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%.