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Asia Frontier Capital (AFC) - July 2019

The average man "tends to buy high and sell low" − Ray Dalio, American investor, hedge fund manager, and philanthropist

The average man "tends to buy high and sell low"

− Ray Dalio, American investor, hedge fund manager, and philanthropist


AFC Asia Frontier Fund USD A1,307.85−0.1%−4.1%+30.8%
AFC Frontier Asia Adjusted Index2 1.4%13.0%6.9%
AFC Iraq Fund USD D607.03−2.4%+3.3%−39.3%
Rabee RSISX Index (in USD) −4.4%−4.0%−53.8%
AFC Uzbekistan Fund1,075.69+1.1%+7.6%4+7.6%
AFC Vietnam Fund USD C1,836.89+1.2%+3.4%+83.7%
Ho Chi Minh City VN Index (in USD) +4.8%+11.5%+77.3%
  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 since 1st June 2017. Prior to that it reflects 100% of the MSCI Frontier Markets Asia Net Total Return USD Index, and after 1st June 2017 it is 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 only since 1st April 2019

Global markets remained volatile this month as geopolitical tensions (U.S. – Iran) and trade tensions (U.S. – China) continued to unfold. However, certain Asian frontier markets witnessed a strong performance with Sri Lanka witnessing a big rally of +10.5% on the back of low valuations and improving macro-economic indicators. Vietnam saw a rally as well in its Ho Chi Minh VN Index with a gain of +4.4% this month on the back of a good quarterly results season as well as positive moves from Vingroup companies which have a high weighting in the index.

Trade tensions between China and the U.S. picked up once again as President Trump threatened to impose a tariff of 10% on around USD 110 bln of imports from China starting 1st September while tariffs could be imposed on another USD 160 bln worth of imports from 15th December. If this plan goes ahead, almost all exports from China to the U.S. would be under tariffs with USD 250 bln of Chinese exports already under tariffs since 2018.

Though this move racks up trade uncertainty, it could create long term opportunities for Asian frontier markets as the new round of tariffs would cover a large number of consumer goods such as smartphones, laptops, toys, garments and footwear - products which are the manufacturing strengths of Asian frontier economies like Bangladesh and Vietnam. In the first half of this year, exports of garments from Asian frontier markets to the U.S. have seen very strong growth, while over the long term Bangladesh and Vietnam have continued to capture global market share in garment exports. This is a very important theme which we see being played out when we are conducting our on the ground trips in terms of greater demand for industrial land and/or more export orders from U.S. clients.


(Source: U.S. Department of Commerce)


(Source: World Trade Organisation)



Emerging + Frontier Forum

CEO and Fund Manager Thomas Hugger presented at Bloomberg’s Emerging + Frontier Forum in Bloomberg’s European Headquarters in London on 25th June 2019. Thomas was on the panel discussing Governance and Transparency in frontier markets. The event was well represented across the fund management, industry and government sectors and reflects the growing importance being given to the future of frontier markets



CWC Iraq Petroleum Conference

Our CIO of the AFC Iraq Fund, Ahmed Tabaqchali talked at the CWC Iraq Petroleum Conference in London on 27th-28th June on the topic “Spotlight on the Future Relationship between Kurdistan Regional Government of Iraq & the Federal Government of Iraq”. He published an article on the topic in the Al-Bayan Center for Planning and Studies.



Below please find the manager comments relating to each of our 4 funds for the month of July 2019. Later this month we will share with you a travel report from the fund manager of our AFC Iraq Fund providing an update of his experiences in Iraq since his last report from the beginning of 2018.

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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Hong Kong   15th – 28th August   Andreas Vogelsanger
Yangon, Myanmar   15th August – 30th September   Scott Osheroff
Zurich   19th August   Thomas Hugger
Ho Chi Minh City   11th – 13th September   Andreas Vogelsanger
Sulaimani/Baghdad/Erbil   28th August – 20th December   Ahmed Tabaqchali
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AFC Vietnam Fund - Manager Comment



The AFC Vietnam Fund returned +1.2 % in July with a NAV of USD 1,836.89, bringing the return since inception to +83.7%. This represents an annualized return of +11.5% p.a. The Ho Chi Minh City VN Index in USD gained +4.8%, while the Hanoi VH Index added +1.3% (in USD terms) in July 2019. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.53%, a high Sharpe ratio of 1.23, and a low correlation of the fund versus the MSCI World Index USD of 0.29, all based on monthly observations.

Market Developments

While earnings announcements for the second quarter are ongoing, banks and Vincom Group stocks led to a strong recovery of the Ho Chi Minh Index. Vietcombank, one of the leading banks in Vietnam, will become an insurance-distribution partner for Prudential Plc. and Hong Kong billionaire Richard Li’s FWD Group. Based on unofficial sources, it is expected that Vietcombank will receive an initial payment of about USD 400 mln and additional payments depending on business performance.

It is interesting to note that with the exception of the expensive Vincom-Group-stocks driving the HCMC Index, all other important indices were down over the past 3 months. Our fund, which is relatively uncorrelated, benefitted from some moves in inexpensive stocks which reported excellent earnings, like our biggest holding, the insurer Agriculture Bank Insurance (ABI), which rallied 20% over the past 3 months and is still trading at an unbelievable 4.7x price/earnings ratio, based on our 2019 estimates.


VN30 Index June 2018 – July 2019 and market breadth

(Source: Bloomberg)



Other sectors, such as construction and brokerage companies, reported weaker earnings. One would expect that brokerage income should increase in a rapidly developing financial market like Vietnam, but with declining stock prices since spring 2018, trading volumes also decreased until earlier this year. The second negative factor of weaker earnings of brokerage companies is less activity/speculation from local “investors”, who usually trade on rumours and care less about valuations. Since many, if not most, Vietnamese retail investors are trading on margin where they have to pay high interest rates of 10-15%, income from the interest received is often higher than the brokerage commissions themselves.

Some examples of how severe those shares have been hit can be seen in the stock price and earnings development of the leading brokerage stocks:


Revenue and Net Profit Growth of the 3 largest Brokers in 1H-2019 (%)

(Source: VND, SSI, HCM, AFC research,


Ho Chi Minh City Securities Corp, October 2013 – July 2019

(Source: Bloomberg)


While we believe that brokerage stocks are a very good high beta investment over the long term, our exposure to brokerage stocks is much lower than in the first few years of the fund. With an improving market environment where we can also see market turnover stabilizing, the sector could get attractive again soon.

Chinese people are buying Vietnamese property aggressively

It is no secret anymore that Vietnam’s economy benefits from the trade war between the US and China. Chinese manufacturers and other multinational companies are shifting production from China to Vietnam, in order to avoid tariffs from the US. Some of the key beneficiaries are industrial park operators and warehouses lease companies in Vietnam.

Chinese entrepreneurs are not only buying industrial park land, but also Vietnamese property in general, such as apartments, land, real estate companies etc. Chinese investors have a preference for properties in cities such as Quang Ninh, Hai Phong, Danang, Dalat and Ho Chi Minh City. Quang Ninh and Hai Phong are quite close to the Chinese – Vietnamese border, Danang and Dalat are tourism cities, and Ho Chi Minh is the economic capital of Vietnam. With the manufacturing shift from China to Vietnam, there is also an increased demand from new Chinese immigrants to buy apartments, houses, or land in Vietnam. Furthermore, Vietnam is one of the most visited tourist destinations for Chinese travelers due to affordable costs and beautiful landscapes. This is the main reason why property prices in those five cities are increasing at a rapid pace.

(Source: Asia Web Direct)

According to Vietnamese law, foreigners are allowed to buy up to 30% of the units in a building, of which Chinese nationals are accounting for about one-half of this. Although foreigners are not allowed to buy land in Vietnam, some Chinese investors still find ways to buy land in Vietnam through Vietnamese proxies. It is interesting to note that in cities like Danang, Quang Ninh, Dalat, Nha Trang and Hai Phong, many restaurants, hotels and tourist attractions are owned and run by Chinese people, such as the largest casino in Danang, Crowne Plaza, which is owned by a Chinese citizen. The most famous tourist place in Dalat, Valle d’amour (Love Valley), which used to be owned by a Vietnamese company, is also now in the hands of a Chinese company.

According to CBRE, a leading real estate brokerage, nearly one-third of their total transactions in 2018 came from Chinese clients. Mr. Thien Nguyen, a broker manager of Mirae Asset Securities Company, the largest Korean broker in Vietnam, said that they host 2-3 meetings and conferences for Chinese investors weekly in order to introduce them to real estate projects in Ho Chi Minh City. Apparently, Chinese investors are very keen to buy Vietnamese properties and they don’t usually bargain much.


Chinese investors visiting a real estate project showroom

According to Mr. Chau Vo, a property broker in Danang, Chinese investors are also aggressively buying land on Danang beach at almost any price, in order to build hotels, restaurants or shopping centers to provide services to Chinese tourists.

(Source: Mirae Asset Securities Company)


A restaurant owned by Chinese in Danang





Vietnam’s foreign reserves reach a record high of USD 68 bln

Foreign direct investments and overseas remittances have helped the country to build up its foreign reserves which doubled over the past three years. This is an important factor to help the Vietnamese central bank to continue to stabilize the USD/VND exchange rate.

Vietnam’s foreign reserves (USD bln)

(Source:, GSO, SBV, AFC Research)


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


At the end of July 2019, the fund’s largest positions were: Agriculture Bank Insurance JSC (5.2%) – an insurance company, Sametel Corporation (4.3%) – a manufacturer of electrical and telecom equipment, Phu Tai JSC (3.4%) – a home and office furnishings company, Idico Urban and House Development JSC (2.8%) – an energy, construction, and real estate business, and Dinh Vu Port Investment & Development JSC (2.6%) – owner/operator of the Dinh Vu Port.

The portfolio was invested in 63 names and held 8.3% in cash. The sectors with the largest allocation of assets were industrials (33.1%) and consumer goods (29.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.92x, the estimated weighted harmonic average P/B ratio was 1.10x and the estimated weighted average portfolio dividend yield was 7.34%.

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AFC Uzbekistan Fund - Manager Comment



The AFC Uzbekistan Fund returned +1.1% in June with a NAV of USD 1,075.69, bringing the return since inception (29th March 2019) to +7.6%.

With the AGM (annual general meeting) season officially concluded, liquidity increased throughout the month and we were able to markedly increase our holdings in several names, including the largest steel plant in Central Asia which is undergoing a capacity expansion to double production and which will enable Uzbekistan to become a net steel exporter. The most notable dividend news among our holdings was a cement company which held its AGM at the tail end of June where it reported a dividend which translates into a current dividend yield of 24.75%. Cement remains a good place to be positioned as Uzbekistan’s construction boom continues as the nationwide infrastructure buildout (funded by the private and public sector) accelerates.

GDP growth exceeding expectations:

In the first half of 2019, GDP grew by 5.8%, higher than the 5.5% forecast by the International Monetary Fund (IMF). Meanwhile, inflation accelerated by 5.6% year on year, but looks to be in line with the Ministry of Finance’s target as it aims to realize single digit inflation by 2021. Further, since the beginning of the year, June was the first month to experience deflation (0.5%), which is encouraging as foodstuffs were the main items experiencing deflation (tomatoes -57.2% and cucumbers 52.1%).

Further positives in currency liberalization:

While capital controls for foreign investors were formally lifted on 2nd March 2019, where Asia Frontier Capital was the first foreign investor to successfully repatriate capital, Uzbek citizens are still restricted from freely buying and selling foreign exchange. As Uzbekistan rapidly liberalizes its economy, it is only a matter of time until this arbitrary restriction, easily circumvented, will be eliminated, thereby creating further transparency in the foreign exchange market. On 22nd July 2019 a meeting of the legislative chamber of the Oliy Majlis (Parliament) was held where there was discussion about introducing a draft law to introduce changes and amendments to the laws of currency regulation, specifically permitting the free trading of foreign exchange in Uzbekistan. Once approved, this will increase competition on FX rates among banks and further improve the business climate.


The world’s 9th largest gold producer that is home to the world’s largest open pit mine, Muruntau (which is currently undergoing a USD 730 mln expansion), Uzbekistan has begun to publish once secret statistics about its gold production. Generating nearly 25% of the country’s export revenue, gold is big business in Uzbekistan. With approximately USD 16 bln in gold reserves, Uzbekistan exported USD 2.9 bln worth of precious metals in 2018 and is targeting sales of 150 tons by 2020 with up to 300 tons by 2021. The Central Bank has also lifted a ban on the publication of mineral reserve, production and sales data as it begins encouraging private sector investment in mineral exploration to help increase the country’s precious metal reserves. In a world of increased currency volatility and gold being a preferred “safe” asset of central banks around the world, Uzbekistan’s large gold reserves should provide an important backstop for the currency and broader economy. Further, the largest gold miner in the country, state-owned Navoi Metallurgical Mining Company, is being restructured and split into two entities (it also has a uranium arm), with the intention to conduct an international IPO in the early 2020’s.

Muruntau, the world’s largest open pit gold mine

(Source: Wikipedia)

As of 31st July 2019, the AFC Uzbekistan Fund was invested in 28 names and held 7.0% in cash. The markets with the largest asset allocation were Uzbekistan (88.8%) and Kyrgyzstan (4.2%). The sectors with the largest allocation of assets were materials (55.6%) and industrials (16.3%). 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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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares declined −0.1% in July 2019 with a NAV of 1,307.85. The fund outperformed the AFC Frontier Asia Adjusted Index (−1.4%) but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+2.9%), the MSCI Frontier Markets Net Total Return USD Index (+2.5%) and the MSCI World Net Total Return USD Index (+0.5%).The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +30.8% versus the AFC Frontier Asia Adjusted Index, which is down −6.9% during the same time period. The fund’s annualized performance since inception is +3.7%, while its 2019 performance stands at −4.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.95%, a Sharpe ratio of 0.34 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.

This was another mixed month for Asian frontier markets with Sri Lanka and Vietnam seeing positive moves while the rest of the fund’s universe ended the month in negative territory. Macro concerns in Pakistan kept the market in Karachi weak while domestic selling pressure kept the Dhaka Stock Exchange under pressure despite favourable macro indicators such as increasing exports and remittances, a declining current account deficit and extremely strong GDP growth of 8.0%.

This month’s performance was led by Sri Lanka as the Colombo All Share Index saw a broad-based rally of +10.5% on the back of softer benchmark interest rates, low valuations and improving macro indicators (higher foreign exchange reserves and a contracting trade deficit). The fund’s telecom and two consumer-related holdings saw their share prices increase by +23.3%, +15.5%, and +9.8% respectively and P/E multiples for all three of these companies continue to be less than 10x reflecting the value in the market.

The fund’s Vietnamese holdings also had a good month as most of the companies that the fund holds have declared strong earnings growth for the second quarter with a median earnings growth of +18.4% YoY. One of the companies’ results which stands out is that of industrial park developer Kinh Bac City Development (KBC), which saw its 2Q19 revenue increase by 204% while net profits grew by 397% on the back of higher land sales at its industrial parks. We have been invested in this name for a few years due to the trend of rising foreign direct investment into Vietnam and the current trade tensions appear to be playing out well for the company as is reflected in rising land sales to companies looking to relocate from China or looking at manufacturing locations other than China. This demand for industrial land is also leading to higher prices with price per square meter at one of KBC’s industrial parks increasing by 40% YoY in the first half of 2019. The stock is up +23.0% year to date.

The fund’s Vietnamese airport operator, Airports Corporation of Vietnam (ACV), also declared good 2Q19 results and more importantly the company is seeing traction in its non-aeronautical business as South Korea based Lotte Duty Free opened its duty free store at Noi Bai International Airport in Hanoi which should incrementally help ACV increase its higher margin non-aeronautical revenues which at 20% of overall revenues is significantly lower than regional peers.

Though tourist arrivals into Vietnam have been slower than last year, ACV is still seeing higher passenger throughput relative to both regional and global peers as connectivity to Vietnam improves due to the growth of low-cost carriers. Furthermore, as the chart below shows, well established airport operators have generated a median cumulative total return of 15.8% over the past decade and ACV is well positioned to generate long term returns due to increasing capacity, a greater proportion of international passengers, and higher non-aeronautical revenues, the latter two of which have higher margins.


(Source: Bloomberg)


(Source: Company filings, ADP (Aeroports de Paris),
MAHB (Malaysia Airports), AOT (Airports of Thailand))


Sentiment in Bangladesh weakened again after two months of positive returns for the market as domestic investors continue to worry about the net interest margin pressure being put on banks by the government as well as the liquidation of one of the smaller non-banking finance companies. However, it is important to put these issues in perspective: (1) the “pressure” being put on banks to reduce their lending rates may not be possible in reality as the government continues to offer risk free interest rates of 11% through their National Saving Certificate schemes which in turn is putting pressure on the deposit cost for banks leading them to pass on the higher deposit cost to their borrowers. (2) The liquidation of the non-banking financial company is not a systemic risk as it accounts for 0.1% of total industry assets and this event is in fact seeing depositors move their funds to well established and well-respected institutions. (3) The non-performing loans ratio in the banking industry is heavily skewed towards state owned banks while most private sector banks are well managed. (4) Recent quarterly results of most private sector banks have been stable with respect to net interest margins which reflects their ability to adapt to arbitrary regulatory changes.

Despite some uncertainty in the stock market, consumption on the ground remains very strong with most consumer companies that have declared 2Q19 results so far showing robust earnings growth. The fund’s Bangladeshi consumer appliance holding, Singer Bangladesh, declared 2Q19 revenue and net profit growth of 25.4% and 40.2% YoY respectively led by higher sales thanks to Ramadan and the Cricket World Cup both taking place in the second quarter of this year. Margins also continue to improve as the company assembles more products domestically rather than depending on imports. Singer Bangladesh’s stock price has climbed +25.5% year to date.

The Bangladeshi manufacturing sector also continues to see further positive developments as Vivo, the Chinese mobile phone company, has decided to establish a smartphone assembly line in Bangladesh and this is in addition to Samsung’s assembly line which went online last year. These are positive indicators for the country’s manufacturing sector as it diversifies away from relying only on readymade garments.

In Kazakhstan, the fund’s only position, Halyk Bank, continued to do well as it rallied by +8.5% this month after its +11.7% move in June. The bank continues to benefit from loan loss reversals and cost synergies from its recent merger with Kazkommertsbank. With dividends, Halyk Bank has returned +48.5% for the fund so far in 2019.

Pakistan’s central bank raised benchmark interest rates by 100 basis points which takes cumulative interest rate increases to 750 basis points since January 2018. Pakistan appears to have negatives such as Rupee depreciation and interest rates behind it while there are also positive indicators such as the first disbursement of USD 1 bln from the USD 6 bln IMF loan program as well as a positive meeting between Prime Minister Imran Khan and President Trump. These measures should help stabilize the economy and put it on a path to corporate earnings recovery next year.

The best performing indexes in the AAFF universe in July were Sri Lanka (+10.5%), Vietnam (+4.4%) and Kyrgyzstan (+3.3%). The poorest performing markets were Pakistan (5.8%) and Bangladesh (5.2%). The top-performing portfolio stocks this month were a Mongolian junior gold explorer (+100.0%), a Mongolian building products company (+26.7%), a Sri Lankan telecom company (+23.3%), a Mongolian junior gold/copper explorer (+21.1%) and a Sri Lankan consumer goods producer (+15.5%).

In July, we added to existing positions in Mongolia and Vietnam and we exited a mining company each in Mongolia and Myanmar, a gas developer in Papua New Guinea, a bank in Pakistan and Sri Lanka, an infrastructure company in Vietnam and reduced our exposure in a Laotian, Mongolian and Pakistani company and four Vietnamese companies.

As of 31st July 2019, the portfolio was invested in 74 companies, 2 funds and held 15.1% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (6.8%), and a pump manufacturer from Vietnam (6.1%). The countries with the largest asset allocation include Vietnam (24.2%), Mongolia (16.5%), and Bangladesh (15.0%). The sectors with the largest allocations of assets are consumer goods (21.2%) and industrials (18.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.00x, the estimated weighted harmonic average P/B ratio was 0.82x and the estimated weighted average portfolio dividend yield was 4.35%.

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AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned −2.4% in July with a NAV of USD 607.03 which is an outperformance versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index) which returned −4.4% for the month. Year to date the RSISUSD is down −4.0% while the fund is up +3.3% YTD.

The market’s action in July was so quiet that it turned activities like watching paint dry into spectator sports, as the start of the peak summer and holiday season depressed trading volumes. Nonetheless, the average daily turnover’s decline of −15% month-on-month did not erase the turnover gains made in the prior two months, small as they were.

The highlight of the month, though, was the release of the latest IMF country report for Iraq, in which the IMF updated its estimates, last made in the summer of 2017, for both the future economic outlook and for the last few years. The changes to its GDP growth estimates for the crisis years 2014-2017 were as follows:






Old estimates





New estimates





While estimates for the years following the conflict changed as follows:






Old estimates





New estimates





The main takeaway is that the crisis years were, on the whole, weaker than initially expected. Although 2018, the first year following the conflict, was the second year of a deep recession with a contraction of -0.6% on the back of the prior year’s -2.5% decline, instead of it being the first year of an economic recovery, at +2.9%, following a shallower decline of -0.4%  -a message telegraphed by companies listed on the Iraq Stock Exchange (ISX) over the last two years. On the other hand, the expected recovery in 2019/2020 is now estimated to be much stronger with GDP growing at +4.6%/+5.3% instead of +1.7%/+2.0%.

Higher oil exports and the improved oil pricing environment over the last two years has resulted in much higher government revenues than estimated earlier from 2017 onwards. This, with a long lag, is initially translating into increased consumer spending in 2019, given that the government employs over 50% of the working population. This would then be followed by the government’s investment spending powering the non-oil economy. Subsequently, the IMF’s new assumptions on non-oil GDP growth rates are crucial for the economy and the stock market. The IMF’s estimates for the severe contraction in non-oil GDP during the crisis years changed as follows:






Old estimates





New estimates





Accordingly, the downward trajectory in 2015 was much steeper at −14.4% than earlier estimates of −9.6%, while the stability expected for 2017 was a double dip recession following the bounce in 2016. The contraction also lasted longer, at four years, as opposed to earlier expectations of three years. Estimates for the years following the conflict therefore changed as follows:






Old estimates





New estimates






Confirming the earlier message that 2018 was the second year in a contraction with the non-oil GDP dragging the overall GDP down, negating the strong contributions of higher oil prices and exports to the overall GDP growth. Subsequently, the expected recovery for 2019/2020 would be much stronger at +5.4%/+5.0% versus earlier estimates of +3.0%/+3.9%. The changes for outlook for non-oil GDP growth are consistent with the analysis, made here over the last few months, of the drag on the economy in 2018 and early 2019 as a result of the political paralysis before, during, and after the May 2018 parliamentary elections. This paralysis only ended in March as the 2019 budget was only passed into law in late February 2019.

Furthermore, the IMF estimates that non-oil investment spending for 2019 would be about USD 11.25 bln, or an +8.5% stimulus to the new non-oil GDP estimate for 2019. It’s unlikely that the government would be able to spend all of the budgeted amount in 2019, given the slow nature of investment spending, and the government’s historic under-execution of such spending. This probably explains the IMF’s estimates for investment spending at about 13.5% less than that projected by the 2019 government budget.


(Source: IMF, country reports no. 17/251 and 19/248, AFC)

On the heels of the new IMF report, the Ministry of Finance (MoF) data as of May 2019 shows a month-on-month growth in investment spending of +20% from a very small base, as the January-May investment spending is only about 8% of the non-oil investment spending budget of USD 11.25 bln. This implies that most of the estimated +5.4% growth in non-oil GDP for 2019 would be back-end loaded, and that much stronger growth is anticipated in the second half of 2019 relative to the first half. It will likely accelerate further in 2020 as the unfinished spending for 2019 spills over into 2020. The government has considerable firepower at its disposal to continue investment spending, even as it continues to under-execute, as the same MoF data for May shows a further growth in surplus for 2019 at about USD 3.3 bln for a cumulative 29-month surplus of USD 26.5 bln.

As postulated here in the past, this investment spending, which started with a trickle in 2019, should grow as the full spending gets underway, carrying over into 2020. Ultimately, this should lead to a sustained economic recovery in line with the new IMF’s future outlook, or probably somewhat higher given the multiplier effects of such spending.

The news from the corporate world supports the economic picture painted by the IMF as evidenced from a number of corporate earnings reports for the second quarter. Pepsi bottler Baghdad Soft Drinks (IBSD) continued its strong growth with revenues for the six months in 2019 up +3% over the same period in 2018, with its pre-tax profits for the same period up +9%. Telecom operators AsiaCell Communications (TASC) and Zain Iraq (TZNI) reported increased customers by 6% and 4% respectively for the six months in 2019 versus the same period in 2018. However, both revenues and earnings continued, for the same period, to show an industry in the early stages of recovery with TASC having flat revenues but earnings before interest depreciation and amortization (EBITDA) down −9%, while TZNI reported revenues declining −6% and EBITDA up +13%. Both companies cited increased competition and marketing costs.

Bank of Baghdad’s (BBOB) second quarter (Q2) numbers marked a bank following through with the recovery that began in 2018, which, while confirming the initial signs of a gradual recovery in the sector, also disappointed local speculators who were hoping for a repeat performance of the first quarter (Q1). Deposits continued to grow at +4.3% for the first half of 2019 versus the same period in 2018, while credit growth continued to be negative at −1.4% - which is a slower rate compared with the past - and led to a drop of −27.1% in interest income. FX income recovered +57.0%, which is an easy comparison given the severe drop seen in the same period in 2018, but nevertheless points to a stabilization in this income source. Commission income, continuing to rise in importance, was up +21.3%. Net income, up +983% in the period or at over 10x the figure for the same period in 2018, while very healthy, was mostly achieved in Q1. Therefore, while Q2’s net income showed continued growth, it nevertheless poured cold water over speculative hopes for the bank to resume dividend payments for 2018’s earnings. It was these hopes that led to a +62.5% rally in the stock in May, which soon moderated to a decline of −12.8% in June, and declined a further −17.6% in July as the bank confirmed in its AGM that it would not pay dividends for the year. The stock’s closing price in July is still up +16.6% from the April close before it started its wild three-month ride. Although 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 from the market’s responses to such disappointments in 2018. At that time, all banks were painted with the same brush, which shows a market that has begun to discriminate, showing it has likely bottomed or is making a bottom.

Trading activity in August will likely to continue to be in-line with that of July, as it is still the peak of the summer season and will include the second Eid holiday break of the year. While there is no new source of liquidity in the market and local speculators continue to dominate activity, foreign investors have been consistent net buyers over the last few of months in a marked contrast from the picture for most of the prior months as the chart below shows.

Index of net foreign activity on the Iraq Stock Exchange (ISX)

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

The extension of the June pull-back in July continues to suggest the beginning of a consolidation phase which would need a significant recovery in turnover before a recovery can become sustainable and for the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), to claw back some of the −70.5% decline from the peak in early 2014 to July’s 2019 closing levels.

As of 31st July 2019, the AFC Iraq Fund was invested in 14 names and held 3.6% 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 (92.8%), Norway (2.9%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (46.3%) and consumer (21.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.51x, the estimated weighted harmonic average P/B ratio was 0.61x and the estimated weighted average portfolio dividend yield was 5.84%.


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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