Asia Frontier Capital (AFC) - September 2016 Newsletter
"Leave no stone unturned to help your clients realize maximum profits from their investment.”
September has been another good month for AFC. The AFC Asia Frontier Fund returned +2.3%, up for the seventh month in a row to a new all-time high, bringing the year to date performance to +14.2%. At the same time, the MSCI Frontier Markets Asia Index was down by -0.5% for the month and up +8.6% year to date, showing the fund outperformed in September by +2.8% and year to date by +5.6%. The AFC Vietnam Fund was flat this month at +0.1% after 7 consecutive positive months. It has resulted in a year to date performance of +18.5%. The AFC Iraq Fund also showed progress with a gain this month of +0.5%. On an annualized return basis, the AFC Asia Frontier Fund has returned +10.8% since inception and the AFC Vietnam Fund has returned +20.1% since inception, both in USD terms.
On 20th September 2016, HFM presented the Hedge Fund Performance Award 2016 in the category of Relative Value to Thomas Hugger for the performance of the AFC Vietnam Fund. This accolade is a testament to our strength in fund performance and risk management resulting in significant performance over the index and also over peers. This award is particularly meaningful as it is based on actual performance data over the last 12 months. The AFC Vietnam Fund will complete its 3rd year in December 2016, and as the fund is up +68.2% since inception, we look forward to receiving similar awards for our fund’s 3-year performance.
We know that outperforming the index by active managers in frontier markets is more common than in developed markets. At the same time, passive funds in frontier markets often don’t perform well and have significant tracking errors. Both factors make the case to choose active management over using ETF’s to obtain frontier markets exposure.
Tracking errors represent the difference between the performance of a passive fund such as an ETF and the index it is supposed to track. As ETFs are often used as an efficient instrument to get exposure to a market or a market segment, there can be significant inflows into them or outflows from them in any given time. With that, the need for the ETF provider to buy and sell the underlying stocks is significant, and as a result trading costs and slippage both contribute to the tracking error. For frontier index constituents that have low liquidity, moving in and out of the stock by a passive fund can be costly. On top of that, certain exchanges apply certain limits on the range of prices a stock can trade at during the day, adding another reason that introduces a difference between the index and the ETF. Morgan Stanley concluded the tracking error to be an average 0.45% in 2014 for US ETFs (weighted average). As the chart below shows, the case for some Vietnam trackers is completely different. The trackers are both lagging behind significantly compared with the Ho Chi Minh City index and the Hanoi index. And they are far below our AFC Vietnam Fund’s performance.
AFC Vietnam Fund versus index and Trackers.
Another factor that can introduce a tracking error is the fact that some exchanges in frontier markets limit foreign shareholder ownership of certain stocks. As a result, the ETF’s which are trying to replicate the index are having to find ways around holding the exact copy of the index constituents in their portfolio, adding another contributing factor to the tracking error.
Regarding the reasons of outperformance of funds in the frontier space, it is worth noting that the index constituents often include companies that didn’t get to be a prominent listed company purely by their own merit. For example, they could be current or past state owned companies, which have been (partially) brought to market. As a result, the management and boards of these companies don’t have the same incentive to act in the best long term interests of the shareholders, but their agendas are more complicated. That can be the reason that the companies are not performing as well as they could, and so the performance of the index is being dragged down compared to the overall economy. Active managers that have the freedom to avoid these companies and just choose the companies that are well managed and that act in the best interest of the shareholders will often perform better.
It is this actively managed and benchmark agnostic approach that has led to outperformance for the AFC Asia Frontier Fund and AFC Vietnam Fund over their respective benchmarks.
This month we will be travelling to most of our key markets with trips to Bangladesh, Pakistan and Vietnam. We believe that being on the ground is a great value-add when it comes to research and getting a feel of what is going on in a company or country. We will update our readers on these trips in our travel reports in the coming months.
In the spirit of American businessman Arthur C. Nielsen’s quote above, our singular goal is to obtain the best long term performance for our investors, with a low level of risk. Our own travels to the markets we invest in contribute to that, as does our 2nd Vietnam Investor Tour from 26th March 2017 to 2nd April 2017, which we wrote about in last month’s newsletter.
Ahmed Tabaqchali presenting at “Showcase Iran 2016”
Ahmed Tabaqchali, the CIO of the AFC Iraq Fund, will be speaking at the “Showcase Iran 2016” conference in London held on Monday 24th October 2016 at Amba Hotel Marble Arch.
Our contributing editor John Enos just returned from his journey to several Central Asian frontier countries (where we don’t invest currently): Kazakhstan, Kyrgyzstan, Uzbekistan, and Turkmenistan. In this month’s newsletter, we present the third and final part of a series of articles in which he recounts his interesting experiences during his exciting travels in Turkmenistan.
AFC Asia Frontier Fund USD A-shares gained +2.3% in September 2016. The fund outperformed the MSCI Frontier Markets Asia Index (-0.5%), the MSCI Frontier Markets Index (+2.1%) and the MSCI World Index (+0.4%). The USD A shares achieved a NAV of USD 1,589.07 which is a new all-time high (the previous high was in August 2016 with USD 1,553.03). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +58.9% versus the MSCI Frontier Markets Asia Index which is up +12.2% and the MSCI Frontier Index (+2.6%) during the same time period. The fund’s annualized performance since inception is +10.8% p.a.
The fund had another month of positive performance led by several stocks. The biggest contributor to performance was a Mongolian coking coal company which saw its stock price increase on the back of increase in coal prices over the past few months. Other resource based names in the portfolio, namely a Mongolian junior copper/gold producer also saw an increase in price which helped overall performance.
In Vietnam, performance was led by a soft drinks manufacturer which is a subsidiary of Sabeco (the largest beer brewery in Vietnam in terms of market share). The government is looking to sell its stake in its two beer breweries, namely Sabeco and Habeco, which is better established in the North of Vietnam. This move is not surprising given that the government is running a budget deficit of around 6% and there has been talk about this for quite some time. News surrounding the stake sale led to a run up in prices of stocks that are linked to the beer breweries and this was the case for the soft drinks manufacturer which the fund holds and it returned +32% during the month. Performance was also helped by a +25% gain in an automotive battery company the fund holds. This stock has been one of the top performers for the fund so far this year.
On the macro front, 3Q16 GDP figures for Vietnam were released with GDP growth at 6.4% which was better than 5.5% and 5.8% in 1Q16 and 2Q16 respectively but lower than 6.5% in the same quarter last year. The main reason for the lower year-over-year growth is due to the impact of the drought this year on the agricultural sector as well as lower revenues from the oil & gas industry given lower crude oil prices. However, the manufacturing sector continues to perform well with manufacturing growth at 11.2% in the first nine months of 2016 compared to 10.2% in the same period last year. Within the services sector there was good growth as well with the retail and wholesale sector growing by 8.2% in the first nine months. Though poor output from the agriculture and oil & gas sectors is softening overall GDP growth, the outlook for the other sectors of the economy still remains positive and Vietnam should be able to achieve 6%+ GDP growth in 2017 as well, given the support the economy has from the manufacturing and services sectors which will be backed by credit growth.
The other major contributors to positive performance were automobile stocks in Pakistan with a truck/bus manufacturer gaining +43.3% since the purchase at the beginning of the month while the other two passenger car manufacturers the fund holds gained +34% and +18% respectively. Automobile sales across segments such as passenger cars, trucks & buses and motorcycles have been doing well over the past twelve months given lower fuel prices and lower interest rates, as well as infrastructure-related activities such as the China Pakistan Economic Corridor “CPEC” which could also be accelerating truck sales.
The non-market and non-economic related news in Pakistan was about the tensions with India towards the end of the month. The Indian military response to the recent attacks in Kashmir was not surprising given that public pressure on the Indian government to act was increasing over the past few weeks. Though this military strike could heighten tensions between the countries we do not think there will be any large scale escalation of the conflict as neither side would benefit from such a situation and given Chinese and US interests on either side of the border any major escalation from here would be surprising.
In light of these incidents, the benchmark KSE100 Index has not reacted much since the day of the military strike (29th September 2016) and we believe that the positives in the economic story backed by the China Pakistan Economic Corridor “CPEC” still remain. However, with the IMF program ending a few months ago and general elections in 2018 there could be room for the government to go slow on its reforms such as privatisation and managing the budget deficit.
The best performing indexes in the AAFF universe in September were Iraq with (+4.2%), Bangladesh (+3.7%) and Pakistan (+1.8%). The poorest performing markets were Cambodia (-4.7%) and Mongolia (-4.4%). The top-performing portfolio stocks were a Mongolian coal mine (+125.2% since the fund’s purchase on 13th September 2016), a Mongolian junior mining company (+100%), followed by a Pakistani truck/bus assembler (+43.3% since the fund’s purchase on 2nd September 2016) and another Mongolian coal mining company (+36.9%).
In September we added to existing positions in Mongolia, Myanmar, Pakistan, and Vietnam and we reduced our existing holding in a Pakistani company. We added a Pakistani automotive battery producer, a Pakistani truck/bus assembler and a Mongolian coal mine. We exited an Iraqi insurance company and a Pakistani brewery.
As of 30th September 2016, the portfolio was invested in 96 companies, 1 fund and held 5.4% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (6.8%) and a Pakistani pharmaceutical company (5.5%). The countries with the largest asset allocation include Vietnam (30.3%), Pakistan (25.8%) and Bangladesh (15.2%). The sectors with the largest allocation of assets are consumer goods (36.2%) and healthcare (19.5%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 16.34x, the estimated weighted average P/B ratio was 1.39x and the estimated portfolio dividend yield was 2.58%.
For more information about Asia Frontier Capital’s Asia Frontier Fund please click the following links:
AFC Iraq Fund Class D shares returned +0.5% in September 2016 with an NAV of USD 571.01, an underperformance of -2.1 % vs. the Rabee RSISX USD Index (RSISUSD) which returned +2.6% in USD terms. The fund has outperformed the RSISUSD by +7.2% year to date and +5.2% since inception.
The average daily turnover on the equity market dropped 5% from the extreme lows recorded in August with most prices going sideways to slightly higher. The main observations that continued from last month are the absence of selling pressures from foreigners and locals; foreigners continue to be mostly absent and local liquidity is still constrained as the chart below shows (excluding actions by strategic holders whether foreign or local).
Turnover on the Iraq Stock Exchange (ISX) vs net Foreign trading
Nevertheless, the market has begun to discount the end of the conflict with the limited local liquidity chasing the Bank of Mosul driving a rally of over 50% in the second half of the month. However, even though this 50% rally is also a function of the phenomena of low priced stocks which tend to exaggerate moves, yet speculative retail interest spread to other low-priced stocks, a combination that accounted for most of the index gains and the underperformance of the fund. This underperformance will likely continue while lower priced & lower quality but high beta stocks bounce strongly initially but should dissipate as higher quality stocks resume market leadership as part of the market bottoming & eventual recovery process.
Bank of Mosul
In the bigger picture, the market’s sharp bounce of the multi-year lows in June started a consolidation phase and shows that after a six-month lag it has reasserted the correlation with oil prices (see chart below). However, well before the market responded, Iraq’s USD Bond (USD 2.7 billion bond, issued in 2006, due in 2028 with a 5.8% coupon) rallied and marched in tandem with oil prices up over +38% while Oil’s rose +80% from its January lows. The overall action of the market over the summer supports the thesis that it is at an important low very much in-line with similar observations in other markets that endured comparable bear markets.
Rabee Securities’ RSISUSD Index, Iraq’s USD 2.7 bn Bond and Brent Crude
The proposition of the attractiveness of emerging & frontier markets after a 5-year bear market discussed in April and elaborated on in June following Brexit “Additionally, institutional asset allocators are likely to reduce exposure to developed markets and to increase exposure to emerging & frontier markets for similar reasons plus viewing risks to be higher in developed markets. These developments support the argument made here in April which proposed that the five-year bear market in emerging markets and industrial commodities including oil was coming to end and that the significant rallies from January's lows are part of a multi-month bottoming process” is now entering the mainstream thinking with both asset allocators and fund flows increasing exposure to emerging market bond & equity funds.
Copper, Iron Ore, Brent Crude, MSCI EM & FM indices rebased to 2011
The chart above shows that the bottoming process continues with the Emerging Markets Index seeming to lead and sustain the rally YTD. The Frontier Markets Index, having peaked later, is bound to follow with a few months’ lag. So far it seems to be doing this by going sideways or consolidating. This analysis extends naturally to Iraq, which started witnessing meaningful foreign fund inflows since 2012 and as such started to correlate more with the MSCI Frontier Markets Index as can be seen from the chart below:
MSCI Frontier Markets Index & RSISUSD Index, rebased since early 2012
The preliminary OPEC agreement in Algeria is a positive development because the proposed action is along the lines of least resistance, i.e. in the direction of fundamental market changes and serve to accelerate the rebalancing of the market from an over-supplied one over the last two years to a balanced market by next year and long-term an undersupplied market. There are many obstacles and likely setbacks to this agreement which could derail it and prices are likely continue to be volatile, with an upward bias, over the next few months.
The liberation of Mosul continues to progress with the sustained encirclement of the city by the Iraqi army & Kurdish Peshmerga forces backed by the international coalition with an increased military commitment by the US. Simultaneously, Iraq's international sponsors are advancing the humanitarian work, including aid, in dealing with the expected humanitarian crisis from the battle. However, continued domestic political infighting led to the impeachment of the Finance Minister by parliament following the impeachment of the Defense Minister in August. As odd as it might first seem, this has the seeds of a future political stability for the country: these impeachments were only possible because the sectarian alliances since 2003 of Kurds, Sunnis and Shias have begun to unravel in the last few months leading to potential cross-sectarian alliances. While these are still tenuous and far from stable, nevertheless they make the division/separation of the country along sectarian lines unlikely. Having said this, the development of a decentralized federal Iraq, not along purely sectarian lines, is still the most likely and sustainable/stable long-term solution post ISIS.
As of 30th September 2016, the AFC Iraq Fund was invested in 14 names and held 8.7% in cash. As the fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq, the countries with the largest asset allocation were Iraq (96.0%), Norway (3.3%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (56.0%) and consumer staples (14.8%). The estimated trailing median portfolio P/E ratio was 9.81x, the estimated trailing weighted average P/B ratio was 0.89x, and the estimated portfolio dividend yield was 2.38%.
For more information about Asia Frontier Capital’s Iraq Fund, please click the following links:
The AFC Vietnam Fund gained +0.1% in September to reach a new high NAV of USD 1,681.59, bringing the year to date net return to +18.5% and the net return since inception to +68.2% which represents an annualized return of +20.1% p.a. By comparison, the September performance of the Ho Chi Minh City VN Index was up +1.7% while the Hanoi VH Index increased by +0.8% (in USD terms). Since inception, the AFC Vietnam Fund has outperformed the VN and VH Indices by +40.6% and +50.4% respectively (in USD terms).
While the HCMC-index recovered quite strongly in the second half of September and reached a new multi-year high, the rally was still concentrated in just a few stocks. At least the index in Hanoi was able to catch-up in the last few trading days, be it with a focus on a few sectors only. While Vinamilk was losing about 10%, the biggest winners were oil & gas and financials.
Until now, in 2016, stock performance was driven by stories around index-related big cap stocks, while the majority of stocks were neglected. The 2016 price change of the main index in HCMC was three times the performance of the index in Hanoi and even there it was mainly the result of the performance of a few sectors.
After small cap stocks had performed very well over the last few years - especially in 2013 and 2014 - this year big names have stolen the show. With our portfolio now trading at a roughly 50% discount to the market, and a thrilling technical picture, we are looking at an interesting final quarter.
There will certainly be fewer privatizations in 2016 than last year, but the government is now focusing on well-known big companies like Saigon Brewery (Sabeco), which will submit its share listing documents soon to the Ho Chi Minh City stock exchange after getting approval from the Ministry of Industry and Trade. Sabeco is the largest brewery in Vietnam with more than 40% market share, holding a lot of famous and popular brand names such as “333” and “Saigon Beer”. In 2015, total revenues of Sabeco hit a record high of 27,144 billion Vietnamese Dong (USD 1.2 billion) and profit before tax of VND 4,470 billion (USD 200m). The Ministry of Industry and Trade is currently the largest shareholder of Sabeco with a 90% stake. According to government sources, the state will sell its stake in Sabeco in two phases after listing. In the first phase, the Ministry of Industry and Trade will sell about 54% of the company and in the second phase a few months later they will sell the remainder.
Currently there are at least 7 major international breweries interested in buying Sabeco’s stake, such as Heineken, Anheuser-Busch, SAB Miller, Asahi, Thai Bev and Kirin Holdings. The Sabeco listing will be a major event for Vietnam’s financial markets since it will attract new foreign investors and it will be another small step to reach emerging market status.
While insurance companies in the Western world are fighting with sluggish growth rates for the past few years, Vietnam’s insurance sector is still very young. According to the Vietnam Insurance Association, insurance expenditure per capita is only 1.5% of GDP in Vietnam, compared to the average of 5.2% in Asia. With a population of 92 million people, of which 60% are less than 35 years old, the insurance industry is forecasted to grow substantially over the next few decades. Petrolimex Insurance (PGI) for example, is the second largest automobile insurer in Vietnam with a 16% market share in 2015, up from 12% in 2012. PGI is one of the most aggressive insurance companies in Vietnam in terms of product distribution, for example they sell motorbike insurance on the street through insurance brokers.
Insurance broker on the streets of HCMC
The AFC Vietnam Fund holds two insurance stocks in its portfolio, Agricultural Bank Insurance (ABI), one of the fastest growing insurance companies, and Vietnam Reinsurance (VNR), of which Swiss Re holds a 25% stake.
Vietnam’s GDP growth hit 6.4% in the third quarter of this year, up from 5.5% and 5.8% in the first and second quarter. Consequently, the GDP in the first nine months of 2016 increased by 5.9%, slightly lower than the same period of last year, mainly due to a weaker agriculture sector in the first half year, which was affected by a severe drought. The General Statistic Office of Vietnam (GSO), expects the Q4 GDP growth to come in higher than Q3.
The State Bank of Vietnam (SBV) reported in September a healthy improvement of foreign reserves. Vietnam was able to increase the reserves by USD 10 billion in the first nine months to a new record high of USD 40 billion which will certainly be an important factor for stability of the Vietnamese Dong.
CPI jumped strongly in September, mainly due to higher education fees. September CPI rose 0.54% MoM and 3.34% YoY, according to the latest data released by the General Statistics Office (GSO). Education had the strongest monthly inflation at a rate of 7.19% in September as the new school year started under new education policy.
FDI disbursement maintained its growth momentum while new registered FDI started to slow down slightly in the first nine months of 2016. During the same time, total new and additional registered FDI reached USD 16.43 billion, a decrease of 4.2% YoY. However, FDI disbursement continued to grow at USD 11.02 billion, gaining by 12.4% compared to the same period last year.
In September, the Vietnam economy saw a slowdown of exports by 6.8% compared to August, but up 9.0% against the same period last year. In the first nine months, total exports reached USD 128.2 billion, an increase of 6.7% compared to the same period in 2015. Exports in September were USD 15 billion, -17.4% MoM, partly because of Samsung’s problems with the new Galaxy Note 7. Another factor was the effect of the bankruptcy of the Korean Hanjin Shipping Company which had about 10% market share in Vietnam. However, this is only a short term effect and we expect that exports will improve over the coming months. Imports in the first nine months hit USD 125.4 billion which brings the total trade surplus to USD 2.8 billion.
Most banks in Vietnam reduced their deposit interest rates in September after the government announced that they have already sold enough treasury bills this year. Lower interest rates should also help to boost the economic growth in the last three months of 2016.
While volatility is typically higher in the month of September, as seen in many developed markets last month, the exchanges in Vietnam were pretty stable. An encouraging technical market picture and the recent foreign buying should provide investors with confidence, especially as the fourth quarter is usually a strong seasonal period for equity markets.
At the end of September, the fund’s largest positions were: Sam Cuong Material Electrical and Telecom Corp (3.2%) – a manufacturer of electrical and telecom equipment, Bao Viet Securities JSC (2.2%) – a securities brokerage company, Vietnam Sun Corp (1.8%) – a travel services company, PetroVietnam Fertilizer and Chemical JSC (1.7%) – a fertilizer manufacturer, and Nui Nho Stone JSC (1.7%) – a stone mining company.
The portfolio was invested in 84 names and held 3.9% in cash. The sectors with the largest allocation of assets were consumer goods (35.3%) and industrials (23.3%). The fund’s estimated weighted average trailing P/E ratio was 8.89x, the estimated weighted average P/B ratio was 1.19x and the estimated portfolio dividend yield was 5.48%.
For more information about Asia Frontier Capital’s Vietnam Fund please click the following links:
After concluding my Central Asia trip, I found that most people I talk to have actually never heard of Turkmenistan. “That’s a country…?!?” was an all-too-familiar response. A few people knew vaguely of Turkmenistan and its notoriety. With a post-Soviet history of iron-fisted rule by megalomaniacs and strict rules on entry and travel to the country, Turkmenistan is often referred to as the “North Korea of Central Asia”. Ashgabat, the capital city, was described in the Lonely Planet as a bizarre desert metropolis where Las Vegas meets Pyongyang.
The decision to even visit the country started several months prior to the trip while having lunch in the Silom neighborhood of Bangkok. I was surprised to see a Turkmenistan Airlines office in the mall complex, and promptly walked in. The handful of Thai employees seemed surprised that I was there to see them and was actually interested in flying back to Thailand from Turkmenistan. Turns out, there are direct flights from Ashgabat to Bangkok and the fares are far more competitive than options from Bishkek or Tashkent. The airline had a 4/10 ranking on Skytrax and lots of cringeworthy customer reviews (“cabin crew were emotionless”…“no alcohol is served. Why?”…“how can you not have in-flight entertainment on an intercontinental flight?!?”). Funny enough, Turkmenistan Airlines has found a unique market niche in catering to Britain’s large Sikh population: it offers direct flights from Birmingham-Ashgabat and from Ashgabat-Amritsar (India), providing one of the most direct options for UK Sikhs to get to India. It was quite amusing to see dozens of Sikhs hanging out at Ashgabat’s underwhelming airport, transiting through with no remote interest in venturing out to see Turkmenistan.
We entered Turkmenistan overland from Uzbekistan at the backwater desert town of Dashoguz. All travelers must be accompanied by a tour guide when traveling outside of the capital, so we were to be met by our driver and guide once we crossed the border. The Turkmen border crossing was one of the most annoying crossings I’ve ever done (yes, arguably worse than Somalia to Ethiopia, and that says a lot!) Not only were the Turkmen border guards terse, gruff, and unsmiling, they demanded to search every last item we brought into the country. I’ve never had my toiletry bag so thoroughly analyzed, and for every tablet or pill, the military garb-clad guard demanded to know its purpose. I’m sure that our austere inspector Ahmed learned a great deal about the different varieties of Western anti-diarrhoeals and antibiotics that day.
Three hours later, we emerged into Turkmenistan and found our guide. Like Uzbekistan, there is a black market for currency in the country, but it is much more discrete and as foreigners, we didn’t want to risk deportation or worse. The official exchange rate is 3.5 Manat to the dollar, but we had read worrying reports about the lack of functional ATMs in the country, so our guide helped us change our $100 bill notes into Manat and we left Dashoguz in an off-road 4x4 to drive through the bleak and barren desert of northeastern Turkmenistan, heading south towards Darvaza.
Darvaza, where we were going to spend the night camping in the desert, was not really a town at all. The main attraction there is the “Door to Hell”, which is surely Turkmenistan’s most famous and captivating tourist draw. The Door to Hell is an enormous fiery hole in the middle of the desert whose flames have been burning non-stop for nearly 50 years. In 1971, Soviet engineers were drilling for oil at the site and the rig collapsed into a crater with a diameter of 70 meters and a depth of 20 meters. For some fantastic reason, the engineers thought that lighting the crater on fire would help to burn off any poisonous gases that might be emitted and would affect nearby towns. Turns out, the free-flowing gas had other ideas, and the fiery pit of hell has burned without cease for over four decades. Our guide promised us that the pit continues to burn in the winter, even when the desert is blanketed in snow.
The sight itself was spectacular! There was no one else around except for the three of us, and endless desert stretched in every direction, except for a lone yurt dotting the distant horizon. The roar of the flames was loud and ominous, and as we cautiously walked to the surface of the crater, the wind picked up and we suddenly thought we’d be burned by the scorching gas fumes being blown directly into us.
During the day, the fiery pit is still amazing, but our guide assured us that it was much better at night, when the flames glow against the dark and starry Turkmen desert night. We were also instructed to make camp behind a small hill about 500 meters from the crater, so that we would wake up alive and not asphyxiate from unknowingly huffing gas fumes during our sleep.
We made camp, and as the sun set over the beautiful Turkmen desert, we sat on a traditional Turkmen carpet, eating chicken our guide had barbequed, drinking from the oversized bottle of vodka that our guide believed we needed for a one-night jaunt in the desert, and watching the enchanting glow of the Door to Hell.
After dinner, with a warm buzz from the cheap vodka (Turkmenistan, like most places in Central Asia, seems to subsidize vodka and petrol), we crept toward the crater, captivated by its gigantic flames. Staring into 10 meter flames while standing on the very edge of a huge fiery pit is almost a hypnotic experience, and after many failed photo attempts, we retreated to our tent.
In the morning, we set off for Ashgabat, but stopped for a mid-morning break at a dusty village to see the traditional Turkmen way of life. Turkmens, like many of the people we had met in the ‘Stans, were historically nomadic, and one still sees yurts today in the rural areas of the country. Visiting the village was a great introduction to many of the most distinctive aspects of Turkmenistan’s culture. We were ushered inside a family’s yurt, which was draped in beautiful hand-woven carpets, and treated to large mugs of fermented camel’s milk. I’ve had camel’s milk before in the Horn of Africa, and unfortunately, my palate doesn’t seem to have changed much – it tasted like fermented milk mixed with sour soda water. It's also a notorious laxative, and so I tried to be polite and pretend to enjoy the local delicacy while keeping in mind that there were only squat toilets for 200 miles in any direction.
After our camel milk ceremony in the yurt, the patriarch of the family proudly posed with his eagle, which had been tethered to the yurt with a home-made leash of sorts. What a spectacular bird to have keeping watch over your yurt!
We continued onward to Ashgabat, the capital city, which means “City of Love” in Arabic. No clue where that name came from, but I think it should be renamed to something more along the lines of “City of Strange” or “Bizarre White Marble Ghost-town”. Today, Ashgabat has a population of just over a million people, and its lavish buildings and immaculate roads are a testament both to Turkmenistan’s natural gas wealth and the unusual idea of beauty that the country’s former President clearly had.
Saparmurat Niyazov ruled Turkmenistan from 1985 until his death in 2006, and his megalomania is the stuff of stories. His personality cult forced comparisons to Kim Jong-il and the countless examples of his larger-than-life, egotistical rule were everywhere I looked. His self-imposed title, Türkmenbasy, meant “Father of All Turkmen”, and during his rule, national media always referred to him in the press as "His Excellency Saparmurat Türkmenbasy, President of Turkmenistan and Chairman of the Cabinet of Ministers". Known as one of the world’s most totalitarian and repressive dictators, his personal fortune was estimated to be in excess of USD 3 billion. He renamed months and most days of the week to reflect Turkmen culture or his own history – April was renamed Gurbansoltan, his mother’s name. Dogs were banned, and hospitals and libraries outside of the capital were closed. He wrote a book, Ruhnama, intended to be the “spiritual guidance of the nation”, and it became mandatory reading in all schools, even appearing on the country’s driving test exam.
Ashgabat reflects his cult of personality, and feels like an eerily empty post-modern city straight out of the Wizard of Oz. In 2013, the Guinness Book of World Records announced that Ashgabat had recorded the world's highest concentration of buildings lined with white marble. Every building I saw in Ashgabat was white, and the perfectly-paved streets were nearly entirely empty. Taking photos in most of downtown Ashgabat is forbidden and strictly enforced; apparently many of the buildings are government ministries and photography is a national security threat. As tourists, we were free to walk around Ashgabat without a guide, but it was quite unsettling seeing armed and uniformed policemen and soldiers standing at attention all over the city and keeping watch over nothing in particular while staring in an unfriendly manner at us. It was also scorching hot, around 40 degrees Celsius and the sprawling city made walking less than ideal.
The number of gaudy monuments and buildings blew my mind. In Ashgabat, it seems that every traffic circle is adorned with an ugly, flashy, and enormous structure or monument of some sort, and they all seem out of place. One wonders whether the money spent on the capital’s décor couldn’t be put to better use in the poor, rural areas of Turkmenistan. Such is life in a gas-rich, Central Asian autocracy, I suppose!
On our final day in Ashgabat, we decided to visit the Turkmen Carpet Museum, located adjacent to the Ministry of Carpets (yes, you read that right). Ashgabat is a bit underwhelming in terms of actual attractions, so we figured we ought to give the museum a go. The place was cavernous and completely empty, yet the entrance fee was a whopping USD 20! The part which really made us laugh was that we were told we were allowed to take only 3 photos, but that each photo after that would cost us USD 5. Luckily, we met a Turkmen woman working for the museum who was a historian trained in the US and was overjoyed to meet two Americans looking at carpets in her home country. She gave us a great overview of the history of the different patterns – carpets are so revered by Turkmens that the country’s national flag prominently features the 5 patterns from the carpets of the country’s main tribes. Best of all, she dismissed the camera fee as nonsense and offered to take as many photos of us as we wished!
Finally, our six-week Silk Road journey had come to an end. Almaty to Ashgabat, on bicycle, train, and taxi. We had gone eagle hunting in Kyrgyzstan, lived lavishly thanks to the Tenge’s depreciation in Kazakhstan, wandered spectacular Silk Road ruins in Uzbekistan, and camped next to a burning gas crater in the Turkmenistan desert.
Central Asia is certainly the most fascinating part of the world I’ve ever experienced, and the food, the people, the culture, and the beauty of the region will stay with me forever.
It is also a region that will become increasingly important in geopolitics as China eyes new transport and resource corridors, Russia strengthens its influence, and as the countries in the region continue to emerge from the post-Soviet era and increasingly engage with the rest of the world. It’s already happening: Kazakhstan has opened an embassy in Ethiopia, Indians are attending medical school in Kyrgyzstan, European tourists are recognizing the potential of Uzbekistan’s UNESCO sites, and young Turkmens are moving to Ukraine, Malaysia, and Turkey to study.
I look forward to visiting the region again soon and would encourage readers to plan a trip to the “Stans” sooner rather than later!
I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues.
With kind regards,
Asia Frontier Capital Limited
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 Iraq Fund, AFC Iraq 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 funds 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.
AFC Asia Frontier Fund is registered for sale to qualified/professional investors in Japan, Singapore, Switzerland, the United Kingdom and United States. AFC Iraq Fund in Singapore, Switzerland, the United Kingdom and the United States. AFC Vietnam Fund in Japan, Singapore, Switzerland and the United Kingdom.
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.