Cambodia’s GDP growth is expected to be 7% in 2019, similar to 2018. The country continues to be the recipient of robust FDI from private and government-related Chinese and Japanese companies with a focus on manufacturing and infrastructure. The country is also projected to see a further increase in tourist arrivals as its main cities become more interconnected regionally, by both land and air. There are plans for an expressway between the capital, Phnom Penh, and Ho Chi Minh City, Vietnam, the construction of a Chinese-funded airport in the casino and industrial town of Poipet at the border with Thailand, as well as the addition of new flight routes to the port and beach resort town of Sihanoukville. Due to the rapid influx of foreign investment over the past several years, Cambodia’s property market is in need of a pause as prices in certain areas of Phnom Penh are nearing those in the central business district of Bangkok and could pose a potential risk to the economy in the short-term. Cambodia in 2018 followed Ukraine (+82.3% in USD) with a +32.6% performance, making it the second best performing stock market in the world. Many of the stocks are fairly valued and we do not expect a continued rally in 2019.
Iraq’s brighter outlook at the start of 2018 - marked by the end of the ISIS invasion and the recovery in oil prices – was postponed for much of the year by political uncertainties surrounding the May 2018 parliamentary elections.
The political uncertainties before the elections continued following the indecisive election results as the different political parties negotiated the formation of a coalition government. Adding to this mix of uncertainty was the eruption of massive demonstrations in the south, where protesters demanded reform and investment into basic services. These uncertainties started coming to an end in early October with the promise of appointments of a president and a prime minister in a fashion that broke the failed mould of the past. These were followed with the formation of a working government which, while still incomplete, can begin to act on the needed spending for a post-conflict recovery.
Paradoxically, while the political uncertainties paralyzed the government process, the government’s revenues soared thanks to the recovery in oil prices with the result that the government was on course for a two-year accumulated surplus of up to USD 24.5 bln by the end of 2018. The oil market’s decline from unsustainably high levels of the summer is an unwelcome development but should not alter the positive revenue momentum as long as the government continues with the fiscal discipline brought on by the IMF’s 2016 Stand-By Arrangement (SBA).
The first of the companies to emerge from the severe economic contraction of the last few years were telecoms, with two major mobile operators out of three national operators reporting third quarter earnings that display the markers of recovery in earnings, margins, and profits. Among the two, AsiaCell voiced its confidence in its recovery with a 12% dividend on the back of last year’s 14% dividend – which in absolute terms is about one third higher than that of last year. Other sectors, in particular banking, should begin to show similar patterns of recovery through 2019.
The delayed economic recovery continued with its negative effects on the equity market, down -16.6% by the end of November on the back of consecutive annual declines of -11.8%, -17.3%, and -22.7%. An upcoming economic recovery coupled with a reversion to the mean should bring with it a market recovery which is also paced by an earnings recovery across listed companies.
However, significant challenges remain with the huge demands for reconstruction, winning the peace, defeating a likely emerging ISIS insurgency, and controlling violence. In particular, the fragmented politics of the new parliament will continue to be a marker of risk for the government’s future stability which would in turn pose a risk to economic recovery.
We can expect stable economic growth from Kazakhstan as higher oil prices compared with two years ago have helped stabilize the economy, while the banking system continues to be cleaned up which has led to an easing of interest rates by the Central Bank. With a debt to GDP ratio of 26% and foreign reserves of USD 86 bln, the current macro environment will allow the government to undertake reforms to diversify its economy in the long run. Additionally, the rail link between China and Eastern Europe could lead to a positive economic spillover for the rest of the country. We expect to maintain our position in the bank which the AFC Asia Frontier Fund holds as it is a good proxy to economic growth given the bank’s size as well as strong capital buffers.
Kyrgyzstan is projected to grow its GDP by 4% in 2019, an acceleration from the projected growth of 2.5% in 2018. This expected increase in growth will mainly be attributed to an increase in industrial output and remittances from overseas workers. However, with a debt to GDP of 50% (44.7% of which is held by China) and a projected budget deficit of 3.8% in 2018, Kyrgyzstan will remain subject to potential economic or political shocks in South Korea, Kazakhstan, or Russia since these are the countries where the majority of its overseas workforce, who remit capital home, are located. Remittances comprise approximately 25% of GDP.
Laos’ GDP is projected to grow by 6.9% in 2019, an acceleration from projected growth of 6.6% in 2018, as the country continues to attract mainly Chinese and Vietnamese investments, the former of who are constructing the USD 6.7 bln, 409-kilometer Laos-China railway, part of the railroad network envisioned to connect Kunming, China to Singapore. While the railway is touted by the Laos government as an important artery and economic achievement in the country, it is the leading contributor in the World Bank’s estimate of the Laos government’s debt/GDP, which is projected to reach 70% by 2022. The development of economic zones near the capital, Vientiane, is attracting SME factories from China who are looking to relocate to regions with cheaper labor and who in turn are helping to diversify the economy. Perhaps the most encouraging addition to the Laos economy this year will be the completion of the Xayaburi hydroelectric dam on the Lower Mekong River which will have an installed capacity of 1,285 MW. EDL Gen Co., listed on the Laos Stock Exchange, owns 19% of the project and should generate substantial income for the country. The AFC Asia Frontier Fund holds this company as it is currently providing a dividend yield of 7.3%.
Mongolia’s GDP is projected to grow by 4.3% in 2019, a decent increase from the projected growth of 3.8% in 2018. So long as the border points with China, specifically the Gants Mod border point where the majority of Mongolia’s coal and copper concentrate is exported through, remain open, Mongolia should continue to improve its foreign exchange reserves and be able to maintain its good standing with the IMF. This is then likely to result in a continued rebound in local consumption and the real estate market. The government plans to IPO at least 30% of the state-owned Erdenes Tavan Tolgoi coal mine “ETT”. If this does occur, it will most likely be listed in either New York or Hong Kong and enable the government to build, with the IPO proceeds, a railroad from the coal mines in the South Gobi to the Chinese border, drastically decreasing transportation costs of the country’s most important export product. The key risks to Mongolia during the year will remain the potential for China to restrict commodity imports, a potential fall in commodity prices, and increasing political turmoil in the run up to 2020 parliamentary elections.
Myanmar’s GDP is projected to grow by 6.4% in 2019 which will be one of the highest growth rates in the region despite the negative press reports it has received lately.
Myanmar also faces the challenge of an increasingly insolvent banking system which will need to be restructured. The Central Bank, recognizing this issue, has recently permitted foreign banks to own 10% of local banks, as well as permitting foreign banks to lend to local corporate clients. The big story for 2019, however, will be the potential development of the China-Myanmar-Economic-Corridor (CMEC). The CMEC includes an integrated transport and industrial zone network stretching from the Myanmar-China border in Shan state through Mandalay to Yangon and west to the port city of Kyaukpyu, the latter of which is seeing the construction of a Chinese-funded deep water port and a special economic zone.
The Myanmar government’s creation of a new Ministry of Investment late last year is intended to operate on a “one window policy” expediting licensing of foreign businesses in a bid to cut down on bureaucracy and increase FDI. If operated properly, this ministry could be a game changer, helping Myanmar to receive increased investments in the agricultural and manufacturing sectors, especially as the China-U.S. trade war continues. In the insurance industry, it is expected that several foreign insurers will be granted licenses in 2019 to operate independently in Myanmar. This could lead to a significant capital inflow, similar to the USD 3 bln in FDI when the telecom sector was liberalized, as well as lead to the demand for new investment products for insurers to invest into.
However, foreigners are still not allowed to invest in the local stock market, with 5 stocks listed currently, and it is still not certain that this will change in 2019.
In 2018, the PKR depreciated by 26%, domestic benchmark interest rates rose by 425 basis points, a new Prime Minister (former cricket hero Imran Khan) was democratically elected, and economic growth slowed down.
As we enter 2019, expectations are that an IMF loan program of about USD 4 to 5 bln will be approved, since in the last few months the newly elected government has taken some tough decisions such as raising gas prices, devaluing the PKR, and reducing public expenditure in order to meet IMF requirements. History shows that after an IMF program is in place, the stock market generally has positive returns (see table below). Given the current environment, our strategy in Pakistan will focus on bottom up opportunities as companies across sectors are trading at valuations significantly below their five-year average multiples. We like selected companies in the auto, banking, cement, and energy sectors.
Though the near term outlook is not favourable, we don’t lose sight of the fact that the country has a sizeable population of 200 mln people with a median age of 23 and this clearly presents a solid case for opportunities in consumption-related sectors.