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Asia Frontier Capital (AFC) - August 2019

"Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do." − Marc

"Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do."

− Marc Twain, American writer, humorist, entrepreneur, publisher, and lecturer


AFC Asia Frontier Fund USD A1,288.01−1.5%−5.6%+28.8%
AFC Frontier Asia Adjusted Index2 4.1%16.5%10.6%
AFC Iraq Fund USD D606.43−0.1%+3.2%−39.4%
Rabee RSISX Index (in USD) −0.9%−4.9%−54.2%
AFC Uzbekistan Fund1,055.76−1.9%+5.6%4+5.6%
AFC Vietnam Fund USD C1,866.76+1.6%+5.1%+86.7%
Ho Chi Minh City VN Index (in USD) 0.8%+10.6%+76.0%
  1. The NAV given is for the main share series for the relevant master fund. Investor’s holdings may be in a different share class or series or  currency and have a different NAV. See the factsheets and/or your statement for full details.
  2. The index was adjusted on 1st June 2017. Prior to that it consisted 100% of the MSCI Frontier Markets Asia Net Total Return USD Index, and after 1st June 2017 it consists 37% of that index and 63% of the Karachi Stock Exchange 100 Index in USD.
  3. NAV and performance figures are all net of fees.
  4. YTD since 29th March 2019

Trade war uncertainties continued to impact sentiment across global markets as a new round of U.S. tariffs kicked in starting 1st September on an additional USD 110 bln of Chinese exports to the U.S. Though this new round of tariffs creates an overhang on market sentiment with respect to the future direction of trade talks between China and the U.S. or potential new tariffs from either side, the new round of tariffs could potentially provide export gains for Asian frontier markets as the tariffs cover garments and footwear, which reflect the manufacturing strengths of Bangladesh and Vietnam.

Furthermore, potential new tariffs that could kick in on Chinese exports to the U.S. from 15th December 2019 onwards cover consumer goods such as smartphones, electronic products and toys, also key manufacturing strengths of Vietnam. As written in previous AFC newsletters this year, Asian frontier markets are seeing their exports grow while other regional Asian exporters struggle, which reflects a trend of manufacturing activity shifting to lower cost Asian frontier markets.

The rise in exports is also helping markets like Bangladesh to reduce their current account deficit, which almost halved in the year ending June 2019. Pakistan and Sri Lanka have seen a big decline in imports this year as a combination of currency weakness and import duties restrict import growth leading to contractions in their current account deficits. A combination of rising exports, increasing remittances and restricted imports is expected to lead to healthier current accounts for Bangladesh, Pakistan and Sri Lanka going forward, which is positive for their macro stability. Our top country picks continue to be Vietnam, Bangladesh and Uzbekistan. Another positive is that valuations remain very attractive across Asian frontier markets with the AFC Asia Frontier Fund reflecting this with a P/E ratio of 7.9x, a big discount to all the major MSCI Indices (see graph below).


(Source: Asia Frontier Capital, Bloomberg)

During the month, Ruchir Desai, co-manager of the AFC Asia Frontier Fund, participated in a panel discussion at the 11th Asia Investment & Banking Conference in Hong Kong, an annual conference organised by students at the London School of Economics (LSE). Amongst other topics, discussions centred on economies that could benefit from the current trade war.


(Photo: AIBC )


Below are the manager comments relating to each of our four funds for the month of August 2019. Later this month we will share with you a travel report from Ruchir Desai, the co-fund manager of our AFC Asia Frontier Fund, providing an update after his recent trip to Myanmar.

If you have any questions about our funds or would like to receive additional information, please be in touch with our team at This email address is being protected from spambots. You need JavaScript enabled to view it. .



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Ho Chi Minh City   10th – 13th September   Andreas Vogelsanger
Kuala Lumpur   16th September   Peter de Vries
Singapore   17th – 20th September   Peter de Vries
Ulaanbaatar, Mongolia   23rd – 26th September   Thomas Hugger
Baghdad   23rd – 27th September   Ahmed Tabaqchali
London   27th September – 5th October   Ahmed Tabaqchali
Uzbekistan   3rd – 31st October   Scott Osheroff
Sulaimani, Erbil, Baghdad   6th October – 19th December   Ahmed Tabaqchali
Switzerland   7th – 11th October   Thomas Hugger
London   14th October   Thomas Hugger
Switzerland   18th October – 1st November   Thomas Hugger
Ho Chi Minh City   12th – 15th November   Ruchir Desai
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AFC Vietnam Fund - Manager Comment



The AFC Vietnam Fund returned +1.6% in August with a NAV of USD 1,866.76, bringing the return since inception to +86.7%. This represents an annualized return of +11.6% p.a. The Ho Chi Minh City VN Index lost -0.8% in USD, while the Hanoi VH Index retreated -2.0% (in USD terms) in August 2019. The broad diversification of the fund’s portfolio resulted in low annualized volatility of 8.48%, a high Sharpe ratio of 1.25, and a low correlation of the fund versus the MSCI World Index USD of 0.28, all based on monthly observations.

August saw a repetition of previous months in that the family of Vingroup stocks, the Chinese Yuan depreciation and subsequent big swings in global stock markets were once again the biggest performance drivers. Compared to other markets, Vietnam was once again more stable, showing much lower volatility, with the Ho Chi Minh City Index declining by -0.8% and the Hanoi Index by -2.0%. Our portfolio was better protected from these factors and strong buying interest in many of our stocks helped the fund. While the Vietnamese stock market is still down significantly from its high, our NAV is now only around 2% (in USD terms) below its all-time high.

Market Developments

World stock markets were caught again by questionable rhetoric and actions by the world’s two biggest economies. While Trump is still talking about the wall between the USA and Mexico, he is currently building a much bigger economic wall around the USA, while most other countries are reducing tariffs in order to promote trade and their economies. Who is paying for that wall is pretty clear; namely US consumers and laid-off workers around the globe due to slower economic activity bearing the main consequences of the new trade policy. Part of US politics seems to be to find new enemies, including trade and currencies. 


(Source: Bloomberg)

It might sound good for many Americans that US companies should purchase goods from countries other than China, but the subsequent shift in trade and production will mostly favour countries like Vietnam and ultimately victimize consumers, as it is highly unlikely that the USA (or Europe) would be able to produce most of the products that are currently imported at similar prices.

When recent commentary targeted Vietnam’s “cheap” currency and trade surplus with the US, somebody failed to check the facts. The Vietnamese Dong was one of the strongest currencies when compared to even the biggest and most important currencies in the world (see chart below), and unlike Germany for example, the overall trade surplus of Vietnam is hovering around zero, although Vietnam, like most countries worldwide, has a big trade surplus with the US.



5-year VND, JPY, GBP, EUR against USD

(Source: Bloomberg)


Can 5 stocks represent a market of more than 1,000?

Both the index and our portfolio are much calmer than most stock markets around the globe, but we, like most investors in Vietnam, are still facing the same dilemma that the Index is not reflecting at all what is happening within the broader stock market. July and August saw a continuation of what we have seen in the first half of the year, when 90% of the performance came from the three Vingroup stocks, plus Petrovietnam Gas and Vietcombank. A few other stocks added some smaller gains while the majority of stocks (there are 375 stocks in the HSX Index alone) continued to fall. Therefore, it is no wonder that the performance of most funds is lagging the index and are somewhere near zero for the year. In this environment we are glad to have some stocks which were “discovered” by investors this year which helped us to show a positive performance year to date, and we believe many more of our portfolio holdings will also soon be “discovered”.

One key to a strong stock market performance is local investors picking up stocks at low prices. Many of these stocks have already been sold by some of the foreign funds which had to sell them in order to deal with redemptions earlier this year. Only 1% of a total of more than 2 mln brokerage accounts are owned by foreigners, but these accounts hold around 25% of the total market cap in Vietnam, though most of them are strategic investors. Another 40% of the total market cap is held by management and the government of Vietnam and 35% of market cap is owned by local, mainly retail investors who often don’t care about valuations and are instead following market rumors. Another consequence of this attitude is that last year’s introduction of futures and this year’s first listings of covered warrants resulted in a 99% participation rate of locals in those products as they are perfectly designed to gamble on short term market movements with high leverage. We do not see this as a negative but more of a natural market development in this still very young financial market.

The US markets will not outperform forever even if the common argument is that a prolonged zero interest environment will push up equity prices. This might be true for the US indices but not for most other markets where stocks are trading at the same levels as 20 years ago as is the case in many European markets, for example.

20-year Euro Stoxx 50

(Source: Bloomberg)

Recently, we also saw increased interest in non-blue-chip names. While it has not shown up in the market breadth yet, we saw an outperformance of the small- and mid-cap indices in August. Despite all of these uncertainties, Vietnam stayed resilient and is even looking stronger from a medium-term perspective.


2 year Ho Chi Minh Stock Exchange VN-Index

(Source: Bloomberg)

Phu Tai Joint Stock Company (PTB) – A beneficiary from the trade war

Last week we visited PTB, one of our top ten positions. PTB’s business is split into three main divisions: Toyota car dealership, furniture and natural stone mining. This company is a good example of how Vietnam is benefiting from the current trade war between US and China, since the US is a big importer of furniture and stones. Our fund manager has met with the CEO of PTB, Mr. Le Van Thao, and discussed the current situation and future outlook of the company.

In 2018, the company reported total revenues of USD 196.5 mln, a year on year increase of 22.8%, of which furniture and stone mining contributed the lion’s share. This is mainly due to a sharp increase of furniture and stone exports to the US, with furniture revenues increasing by 47.8% and stone mining revenues by 7.4%. Due to higher demand in this sector, PTB acquired some furniture companies and stone mines for a total investment of USD 11.5 mln.

The CEO also mentioned that the company plans to produce artificial quartz and he expects this will further enhance revenue growth and profitability in the stone mining division. More and more of their customers are switching from natural stones to artificial stones like quartz. He expects the first quartz labs will be operational in Q3 2020. In order to sell its quartz stone to the US, PTB has already signed agreements with several stone distributors in the US, which is the largest quartz stone importer.

Profit structure in 2018 (%)

(Source: PTB annual report, PTB audited financial report, AFC Research)

The CEO also shared PTB’s financial estimates and company outlook for the next three years. Despite these optimistic future forecasts, the stock is still trading at less than 8x estimated earnings for 2019 and is currently one of the fund’s top 3 holdings.

3-year financial outlook (VND bln)

(Source: PTB, AFC Research)

PTB stock price from Jan 2016 to Aug 2019

(Source: Bloomberg)



(Source: GSO, SBV, VCB, AFC Research)


At the end of August 2019, the fund’s largest positions were: Agriculture Bank Insurance JSC (5.5%) – an insurance company, Sametel Corporation (3.9%) – a manufacturer of electrical and telecom equipment, Phu Tai JSC (3.5%) – a home and office furnishings company, Dinh Vu Port Investment & Development JSC (3.1%) – owner/operator of the Dinh Vu Port, and Idico Urban and House Development JSC (3.1%) – an energy, construction, and real estate business.

The portfolio was invested in 62 names and held 7.5% in cash. The sectors with the largest allocation of assets were industrials (32.4%) and consumer goods (29.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.03x, the estimated weighted harmonic average P/B ratio was 1.10x and the estimated weighted average portfolio dividend yield was 7.24%.

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AFC Iraq Fund - Manager Comment


The AFC Iraq Fund Class D shares returned −0.1% in August with a NAV of USD 606.43 which is an outperformance versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index) which returned −0.9% for the month. Year to date the RSISUSD is down −4.9% while the fund is up +3.2%.

The market drifted lower in an Eid-holiday shortened month as turnover declined substantially from July. However, life found its way back to the banks. Average daily turnover declined −40% month-on-month and was the third lowest level over the last five years- the others being April 2019 and September 2018 as can be seen from the chart below. Foreign investors continued to be net buyers, consistent with the trend of the last few months, although at lower total levels in-line with the decline in total turnover.


(Source: Iraq Stock Exchange (ISX), Rabee Securities, Asia Frontier Capital)

The market’s dynamics continue to improve with the return of life to the banking sector, which as a group cooled-off over June and July after a powerful rally in May, led by the Bank of Baghdad (BBOB). This month, the group was led by the National Bank of Iraq (BNOI), which was up +21.1% for the month and +58.6% from the April close before the sector started its rally. Moreover, its earnings report for the second quarter 2019 (Q2/2019) supported management’s bullish outlook for 2019 as expressed in its latest AGM. As reported here in June’s update, while management decided not to distribute dividends for a challenging 2018, it indicated the possibility of resuming dividend payments for 2019 based on its strong results for the first half of the year, as well as positive expectations for the second half. BNOI’s first half 2019 (H1/2019) results show customer deposits were up 28% year to date, while its loan book was up +77% for the same period. Pre-tax earnings for the second quarter were up +48% sequentially, with the year to date figure showing promise for the year - a long way to go before recovering to pre-crises levels- but supporting management’s expectations for the resumption of dividend payments for 2019’s earnings.

While it is not possible to extrapolate much from these results, or to generalize for the sector from them, they support the thesis made here in the last few months that the conditions are in place for the sector’s recovery in 2019-2020. The Commercial Bank of Iraq’s (BCOI) Q2/2019 earnings, while supporting this thesis, nevertheless show the unevenness of these conditions given the different circumstance of each bank. BCOI’s consumer deposits in H1/2019 were up +6% year to date, while its loan book declined by −7%. However, BCOI’s loan book is insignificant at under 8% of its deposits. BCOI was up +4.4% for the month and up +17.5% from the April close before the sector started its rally.

The most interesting development for the sector during the month was the trading action in the Bank of Baghdad (BBOB), which at some stage was up +10.7%, before trimming most of these gains, to end up +3.6%. This comes on the back of its four-month wild ride, during which it rallied +62.5% in May, declined −12.8% in June, declined a further −17.6% in July, to end August up +20.8% from the pre-rally close. The stock’s ride started on speculative hopes that BBOB would resume dividend payments for its 2018 results, sputtered as BBOB poured cold water over these speculative hopes during its recent AGM, but seems to still have plenty of fuel left. This could imply that the market is looking past the bank’s difficulties and focusing instead on the prospects of a bank following through with the recovery in its fortunes that began in 2018 as part of the overall conditions in place for the sector’s future revival.

The market is looking past the weaknesses of BBOB is a further positive aspect of its improving dynamics as mentioned here last month “While, BBOB pulled the other leading banks up with it in May, it did not drag them lower in June and July which is very different than the market’s responses to such disappointments in 2018. At that time all banks were painted by the same brush, which shows a market that has begun to discriminate showing it has likely bottomed or is making a bottom.” The year to date chart below for four leading banks shows these very different responses.

Year to date indexed performance: Bank of Baghdad - BBOB (green), Commercial Bank of Iraq – BCOI (blue), Mansour Bank – BMNS (mauve), National Bank of Iraq - BNOI (brown)

(Source: Bloomberg)

The early picture of the trading activity in September suggests that it will likely be in-line with that of August. Whilst the market is in the early process of discounting the banking sector’s recovery, it is worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy) - still at the widest it has been for the last few years (see below).


(Source: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)
(Note: Oil revenues as of Jul., AFC estimates for Aug.)


As of 31st August 2019, the AFC Iraq Fund was invested in 14 names and held 4.0% in cash. The fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (93.2%), Norway (2.2%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (48.0%) and communications (21.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.12x, the estimated weighted harmonic average P/B ratio was 0.62x and the estimated weighted average portfolio dividend yield was 5.37%

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AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by −1.5% in August 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−4.1%) and the MSCI World Net Total Return USD Index (−2.0%) but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−1.0%) and the MSCI Frontier Markets Net Total Return USD Index (−1.6%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +28.8% versus the AFC Frontier Asia Adjusted Index, which is down −10.6% during the same time period. The fund’s annualized performance since inception is +3.5%, while its 2019 performance stands at −5.6%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.92%, a Sharpe ratio of 0.31 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.33, all based on monthly observations since inception.

Global markets continued to be hampered by trade tensions between China and the U.S. as a new round of tariffs on Chinese exports to the U.S. went into effect on 1st September. Frontier markets though fared relatively better than their emerging market counterparts since the MSCI Emerging Markets Index declined by −4.9% this month.

Vietnam led performance in our fund this month despite the Ho Chi Minh VN Index declining by −0.8% thanks to the fund’s industrial park companies and an industrial pump manufacturing company delivering positive returns which resulted in the fund’s Vietnamese holdings returning approximately +1.3% in USD terms despite the broader market remaining weak. As written in last month’s manager comment, industrial parks continue to see increasing demand for industrial land due to the fact that companies look to relocate from China and this is reflected in foreign direct investments which are up by 6.3% this year to USD 12 bln with China leading foreign direct investment (FDI) commitments into Vietnam.

Tourist arrivals into Vietnam also remain stable, growing by 8.7% YoY so far in 2019. Chinese arrivals have been soft this year and the slack has been picked up by South Korean arrivals, which are up by 22.5% YoY and now account for almost 25% of total international arrivals, just behind China at 30%. The growth of low-cost carriers and increasing FDI into Vietnam from South Korea is possibly leading to this surge.

Market sentiment in Bangladesh remained soft despite an improving macroeconomic environment since the current account deficit almost halved in the latest financial year ending in June 2019. A healthy increase in remittances and exports is the main reason for this big reduction in the current account deficit. Garment exports to the U.S. have increased by almost 15% in the 12 months ended June 2019 with the country possibly seeing more garment export orders from U.S. clients as uncertainty over trade tariffs on Chinese exports builds.

The fund’s second largest position, a Bangladeshi pharmaceutical company, whose GDR the fund holds and which is trading at a 51.7% discount to its local listing, saw weakness in its stock price. The company’s fundamentals remain strong and additionally the company has outperformed its peers in net profit growth over the past four quarters. It appears that recent weakness in this company’s stock price has more to do with global sentiment rather than fundamental factors. This weakness cost the fund approximately 60 basis points this month.

The Sri Lankan Central Bank cut the benchmark interest rate by another 50 basis points this year in order to build some momentum for the economy as private sector credit growth has fallen to single digits over the past quarter. As the country approaches Presidential elections in December 2019, Gotabaya Rajapaksa, the former Defence Secretary and also the brother of former President Mahinda Rajapaksa was nominated as the Presidential candidate by the Sri Lanka Podujana Peramuna (SLPP), a political party led by Mahinda Rajapaksa, which is opposed to the current ruling coalition. With the Rajapaksa’s having a strong following amongst the Sinhalese voter base as well as a historically stronger stance on national security, the events of Easter Sunday could motivate voters to propel the Rajapaksa’s back to power.

From an investor’s perspective, it would be important to have a majority government with stable policies irrespective of which party comes to power in the near future. With valuations looking attractive and macro indicators such as the trade deficit improving, the fund bought the blue-chip company John Keells Holdings since it is a good liquid proxy for any positive economic and political momentum in Sri Lanka.

Halyk Bank, the fund’s Kazakh bank holding, declared another quarter of excellent results since the bank benefits from the synergies of the merger with Kazkommertsbank completed last year. Furthermore, Moody’s upgraded Kazakhstan’s economic outlook from stable to positive since the country benefits from stable oil prices and overall macroeconomic metrics remain healthy. As a result of this upgrade for the sovereign, Halyk Bank’s outlook was also upgraded by Moody’s from stable to positive.

The weakness in the Uzbek Som, which depreciated by 8.3% this month versus the USD, had a negative performance impact on the fund. The reason for the weakness is three-fold: on 20th August the Central Bank free-floated the currency (previously it was a managed free-float), Uzbekistan’s main trading partners, China and Russia, saw their currencies weakening, and the government allowed local residents to purchase foreign physical currencies freely. However, valuations remain very attractive in Uzbekistan and foreign exchange reserves excluding gold currently provide approximately 9 months of import cover.

The best performing indexes in the AAFF universe in August were Kyrgyzstan (+8.7%), Cambodia (+4.1%) and Vietnam (−0.8%). The poorest performing markets were Pakistan (−7.1%) and Kazakhstan (−4.4%). The top-performing portfolio stocks this month were a Mongolian consumer discretionary company (+10.9%), a Vietnamese industrial pump manufacturer (+9.4%), a Vietnamese industrial park developer (+8.8%), a pharmacy chain from Papua New Guinea (+8.3%), and a Mongolian junior copper explorer (+8.0%).

In August, we added a conglomerate in Sri Lanka, increased existing positions in Mongolia and Vietnam and partially exited a position each in Laos and Vietnam.

As of 31st August 2019, the portfolio was invested in 75 companies, 2 funds and held 3.0% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (7.8%) and a Bangladeshi pharmaceutical company (7.3%). The countries with the largest asset allocations are Vietnam (27.8%), Mongolia (18.8%), and Bangladesh (16.5%). The sectors with the largest allocations of assets are consumer goods (24.5%) and industrials (21.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.89x, the estimated weighted harmonic average P/B ratio was 0.83x and the estimated weighted average portfolio dividend yield was 4.17%.

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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund returned 1.9% in August with a NAV of USD 1,055.76, bringing the return since inception (29th March 2019) to +5.6%.

August proved to be a lively month with more big liberalizations implemented in the country. The biggest one was the full floating of the Uzbek Som (“UZS”) and the lifting of all capital controls for Uzbek citizens on 20th August. Leading up to the 20th there was a substantial depreciation of the UZS against the USD which led to depreciation for the full month and year to date of −8.3%, and −11.5% respectively. This had an adverse impact on the fund but the negative effect was limited to a drop of 1.9% this month.

AFC Uzbekistan Fund valuations as of 31st August 2019

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.68x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 8.52%


Uzbek Som floats free:

The USD/UZS rate lost considerable ground in August (following slight weakness in June and July) with the only explanation by the Central Bank being that the currencies of Uzbekistan’s main trading partners, China and Russia, fell. However, on 20th August the Central Bank formally acknowledged that the UZS, which had been a managed free-float regime since September 2017, would now be truly free floating, only subjected to the free-market forces of supply and demand. The same day, capital controls imposed on Uzbek citizens, regarding the buying and selling of physical foreign currency, were lifted (now there are no more capital controls for foreign or local investors/citizens). This resulted in long queues at many bank branches as locals rushed to convert their UZS into USD not knowing if the policy could be reversed and thus preferring to be safe than sorry. This naturally caused the UZS to depreciate against the USD as local banks sold over USD 10 mln in foreign currency on 20th August alone.

USD/UZS Exchange Rate

(Source: Bloomberg)

As Uzbekistan focuses on increasing its regional dominance as an exporter of commodities and finished products (transforming into a mini Vietnam of sorts), an annual currency depreciation of 6-7% would be expected. So, we look at the current situation with the free-floating currency as a one-off event as the government no longer has direct influence over the exchange rate, either through interventions in the market or through capital controls. It is a topic we have been and will continue to watch very closely.

Foreign direct investment (FDI) surges 400% in 1H 2019

What should ultimately help to stabilize the currency is the rapid increase in FDI. In the first half of 2019, FDI reached USD 5.6 bln, just over 400% more than 2018, and was a mix of loans and equity investments for 86 investment projects. If annualized, this would result in 2019 FDI being around 22% of GDP. This is an astonishing figure considering Uzbekistan is only in the very early stages of its long-term growth cycle. While not disclosed, it would be no surprise if the majority of this FDI is directed to the natural resources, manufacturing and infrastructure sectors, with the services sector yet to receive a large influx of investment, but it is nonetheless a fast-growing sector. Furthermore, on 27th August the Uzbekistan Ministry of Investments and Trade signed an agreement with China’s CITIC to establish a USD 1bln investment fund to invest into projects in the upstream and downstream hydrocarbon sector.

Tourism is a key growth story

The tourism industry is beginning to take off, having experienced a 230% increase in visitor arrivals during 2018, reaching 6.4 mln. It should be noted, however, that 80% of these arrivals were from Uzbekistan’s neighbours, Kazakhstan, Kyrgyzstan and Tajikistan, and thus leaves enormous upside potential for European and other Asian tourists who are yet to discover the country.


(Source: AFC Research)

Apart from the Hyatt Regency in Tashkent, the vast majority of 3 to 4-star hotel stock is outdated and can’t fulfil the rising tourist volume. By 2022 the Hilton and a second Radisson will open in Tashkent, helping to ease the supply crunch, but on the lower end of the market there has been a surge in guest houses and bed and breakfast operations run out of locals’ homes. In the first seven months of 2019, 526 guest houses were registered and opened, compared to 106 in 2018. The ability for families to increase their incomes through becoming entrepreneurs, while increasing the stock of beds for tourists should help to lower costs for tourists. Currently, it is not uncommon for a mid-range hostel in Tashkent to cost USD 30 to USD 40 for a bed in a shared dormitory compared to countries like Cambodia or Myanmar where you can pay USD 10 for the same with better quality. This is part of the natural evolution of a young, booming market where demand vastly outstrips supply and is something which the free market is addressing now.

Unfortunately, there are no listed companies through which we can get exposure to the tourism sector yet, but hopefully there will be in due course as revenues from the sector are generated in foreign currency and we believe Uzbekistan is in the early innings of a multi-year growth cycle in tourism as interconnectivity between Uzbekistan and the rest of the world by air, rail and road increases. We are already seeing this with increased flights from Europe and China and new rail connections up and coming between Uzbekistan and its neighbours. 

As of 31st August 2019, the AFC Uzbekistan Fund was invested in 28 names and held 10.4% in cash. The markets with the largest asset allocation were Uzbekistan (85.9%) and Kyrgyzstan (3.7%). The sectors with the largest allocation of assets were materials (52.6%) and industrials (17.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.68x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 8.52%.

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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,
Thomas Hugger
CEO & Fund Manager

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