020 according to the International Monetary Fund, While the Kumtor gold mine (generating roughly 10% of Kyrgyz GDP) halted production due to two workers having gone missing after a rock fall, the Kyrgyz government has since stated that the mine  will produce 18.2 tons of gold in 2019, beating its initial forecast of 16.6−17.6 tons. Kyrgyzstan faces several structural issues due to its lack of competition in most sectors, while also facing a high debt burden to China, courtesy of the previous president’s administration which is hindering growth now. 


In 2020 the two items to watch will be the development of the USD 7 bln railway linking Kunming, China to Vientiane, Laos as it is scheduled for completion in 2021. The impact of this infrastructure project on the Laotian government’s debt service is expected to grow and could impact the peg of the currency, the Laotian Kip. Further, persistent low water levels in the Mekong is expected to lead to under-utilization of the country’s large dam capacity (the country’s largest source of foreign exchange) which could impact the country’s finances.


Mongolia should see significant future upside in the value of copper exports as the commodity is already in a global deficit which is only expected to worsen into the 2020’s. While the outlook for copper is bright, coal exports continue to be restrained by China reaching its import quota for the year. Mongolia’s largest bulk commodity export, coal, is a key contributor of GDP. However, as Mongolia and China have grown increasingly close during the current presidency of Kh. Battulga, it would not be unreasonable to see China continuing to buy Mongolian coal as long as Mongolia remains politically correct in its dealings with China. Being the lowest cost foreign supplier of coal to China, excluding North Korea, it makes sense for Mongolia to maintain good relations with its southern neighbor in order to continue boosting its exports, approximately 90% of which are to China. Furthermore, the listing of state owned coal mine, Erdenes Tavan Tolgoi “ETT” on the Hong Kong Stock Exchange can be a big trigger for an improvement in overall investor sentiment towards Mongolian equities.


The Myanmar government may be distracted by the ongoing investigations into the refugee crises but on the ground, similar to previous years, Myanmar is expected to continue posting 6%+ GDP growth in 2020.  Though western governments could put more pressure on the Myanmar government, we believe support from China, India and Japan would help Myanmar balance off some of this pressure. On the policy front, we could expect some more policy moves to attract foreign capital such as opening up the stock market to foreign investors (finally). From a company perspective, we expect Yoma Strategic Holdings to continue investing into its core businesses by leveraging its recent partnership with Ayala Corporation and we remain positive on the consumption related opportunities in Myanmar.


A deal with the International Monetary Fund (IMF), a devalued currency, peaking interest rates, a contracting current account deficit and more importantly attractive valuations have all led to a rally in the KSE100 Index since the end of August 2019 – and we expect this positive sentiment to continue as (1) the KSE100 Index is still close to 50% below its May 2017 high in USD terms (2) Valuations are still attractive with the KSE100 Index trading at a trailing 12 months P/E of 9.6x (3) The State Bank of Pakistan (SBP) is expected to cut interest rates in 2020 (4) Profitability for cyclical companies is close to the bottom with earnings expected to see a rebound from the second half of 2020.

We therefore like cyclical companies in the auto and cement sectors as their valuations and profitability have contracted significantly over the last two years and are well positioned for a rebound once interest rates ease and economic growth recovers. Though, one caveat to the SBP cutting interest rates would be higher than expected food inflation, which has picked up of late but is anticipated to ease going forward. Given the battering the Pakistani stock market has taken over the past two years and with improving fundamentals, Pakistan can be a standout performer in 2020.


(Source: International Monetary Fund)


Papua New Guinea

Papua New Guinea could post GDP growth of 3−4% in 2020 and this could increase once further investments in LNG and mining projects kick in. There are plans to double LNG production and develop new gold, copper and silver reserves. The government is also trying to diversify its resource focused economy but this a longer-term theme. The fund’s current exposure to Papua New Guinea is through one holding in the consumer space.

Sri Lanka

Gotabaya Rajapaksa’s win in the presidential election in November 2019 was a big positive for investor sentiment and the political momentum for his party, the Sri Lanka Podujana Peramuna (SLPP), making it likely that it could win the parliamentary elections in April 2020. In 2020, greater political cohesion will not only be positive for investor sentiment but also for policy-making which should lead to a pick-up in economic growth rates from a low base in 2019. Greater policy certainty should also lead to a much needed increase in foreign direct investments (FDI) to build out the country’s infrastructure.

The tax breaks announced in the form of personal income tax concessions and lower value added taxes are expected to boost consumption as well as help consumer companies improve their volumes. Lower effective tax rates for the banking sector should improve the sector’s return on equity while lower taxes on voice telecom services should lead to better revenue growth rates for telecom companies. Overall, these moves should lead to higher earnings growth in 2020.

The upcoming budget in April/May 2020 may introduce some tweaks to these tax breaks given the country’s fiscal deficit. In the longer term, the government would also need to contend with their debt repayments as well as debt to GDP which currently stands at 83%.

On balance though, 2020 should be a better year for Sri Lankan equities due to higher earnings growth from the recent tax cuts, a pick-up in GDP growth and much better business sentiment due to political stability. Consumer companies and banks can do well in 2020 as both of these sectors are expected to see improved earnings for the above reasons.


(Source: International Monetary Fund)



Market oriented reforms should lead to Uzbekistan posting GDP growth rates of 6.0% over the next five years. Speaking of reforms, in October the Capital Markets Development Agency met with the president and Agency for State Asset Management (focused on privatizations) and discussed the formulation of a capital markets strategy through the early 2020’s. Shortly thereafter this group announced it expects at least 4 IPO’s/SPO’s of state-owned enterprises in 2020 which will help to increase liquidity and the attractiveness of the Tashkent Stock Exchange. The stock market ended November with a USD 4.8 bln market capitalization and 112 companies listed. While there were significant rallies in certain listed companies (+100% to +200%) for the year, valuations still remain highly attractive with dividends in the high single digit to low double-digit range.


Attaining GDP growth of 6.5−7% in 2020 for Vietnam is realistic due to continued foreign direct investments (FDI) in the manufacturing sector, growth in exports and tourism and robust consumption. Whether China and U.S. stick to their phase one trade deal or not, Vietnam has positioned itself nicely as a manufacturing hub offering relatively lower wages, improving infrastructure and political stability.

With respect to near term uncertainties though, Vietnam has outperformed the region in export growth in 2019 but the soft numbers for October and November 2019 could become a concern if such softness in export growth sustains. We believe export growth of less than 6−7% in 2020 will be viewed slightly negatively by the market due to the role exports play not only in macro stability but also in job creation and consumption. The African Swine Flu has also led to higher inflation in the past few months and though the November 2019 inflation number of 3.5% is still below the Central Bank’s 4.0% target, any move towards 4.0% or higher would make the State Bank of Vietnam edgy and this could lead to a pull-back in loan growth, similar to what we saw in the summer of 2018. However, as of now the overall macro situation remains stable.

On the policy front, we do not expect any major decisions in 2020 regarding the foreign ownership rules as the government machinery moves into planning for the change of power in 2021. So far Vietnam has proved that it is a net beneficiary of trade tensions as reflected in the export and FDI numbers and we believe 2020 should be another year of stable growth. As a result, we continue to remain invested in companies linked to consumer discretionary, industrial parks, logistics and tourism which we believe are structural growth themes in Vietnam.

To conclude, the fund could see an increase in its weights to Pakistan and Sri Lanka in 2020 due to improving fundamentals and consumer/business sentiment in both of these markets. Our top market picks for 2020 are: Pakistan, Sri Lanka, Uzbekistan, Bangladesh, Mongolia and Vietnam.

 Factsheet AFC Asia Frontier Fund  
 Factsheet AFC Asia Frontier Fund (non-US)  
 Presentation AFC Asia Frontier Fund  



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I hope you have enjoyed reading this annual review and outlook for the coming year. If you would like any further information, please get in touch with me or my colleagues.

The AFC Team wishes you and your family all the best for the upcoming Festive Season and a very successful 2020.

With kind regards,
Thomas Hugger
CEO & Fund Manager

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