AFC Asia Frontier Fund – 2024 Review and Outlook for 2025

AFC Asia Frontier Fund Achieves a New All-Time High NAV as Predicted at the End of 2023

Returns in 2024 were also broad-based with the three important catalysts for our markets playing out very well, namely:

• Monetary easing by both Asian frontier and global central banks
• A macro-economic and earnings recovery in our universe
• Discounted valuations attracting investors due to the above two factors

As we enter 2025, we remain very positive on the outlook for the AFC Asia Frontier Fund and also on our fund universe. We strongly believe that Asian frontier countries have entered a positive economic cycle after a challenging few years which has led them to strengthen their economies and thus given them a platform for sustainable growth ahead.

Returns in 2023 and 2024 in our markets were primarily driven by declining interest rates and recovering earnings aided by macroeconomic stability. However, valuation multiples still remain discounted in our universe, which is reflected in the AFC Asia Frontier Fund’s P/E ratio of only 7.1x – which is still close to its all-time low.

P/E Ratio of AFC Asia Frontier Fund Close to All-Time Low Despite the Fund’s NAV Reaching a New All-Time High

With an outlook for stable economic growth and significantly strengthened political stability, we believe returns in 2025 will be driven by an expansion in valuation multiples in our universe as investors factor in the above important drivers in addition to recovering earnings growth.

After solid returns in 2023 and 2024, the AFC Asia Frontier Fund is entering 2025 on a strong footing and given an outlook for robust earnings growth, lower interest rates, and still very attractive valuations, we believe the prospects for fund returns remain very promising.

In 2025, we expect South Asian and Central Asian frontier markets to be relative outperformers since these countries have a very low exposure to global trade, and exports do not contribute significantly to their economies. These countries are more dependent on domestic factors to drive economic growth rather than exports and we believe this will be important in 2025 given the possibility of an uncertain U.S. trade environment.

Furthermore, we expect the economic momentum to continue in 2025 for Pakistan and Sri Lanka on the back of the large decline in interest rates and much improved political stability, especially in the case of Sri Lanka. We also expect Bangladesh to post an economic turnaround towards the second half of 2025, which will be positive for its stock market, which has lagged peers.

If a compromise is agreed to and reached between Russia and Ukraine, we expect Central Asian equities in Georgia, Kazakhstan, and Uzbekistan to re-rate significantly as valuation multiples for companies in these three countries have received a “geopolitical discount” since February 2022. An end to major hostilities in the region will be very positive for investor sentiment, especially towards Central Asia.

Given these factors, we firmly believe that the AFC Asia Frontier Fund is entering 2025 on a strong footing.

2024 Review – Asian Frontier Markets Outperformed the Region

The AFC Asia Frontier Fund and Asian frontier markets achieved another solid year and once again outperformed their regional peers. Fund performance in 2024 was driven by Pakistan, Sri Lanka, Vietnam, Iraq, Kazakhstan, Mongolia, and Georgia. Key detractors to performance in 2024 were Uzbekistan and Bangladesh.

Asian Frontier Markets Have Significantly Outperformed the Region for a Second Year in a Row
(Year to Date Returns in USD)

One major driver of performance in our universe was the monetary easing by both Asian frontier and global central banks which supported both economic and investor sentiment.

Asian Frontier Central Banks Have Cut Interest Rates Aggressively
(Cut in Benchmark Interest Rates in Basis Points since May 2023)

Monetary Easing has Begun by Global Central Banks 
(Cut in Basis Points in 2024)

Drivers of Performance in 2024

Pakistan

The largest contributor to fund performance in 2024 has been Pakistan, with the KSE-100 Index being the second-best performing market globally with a USD return of +88.6%. Though the start of an IMF loan program and improving economic indicators have been important drivers of returns, the key factor for the world-beating rally on the KSE-100 Index has been the aggressive interest rate cuts by the State Bank of Pakistan (SBP) as inflation has now entered the territory of low single digits.

We anticipated interest rate cuts of 600-700 basis points in 2024 and so far, the SBP has cut interest rates by 900 basis points since June 2024 because inflation has fallen at a faster pace than initially expected.

Pakistan is now the fund’s largest country weight through our increased allocation as well as stock price appreciation.

Though returns for the fund in Pakistan were broad-based, some of the key contributors to performance in Pakistan were Airlink Communication, Haleon Pakistan, and Pakistan Stock Exchange.

Airlink’s stock price witnessed a big rally as it increased its local assembly of mobile phones for key brands like Xiaomi while also bringing online the assembly of Xiaomi Smart TVs. Furthermore, the company also won a contract to assemble Acer laptops and tablets.

The fund’s holding in Haleon Pakistan (its previous name was GlaxoSmithKline Consumer Healthcare), which is the Pakistan subsidiary of Haleon PLC, was the best-performing stock for the fund in terms of stock price performance and the third largest contributor to performance in Pakistan. Like in many countries, Haleon Pakistan’s products are household names with brands like Panadol, Sensodyne, and ENO. Besides the company’s powerful brands doing well, the key trigger for the exponential re-rating in its stock price was the lifting of price controls by the government for non-essential drugs, which is very positive for Pakistan’s pharmaceutical industry.

Besides the company’s powerful brands doing well, the key trigger for the exponential re-rating in its stock price was the lifting of price controls by the government for non-essential drugs, which is very positive for Pakistan’s pharmaceutical industry.

The stock price of the Pakistan Stock Exchange witnessed a big rally, which is not surprising given the very positive investor sentiment leading to significantly higher trading volumes on the exchange. Pakistan Stock Exchange has been a multi-bagger for the fund, as we initially purchased this name in March 2023 at a price PKR 8.0 per share – this is almost a 2x return in less than 2 years.

The State Bank of Pakistan has Reduced Interest Rates Aggressively as We Anticipated on the Back of Falling Inflation

Airlink, Haleon, and Pakistan Stock Exchange Are Some of the Multi-Baggers the Fund Holds in Pakistan

Sri Lanka

The fund witnessed an all-round rally in Sri Lanka, and this is not surprising as the Colombo All Share Index is the fourth best-performing stock market globally in 2024 with a USD return of +52.0%. The second year of substantial gains in Sri Lanka has been led by a much stronger-than-expected economic recovery due to robust tourist arrivals, increasing worker remittances, lower interest rates, and an uptick in domestic consumption.

The two biggest performance drivers for the fund in Sri Lanka were Sunshine Holdings and Commercial Bank of Ceylon. Sunshine Holdings is benefitting from an anticipated recovery in its consumer business, while its healthcare division has seen robust growth so far in 2024.

The fund initially invested in Sunshine Holdings in 2017, and the stock has been a multi-bagger for the fund over the last seven years. Our investment in Sunshine Holdings is also a reflection of our investment strategy, where we buy and hold well-run businesses for the long term, which ultimately translates into strong returns. Sunshine Holdings continues to trade attractively at a P/E ratio of 10.3x despite its stock price more than doubling in the last two years.

Commercial Bank of Ceylon continued to be a driver of fund performance in 2024. Bank valuations in Sri Lanka are generally very discounted, while loan growth should see a big comeback in 2025 as the economy gathers pace while NPL ratios should decline, leading to a strong recovery in earnings and RoEs. Commercial Bank of Ceylon is the largest private sector bank in Sri Lanka by assets and market cap and is well leveraged to the ongoing economic momentum in Sri Lanka.

The stock has rallied in the last two years from the bottom in December 2022 but still trades at a P/B of 0.8x. With an RoE going back to pre-crisis levels of 16-17% in 2025 we expect the stock to continue its re-rating and trade at a P/B ratio of greater than 1.0x.

Sunshine Holdings and Commercial Bank of Ceylon Have Been Multi-Baggers for the Fund

Vietnam

Even though the benchmark VN-Index delivered a soft return in 2024, the fund’s outstanding stock selection in Vietnam continued to drive returns. FPT Corp. is the fund’s largest stock position and its strong earnings growth driven by its software outsourcing business continues to re-rate its stock price which made further strong gains in 2024. With an expected 20%+ earnings growth for the next few years and excellent execution capabilities, we believe FPT Corp. will continue delivering superior returns to its shareholders.

FPT Corp. Continued to Drive Returns for the Fund in 2024 – FPT Corp. is the Largest Stock Position in the AFC Asia Frontier Fund

Iraq

The standout performance by our AFC Iraq Fund continues in 2024 with a return of +42.1% (as of end November 2024) on the back of its stellar +110.4% return in 2023. This outstanding performance continues to add value to the overall performance of the AFC Asia Frontier Fund. The AFC Asia Frontier Fund is invested in the AFC Iraq Fund via a share class without management and performance fees.

The AFC Iraq Fund Recorded Another Stellar Year – The AFC Asia Frontier Fund gets its Iraq Exposure via the AFC Iraq Fund

Kazakhstan

The fund’s two key holdings in Kazakhstan are Kaspi and Halyk Bank, and both stocks once again delivered solid total returns for the fund for another year. Kaspi and Halyk Bank are the fund’s second and third-largest stock positions but both names continue to trade at very attractive valuations relative to their earnings growth while offering handsome dividend yields. Kaspi trades at a P/E ratio of 10.3x with a dividend yield of 8.5% and Halyk Bank trades at a P/E ratio of 3.4x and a dividend yield of 16.2%.

Mongolia

The main performance contributors in Mongolia were Hong Kong listed Mongolian Mining Corp and Premium Nexus which is listed in Mongolia. Mongolian Mining Corp continues to benefit from increasing coking coal exports to China since transportation costs are lower from Mongolia to neighbouring Chinese provinces compared with shipping coal from Australia or Indonesia to North China.

Premium Nexus is the leading and largest operator of convenience stores in Mongolia with its brand CU and has been the first mover in developing the modern convenience store format in Mongolia. With this business now becoming profitable in 2024, the company’s stock price has also reflected this, leading to gains for the fund.

Georgia

The AFC Asia Frontier Fund owns shares in the two major banks from Georgia, both of which are listed in London. The fund initiated a position in Bank of Georgia earlier this year while the larger position is in TBC Bank, which the fund has been holding since 2021. This contributed strongly to performance this year as TBC Bank’s Georgian and Uzbek businesses continue to grow in a robust manner. 

Both TBC Bank and Bank of Georgia have solid fundamentals with RoEs of 26% and 41% respectively, while trading at a P/E ratio of only 4.8x and 3.8x respectively. 

Similar to previous years, overall performance in 2024 was driven mainly by names where the fund has been a long-term shareholder, as our investment strategy is to remain invested in companies we are convinced in and let the story play out via both earnings growth and valuation multiples expanding.

2025 Outlook – AFC Asia Frontier Fund on a Strong Footing to Generate Further Gains

We believe that Asian frontier markets have now entered a positive macroeconomic cycle after taking the tough measures needed to provide a platform for future growth.

Some of the key trends we expect in our markets in 2025 are:

1. South Asian and Central Asian Frontier Countries Can Show Relative Outperformance in 2025 – Both Regions are Less Dependent on Global Trade

Since Donald Trump was elected as the next President of the United States, there has been a cloud of uncertainty over countries that are heavily dependent on global trade and, more specifically, dependent on exports to the U.S.

However, South Asian frontier countries like Bangladesh, Pakistan, and Sri Lanka, as well as Central Asian nations like Georgia, Kazakhstan, and Uzbekistan are not heavily exposed to global trade or exports to propel their economic growth. These countries generate most of their growth from the domestic market and their economies are more driven by domestic factors rather than U.S. trade policies.

Furthermore, in the case of Bangladesh, Pakistan, and Sri Lanka, these three countries are all in different stages of a domestic-focussed macroeconomic recovery linked to ongoing reforms and improving economic indicators like inflation, interest rates, and GDP growth that are not correlated to what is happening economically or politically in the U.S. In other words, Bangladesh, Pakistan, and Sri Lanka have the potential to offer uncorrelated returns in 2025 if global trade tensions ramp up.

Lower Dependence on Exports Will Benefit South Asian and Central Asian Frontier Markets in the Event of a Ramp Up in Trade Tensions (Exports as % of GDP in 2023)

2. Next Leg of Rally in Asian Frontier Markets to be Driven by Valuation Multiples Expanding

Returns for the AFC Asia Frontier Fund in 2023 and 2024 have been driven predominantly by the start of an interest rate easing cycle in our universe and an improving outlook for earnings growth due to macroeconomic recoveries taking place in countries like Kazakhstan, Mongolia, Pakistan, Sri Lanka, and Vietnam.

However, valuation multiples for our markets as well as many of the blue-chip companies the fund holds remain discounted relative to their history and in absolute terms. This is reflected in the P/E ratio of the AFC Asia Frontier Fund, which at 7.1x is close to its all-time low despite a very strong performance in 2023 and 2024.

We believe that as the lower interest rate environment continues to feed into economic growth in countries like Pakistan and Sri Lanka, we should see earnings maintaining a strong rebound in growth. This increasing economic momentum will be accompanied by greater political stability which should lead to a period of sustained economic growth that has been absent for the past few years.

A combination of both macroeconomic and political stability in our universe can lead to multiples expanding to their historical averages.

With a high prospect for our portfolio companies to show both earnings momentum and an expansion in valuation multiples, the AFC Asia Frontier Fund has room to continue generating solid returns in 2025 and beyond.

P/E Ratio of AFC Asia Frontier Fund Close to All-Time Low Despite the Fund’s NAV Reaching a New All-Time High

3. Stable to Lower Crude Oil Prices Positive for Bangladesh, Pakistan, and Sri Lanka

With the outlook for crude oil prices for 2025 remaining benign, we expect that Bangladesh, Pakistan, and Sri Lanka will be in a much better position to manage their ongoing economic recoveries since all three countries are net oil importers.

Stable crude oil prices will also be a another positive for the rebound in earnings taking place especially in Pakistan and Sri Lanka. A combination of tailwinds in the form of an economic recovery, earnings momentum, discounted valuations, and less pressure from external commodity prices are the key reasons we are bullish on South Asian frontier markets for 2025.

Lower or Stable Crude Oil Prices will be Another Positive in 2025 for Net Oil Importers Like Bangladesh, Pakistan, and Sri Lanka

Our 2025 Calls

1. Sri Lanka and Pakistan Lead Returns in 2025

To us, Sri Lanka has ticked all the right boxes. Economic recovery is well underway, with GDP growth in the first nine months of 2024 coming in much better than expected at 5.2%. This is backed by a strong rebound in tourism, worker remittance, and domestic consumption. The International Monetary Fund (IMF) has passed the third review of Sri Lanka’s loan program, and the country’s international sovereign bond restructuring is complete.

Much more importantly, this economic stability is now backed by political support in the form of President Anura Dissanayake’s coalition winning a super majority in the November 2024 parliamentary elections. This combination of economic and political positive momentum has been missing in Sri Lanka for the past five years and will provide a very strong platform for sustained momentum in the economy.

Furthermore, with a strong government in place, there is a high likelihood that policymaking will be more stable, while reforms linked to the IMF program will continue.

With all the important positive factors in the form of economics and politics coming together for Sri Lanka, the Colombo All Share Index has the potential to stage a strong rally in 2025 as valuation multiples re-rate to their historical average and net profits for listed companies gather pace on the back of a growing economy and lower interest rates. We also expect infrastructure spending and the investment spending cycle to restart after a long lull.

The AFC Asia Frontier Fund has been increasing its weight to Sri Lanka post the parliamentary election and will look to increase its weight further in the first quarter of 2025.

The Colombo All Share Index in Sri Lanka Can See its Valuations Re-Rate to Pre-Crisis Levels as All Major Positive Catalysts are in Place Now

Though Pakistan’s stock market has seen a massive rally in 2024, the significant decline in benchmark interest rates since June 2024 should continue to lead to liquidity being driven away from bank fixed deposits and fixed income investments into the equity market.

Technical factors aside, valuations for the KSE-100 Index and on a bottom-up company level are still very attractive and have further room to expand on the back of an improving economy supported by a lower interest rate environment.

More importantly, Pakistan’s current account is expected to remain stable on the back of rising remittances and growing exports. Historically, a large increase in Pakistan’s current account deficit has been the key reason for its macroeconomic stress due to its inability to build up a comfortable amount of foreign exchange reserves. These current account related difficulties in the past have led to boom-bust economic cycles, which in turn has been negative for stock market sentiment when boom turns to bust.

We remain positive on Pakistan for 2025 and will look to increase our weight in certain Pakistani companies.

The KSE-100 Index P/E Ratio in Pakistan is Still Trading at a Big Discount to History – Valuations Can Re-Rate Higher as Macro-Stability Leads to an Economic Recovery

Pakistan Can see a Multi-Year Re-Rating if it can Manage its Current Account Deficit (as % of GDP)

2. Bangladesh Could be the Dark Horse in 2025

In our view, Bangladesh is in a similar macroeconomic position to where Pakistan and Sri Lanka were 18-24 months ago. Bangladesh is still facing the bitter medicine of taking tough measures to stabilise its economy in the form of higher interest rates and reforms linked to its IMF program.

However, as we have seen in the case of both Pakistan and Sri Lanka in 2023, as macroeconomic indicators like inflation, the current account, and foreign currency become more stable and begin to improve, the stock market starts to react positively in anticipation of lower interest rates.

We believe the same trend might play out in Bangladesh towards the second half of 2025 as inflation eases, giving room to the Central Bank to begin a monetary easing cycle at some point.

With valuation multiples of blue-chip companies trading at a large discount to their historical average, we think Bangladeshi equities could see a large re-rating similar to what Pakistan and Sri Lanka saw in 2023 as their macroeconomic indicators improved.

The AFC Asia Frontier Fund has a healthy weight of 9.7% to Bangladesh and we will look to increase this in 2025.

Macro-Economic Recovery in Bangladesh Makes a Case for a Strong Re-Rating in 2025 as Valuations are Depressed (P/E Ratio of MSCI Bangladesh Index)

3. Russia-Ukraine Compromise Will be Positive for Central Asian Equities

Ever since the war in Ukraine began in February 2022, listed equities linked to companies operating in Georgia, Kazakhstan, and Uzbekistan have suffered from a “geopolitical discount” to their valuations due to their economic, political, and cultural proximity to Russia.

Despite each of these economies performing well and the companies we hold in these three countries delivering robust earnings growth with solid fundamentals, their valuations are trading at a discount to pre-February 2022.

We expect that a potential compromise to Russia-Ukraine hostilities will be very positive for sentiment towards companies which have received this geopolitical discount and thus, we could see a good re-rating in the stock prices of the fund’s holdings in Georgia, Kazakhstan, and Uzbekistan.

Compromise Between Russia and Ukraine Can Reduce the Geopolitical Discount on Central Asian Equities

Risks to Watch Out For

With many countries in our universe like Bangladesh, Pakistan, and Sri Lanka on a reform path, any major deviation in the form of poor policy choices which disrupt the ongoing economic momentum in a major way in these three countries will be the key risk in our view.

Having said that, after the macroeconomic stress that Bangladesh, Pakistan, and Sri Lanka faced in the recent past, we believe that these three countries now have no choice but to follow through on reforms or make policy choices which support sustainable economic growth.

We believe the governments in these three countries have realised that there is no alternative to creating a stable economic environment and that deviating significantly from this path will be detrimental to socioeconomic stability.

Conclusion

2023 and 2024 provided solid returns for our AFC Asia Frontier Fund investors and the fund is now entering 2025 on a very strong footing as Asian frontier countries have entered a positive economic cycle, which should lead to a period of sustained earnings momentum which will be supportive for an upward re-rating in valuation multiples.

This convinces us to repeat what we wrote at the end of last year: we would not be surprised if the AFC Asia Frontier Fund marks another new all-time high NAV by the end of 2025. The outlook for Asian frontier markets has not been this bright for a long time

For further information on our AFC Asia Frontier Fund, please find below the links to the latest factsheets, investor presentations and webinars:

     AFC Quarterly Update Webinar on Tuesday, 29^th October 2024

I hope you have enjoyed reading this annual review and outlook for the coming year. If you would like any further information, please contact us or our colleagues.

The AFC Team wishes you and your family all the best for the upcoming Festive Season and a very successful and healthy 2025!

With kind regards,

Thomas Hugger & Ruchir Desai
Co-Fund Managers
 

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