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Uzbekistan's "golden crossover" means listed equity dividend yields are now more attractive than bank term deposit rates.


AFC Uzbekistan Fund September 2020 Update


Dear Investors and Friends,

September saw more double-digit dividend yield announcements among the fund’s holdings. Some of these yields are now markedly higher than the average one-year Uzbek Som term deposit rate offered by local banks and may indicate the tipping point for local investors to start taking a more serious interest in listed equities as an alternative investment strategy. The September NAV of the fund increased to an estimated USD 1,113.50 (+0.50%), according to internal calculations. 

  AFC Uzbekistan Fund valuations as of 30th September 2020:

 Estimated weighted harmonic average trailing P/E (only companies with profit):

 Estimated weighted harmonic average P/B: 0.68x
 Estimated weighted portfolio dividend yield: 13.82%


Uzbekistan’s “Golden Cross”

A "golden cross" is a chart technical analysis term in the investment industry referring to when the short-term moving average of a security crosses over a major long-term moving average, to the upside. Commonly, this is the 50-day moving average crossing above the 100 or 200 day-moving average, indicating bullish momentum and the start of an uptrend from a conservative standpoint as the uptrend would likely already be weeks old at this point.

In reference to Uzbekistan, since Thomas’ and my first trip to Uzbekistan in May 2018 (these were actually two separate trips with me tacking Uzbekistan on to the end of an investment tour to Kazakhstan in early May and Thomas making a trip a few weeks later, allocating some of his time to a side trip to Tashkent from Kazakhstan, after my non-stop talking to him about the potential I saw in Uzbekistan) we have held the view that slowing inflation and an injection of foreign capital into the domestic banking sector would in time enable the Central Bank of Uzbekistan (“CBU”) to lower its policy rate, leading to falling lending and deposit rates by banks, thus increasing the attractiveness of listed equities on the Tashkent Stock Exchange for local investors. To be honest, we were early, but we also knew that the odds of Uzbekistan continuing to open and liberalize were in our favour and that we would benefit from being early in order to build healthy position sizes and a strategically well positioned fund before other foreigners arrived.

Having had the opportunity to live in 6 (5 of them frontier) Asian countries over the past decade, I have experienced first-hand just how (positively) violent economic re-ratings can be, specifically in the equity and real estate markets. For example, I recall looking at real estate (rice paddy at the time) on the outskirts of Phnom Penh, Cambodia in 2014 which was selling for USD 5/sqm, and which today is valued at over USD 200. While in every country a re-rating will vary by both the catalysts which drive it and its intensity, we long believed falling term deposit rates, below dividend yields on listed equities, would be one key spark to light a proverbial fire in the multi-year re-rating process of the equities market. This “golden crossover” if you will has now happened and the spread between deposit rates and dividend yields is expected to continue to widen until more foreigners (who are increasingly taking notice and entering the market through brokerage account openings) and local investors wake up to the realization that one of the best investments to make in Uzbekistan today is in listed equities.


(Source: Stat.Uz, AFC Research)


Courtesy of COVID-19, Uzbekistan’s GDP growth in 2020 is expected to slow to 1.5% from the previous World Bank estimate of 5.5%. The expected slowdown in GDP growth has seen demand for credit moderate and inflation fall (save for a short-term spike in various food-related commodities during the initial quarantine in March 2020 due to the closure of international borders).

Disinflation has enabled the CBU to lower its policy rate by 100 basis points on two separate occasions this year, falling from 16% to 14%. These cuts have led the average one-year term deposit rate for individuals at banks to fall from 20.3% in March to 16.4% in August. Businesses meanwhile are offered different (lower) deposit rates which fell from 17.2% to 15.1% during the same period. As inflation continues to moderate and new banks enter Uzbekistan, while existing ones are able to increase their available capital for lending (for example publicly listed bank, Ipak Yuli (TSE: IPKY) issued USD 25 mln in new shares to German investment corporation DEG and Triodos Investment Management in August, while Gazprom Bank, Russia’s third largest bank received approval to open a representative office this month) competition for clientele should begin to drive down lending rates and in due course provide the CBU the means with which to further cut the policy rate.


(Source: Uzbekistan Respublika Markazi Banki, AFC Research)


Likely in a bid to both slow credit growth, that in previous years was as high as 50%, and inflation further, the CBU put a cap on bank lending rates of 21% and 24% from 1st July 2020 through year end for business and individual borrowers respectively. As such socialist policies tend to have unintended consequences, this has been effective with bank lending falling precipitously and  likely to remain subdued until this cap is removed. While certainly not a free-market principle, it will be effective in moderating credit growth and subduing inflation, allowing the CBU to potentially cut the policy rate yet further, a situation which would only make investing into the equities market that much more attractive.   

Concluding, what does all of this mean for the AFC Uzbekistan Fund and the broader Uzbek capital market? From an opportunity cost perspective, local individuals and corporations who currently prefer to invest their risk capital into term deposits can now receive significantly higher double-digit dividend yields from a multitude of listed equities. Previously, the excuse I encountered from locals when discussing the benefits of investing into generationally cheap listed equities with double-digit dividends was that the dividends were not high enough to justify the perceived risk of owning them, relative to term deposits, as many investors don’t understand the risk-reward of investing in equities and view them simply as another fixed-income-type product where cash flow is all that matters. Though, today even a mere assessment of the relative cash flows favours investing into equities, with some of these attractive companies outlined below.

We believe it is only a matter of time until the increasing foreign participation in the stock market and/or locals seeking high yield investment opportunities triggers a more rapid and profound phase of the multi-year re-rating for which the stage is increasingly set.


(Source: Toshkent Stock Exchange, AFC Research)


Asia Frontier Capital in the news

On 16th September2020 I sat down with Ladislas Maurice of “The Wandering Investor” to discuss Uzbekistan on a macro level as well as diving into the deep value and growth potential of listed equities on the Tashkent Stock Exchange. To view our discussion on YouTube, click on the image below.





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The representative of the AFC Uzbekistan Fund (non-US) in Switzerland
ACOLIN Fund Services AG, succursale de Geneve, 6 Cours de Rive, 1204 Geneva. NPB Neue Privat Bank AG, Limmatquai 1 / am Bellevue, CH – 8024 Zürich, Switzerland is the Swiss Paying Agent. In Switzerland, shares shall be distributed exclusively to qualified investors.  The fund offering documents, articles of association and audited financial statements can be obtained free of charge from the Representative. The place of performance with respect to shares distributed in or from Switzerland is the registered office of the Representative.

AFC Uzbekistan Fund or AFC Uzbekistan Fund (non-US) are registered for sale to qualified/professional investors in Singapore, Switzerland, the United Kingdom, and the United States. 

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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