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Asia Frontier Capital (AFC) - September 2019

“I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy". − Peter

“I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy".

− Peter Lynch - American investor and fund manager 

AFC Asia Frontier Fund USD A1,260.46−2.1%−7.6%+26.0%
AFC Frontier Asia Adjusted Index2 +5.9%11.6%5.4%
AFC Iraq Fund USD D630.37+3.9%+7.2%−37.0%
Rabee RSISX Index (in USD) +0.8%−4.1%−53.9%
AFC Uzbekistan Fund1,056.43+0.1%+5.6%4+5.6%
AFC Vietnam Fund USD C1,831.46-1.9%+3.1%+83.1%
Ho Chi Minh City VN Index (in USD) +1.3%+12.0%+78.2%
  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 of 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 and geopolitical uncertainties continued to impact sentiment in frontier and emerging markets this month. The attacks on the largest oil processing facilities in Saudi Arabia led to a large increase in crude oil prices on the day after the attacks. However crude oil prices have softened since then due to fears over lower demand in light of slower global economic growth.

There have been a number of investor concerns this year, mainly related to trade and geopolitics, that have impacted sentiment and led to a sell-off across emerging markets and especially frontier equity markets despite economic growth and fundamentals being strong in various Asian frontier economies like Bangladesh, Kazakhstan, Mongolia, Uzbekistan and Vietnam. In fact, over the next five years, Asian frontier economies are expected to post GDP growth rates which are higher than any other major region. Furthermore, this negative sentiment and sell-off in frontier and emerging equity markets has made valuations very attractive both for the AFC Asia Frontier Fund and the AFC Vietnam Fund as well as for equity markets in our fund universe. As a result, we now see a lot of attractive opportunities across our universe in terms of both valuations and quality of companies.  Additionally our on the ground research trips paint a very different picture compared to the gloom and doom being reported by the media and do not support this year’s selling spree conducted by foreign investors.


(Source: Asia Frontier Capital, Bloomberg)


(Source: IMF )


Our AFC Iraq Fund CIO Ahmed Tabaqchali spoke at the “Security and Economic Forum” which was held by the Al-Rafidain Center for Dialogue in Baghdad on 24th – 26th September 2019. He participated in a panel in the Energy Session, in which the current and past Oil Ministers also took part.



(Source: Al-Rafidain Center for Dialogue in Baghdad)


Ahmed also contributed to the “Iraq in Transition” conference that was held on 3rd October 2019 at the Chatham House in London (link) where he spoke on The Role of the Private Sector in Re-Building the State.

Ruchir Desai, the Co-Fund Manager of the AFC Asia Frontier Fund, will give a talk at the Hong Kong Society of Financial Analysts event titled “Asian Frontier Markets - The Future Growth Drivers” which will be held on 27th November 2019 in Central, Hong Kong. Information about the event, which is open to the public, can be found here.

Below please find the manager comments relating to each of our 4 funds for the month of September 2019. Later this month we will share with you a travel report from the CIO of our AFC Uzbekistan Fund providing an update of his experiences in Uzbekistan since his last visit in May 2019.

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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Tashkent, Uzbekistan   12th October – 20th November   Scott Osheroff
London, UK   14th October   Thomas Hugger
Zurich, Switzerland   18th , 22nd &  23rd October   Thomas Hugger
Ho Chi Minh City, Vietnam   12th – 15th November   Ruchir Desai
Ho Chi Minh City, Vietnam   19th – 22nd November   Andreas Vogelsanger
Cadenabbia, Italy   20t 23rd November   Ahmed Tabaqchali
Sulaimani/Erbil/Baghdad, Iraq   23rd November – 20th December   Ahmed Tabaqchali
Dubai, UAE   2nd December   Andreas Vogelsanger
Geneva, Switzerland   5th – 6th December   Andreas Vogelsanger
Dhaka, Bangladesh   8th – 9th December   Ruchir Desai
Lucerne, Switzerland   9th December   Andreas Vogelsanger
Zurich, Switzerland   10th – 12th December   Andreas Vogelsanger
London, UK   20th December – 23rd January   Ahmed Tabaqchali
Netherlands   23rd December – 2nd January   Peter de Vries


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The AFC Iraq Fund Class D shares returned +3.9% in September with a NAV of USD 630.37 which is an outperformance versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned +0.8% for the month. Year to date the RSISUSD is down −4.1% while the fund is up +7.2% YTD.

In early October, Iraq – Baghdad in particular - erupted in massive demonstrations that at the time of writing led to over 110 civilian deaths and over 6,000 casualties. Demonstrations demanding the provision of services, economic prosperity and an end to corruption have been a feature of the Iraqi scene since 2010. However, they have grown in tempo, peaked during last year’s Basra’s demonstrations, and reignited again in October as a young and angry population ran out of patience with the government’s sclerotic pace of reform.

The government’s heavy-handed and over the top response to the protests, very much like last year in Basra, has angered the youth and transformed the protests into riots. While the protests have been a worrying development that risks an escalation of violence and potentially a much larger conflict, they will likely run out of steam due to “a combination of carrot, stick and fatigue”, as Fanar Haddad called it in his Al Jazeera article “Iraq's protests and the reform farce”, just like last year’s deadly protests.

The carrot element began to take shape with the government’s initial package of handouts in the form of payments, training programmes and subsidised loans for the unemployed youth, as well as subsidized housing for the country’s poor. The scope of these would be enlarged significantly over the course of the next few weeks as the government tries to appease an increasingly sceptical youth movement.

These handouts, whichever shape they take, would be overshadowed by the government’s plans for an expansionary budget for 2020, which would be on a much larger scale than that communicated by the government to the IMF over the summer.

The government has ample resources to implement all of these, as it has achieved a 31-month budget surplus of USD 27.5 bln by the end of July 2019 as shown by the Ministry of Finance’s latest data. The impetus to act, however, is driven by effects of the multi-year protest movement that had a profound effect on how the 2018 election was fought and the current government formation, as it led to the beginning of the break-up of the ethno-sectarian monolithic blocs that were dominant over the past 16 years and which were at the root of Iraq’s past instability.

An expansionary 2020 budget on the heels of 2019’s expansionary budget would likely fuel consumer spending and potentially lead to a stronger than expected consumer-led 3-4 year economic recovery. This could become a sustainable multi-year economic expansion should the government begin to implement a much-needed reconstruction and investment spending program in the non-oil economy.

The early signs of a consumer led economic recovery can be seen from the latest economic data for 2018 as reported by the Central Bank of Iraq (CBI) in its recently released “Annual Statistical Bulletin for 2018”. The Bulletin showed that Iraq’s imports were up +18% in 2018, on the back of the recovery of +13% that began in 2017, following the severe declines from 2014-2016 which were caused by the twin shocks of the ISIS war and the collapse in oil prices crushing the economy, and with-it Iraq’s domestic demand for goods.

The revival in imports in 2017 and 2018 is likely to be a function of a recovery of government spending and a tentative recovery in consumer spending with the resultant increase in demand for imports as the country is heavily reliant on imports to satisfy domestic demand. Importantly, the growth in imports of machinery and transport equipment make a strong argument for the health of the underlying economic activity as can be seen from the chart below.


Iraq’s Imports 2010-2018

(Source: Central Bank of Iraq (CBI), Asia Frontier Capital)

Confirming this recovery is the data on “New Vehicle Sales” as reported by the International Organization of Motor Vehicle Manufacturers, which were up +60% in 2018 on the back of a +35% increase in 2017. The recovery, while from a very low base, is nevertheless encouraging.


(Source: International Organization of Motor Vehicle Manufacturers, Asia Frontier Capital)

The market’s action during the demonstrations has been mostly subdued as the curfews and the government’s shutting down of the internet initially had a negative effect on activity and prices drifted lower, but recovered eventually as life gradually returned to Baghdad, with the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), up by about 2.0% month-on-month as of the time of writing.

However, September ended on a promising note as the market was up +0.8%. Average daily turnover, however, declined −7% month-on-month and displaced last month as the third lowest level over the last five years. 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 as can be seen in the chart below.


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

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


During September, the market’s dynamics followed through with the improvement discussed last month as the banking sector continues to be led by the National Bank of Iraq (BNOI) which was up +39.1%, with other leading banks trailing behind, such as the Bank of Baghdad (BBOB) up +3.4% and Commercial Bank of Iraq (BCOI) up +2.1%. Mansour Bank (BMNS), however, was down −1.5%. It should be noted that the rallies in the banks were all on low turnover in-line with the market’s overall exceptionally low turnover. The return of liquidity will determine the true direction of the group - whether sellers will overwhelm buyers and send prices lower, or if buyers will overwhelm sellers and send prices higher. The discriminating nature of the market, discussed here over the last two months, argues for the later.

As of 30th September 2019, the AFC Iraq Fund was invested in 14 names and held 3.8% 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 (93.3%), Norway (2.3%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (49.2%) and communications (20.5%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.77x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 5.65%.

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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund returned +0.1% in September with a NAV of USD 1,056.43, bringing the return since inception (29th March 2019) to +5.6%.

During the month of September, the AFC Uzbekistan Fund received new money inflows as interest in Uzbekistan continues to grow from international investors as a multitude of international media coverage increasingly puts the country on investors’ radar. The fund remains the only active vehicle dedicated to investing into the Uzbek capital markets and with the new fund inflows we were able to continue deploying capital into multiple highly undervalued companies in our portfolio. Taking advantage of a lack of activity in the stock market during the first three weeks of September, likely due to the end of summer which usually results in an exodus from the cities to the mountains where locals enjoy cooler weather, we were able to allocate a sizable amount of capital into several of our existing portfolio companies at very attractive prices.

During the month the most notable news for foreign investors came on 6th September when the Cabinet of Ministers passed a decree permitting foreigners to purchase the equity of banks without prior Central Bank approval. This is a significant development for the fund, discussed in further depth below.

AFC Uzbekistan Fund valuations as of 30th September 2019

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.70x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 8.42%


Foreign investors permitted to buy bank stocks:

A bureaucratic rule created by the old Karimov regime in the mid 2000’s banned foreign investors from purchasing equity in banks unless prior approval from the Central Bank was given. A ploy to prevent mainly Russian interests from controlling the nascent banking sector (combined equity of all Uzbek banks stands today at roughly USD 30 bln compared to GDP of USD 48 bln), this policy caused a significant shortage of capital in the sector which only served to hurt domestic banks.

On 6th September 2019 this all changed as the reformist Mirziyoyev government continues its transition of Uzbekistan into a free market and scrapped this ban. This is a milestone for the development of the capital markets where listed banks represent approximately 83% of the market capitalization of the Tashkent Stock Exchange. For us, we now not only have access to a greater number of investable companies, but also have a new avenue to gain exposure to private small and medium enterprises and the retail consumer who are borrowing from the banks. With private credit to GDP for retail borrowers estimated at less than 15% of GDP, Uzbekistan is still highly underleveraged relative to other frontier markets. This should be favourable over the long-term, specifically for the private banks which can tap international bond markets by issuing foreign currency denominated bonds at favourable rates, and increase their equity through secondary offerings as foreign investors will be interested due to their lack of loan exposure to government related entities and low rates of non-performing loans.

Many of the 21 listed banks trade below book value and have low single-digit P/E’s while they are growing their equity well in excess of 20% per year (in some cases reaching the high 30’s). We have shortlisted several banks which we plan to begin allocating capital towards this month as the sector is young and growing rapidly.

The AFC Uzbekistan Fund will start purchasing banking stocks soon, after some administrative work is completed since legal entities from 43 countries are currently not allowed to invest.

Parliamentary elections in December 2019

On 22nd December 2019 Uzbekistan will hold general elections in which five political parties will be vying for positions in the 150-seat Legislative Assembly. It is anticipated that roughly 20 mln citizens will be eligible to vote.

What is exciting about these elections is that during my last trip to Uzbekistan (May 2019), there were several videos posted publicly on YouTube by citizens complaining about the poor representation they received in their various constituencies. These videos were followed by calls for those who posted the videos to run in this election in order to replace the old, established guard who can be slow to reform and cut red tape. This potential new generation of politicians has the ability to accelerate the reforms coming out of Tashkent which could transform the provinces in regards to receiving more investment, reducing corruption, and creating new jobs and industries which would benefit locals, something which is necessary in order to increase the standard of living for the general population.

It is widely anticipated that elections will go smoothly and hopefully we will see new progressive individuals winning seats in their constituencies.

As of 30th September 2019, the AFC Uzbekistan Fund was invested in 28 names and held 9.3% in cash. The markets with the largest asset allocation were Uzbekistan (87.3%) and Kyrgyzstan (3.4%). The sectors with the largest allocation of assets were materials (54.7%) and industrials (15.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.70x, the estimated weighted harmonic average P/B ratio was 0.69x and the estimated weighted average portfolio dividend yield was 8.42%.

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AFC Vietnam Fund - Manager Comment



The AFC Vietnam Fund decreased by −1.9% in September with a NAV of USD 1,831.46, bringing the return since inception to +83.1%. This represents an annualized return of +11.1% p.a. The Ho Chi Minh City VN Index in USD gained +1.3%, while the Hanoi VH Index added +2.7% (in USD terms) in September 2019. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.50%, a high Sharpe ratio of 1.19, and a low correlation of the fund versus the MSCI World Index USD of 0.27, all based on monthly observations.

A bank rally fuelled by a small interest rate cut led to gains in the indices where financials are weighted heavily. While the small cap index closed down 2.6% for the month, the HCMC Index gained +1.3%, and the Hanoi Index gained +2.7% on the heels of the index heavyweight, Asia Commercial Bank, which gained +5.4%. With a limited number of stocks supporting this advance, combined with profit taking in our gainers from last month, our NAV declined by 2.0%.

The strange behaviour of the market at the moment shows that while the HCMC Index is trying to break out over the 1,000-point barrier, which it has been fighting for over the last 18 months, the Hanoi Index dipped below 100 during the month for the first time since the summer of 2018. It recovered strongly since then, but is still at levels we saw two years ago!


VN Index (October 2017 - October 2019)

(Source: Bloomberg)


Market Developments

Lower rates as a sign of loosening monetary policy should support economic growth in Vietnam. The State Bank of Vietnam recently reported credit growth numbers at 8.4%, lower than in prior years. The rise in bank shares as a consequence is understandable since interest rates are still high relative to other countries in the region and in the world. Although it may look like nostalgia for most people in the Western world, saving money in Vietnam still makes sense, given that inflation is well under control.

ASEAN 1 year deposit rates in local currency

(Source: Markets Pty Limited)


Unlike in Europe where negative nominal and real interests are having a negative impact on banks’ profit, Vietnam still enjoys an “old fashioned” credit cycle. As always, the limited availability of foreign room for local bank shares makes it difficult for foreign investors to find suitable investments in this sector. Besides Vietcombank and BIDV, most of the bigger bank stocks reached their foreign ownership limit a long time ago and hence are not accessible for international investors without paying a premium.


VCB from May 2017 – September 2019

(Source: Bloomberg)


Of course, one has to ask the question why shares of some banks are still available to foreigners. While some funds do not invest in UPCOM listed banking shares, other banks are too small, too weak or too expensive to invest in. But nevertheless, there are some foreign investors who need to or want to have exposure in the top banks which are still available to them. One example is Vietcombank, which was pushed up by foreign investors to a valuation premium of over 100% compared to other bank stocks. This is of course a risky strategy should banking stocks correct for whatever reason in the future. Vietcombank is now trading at 22x earnings, almost 4x book value and 25% of total assets. Other banks are like Military Bank, for example, which has no foreign room left and is trading at a much lower valuation of 8x earnings, 1.3x book value and 12% of total assets.


Top 5 largest banks valuation

(Source: AFC Research, HSX, HNX)


Other banks in the region are trading at much cheaper valuations as well, like Thailand’s Bangkok Bank at 10x earnings, 0.8x book value, 11% of total assets, or Lao’s leading bank BCEL at only 3x earnings, 0.6 book value and 3% of total assets.

Unlike in developed countries, the banking sector is still growing in countries like Vietnam. Consequently, many international banks are looking into this opportunity and buying stakes in Vietnamese banks to participate in the growth story. It doesn’t always pay off, as history shows, as the banking business is exposed to several risks, including potential write-offs in the case that large borrowers should go bankrupt, exposure to the volatile real estate market, and sometimes even fraud, as we have witnessed in the past. But the biggest problem with investing in banks is usually the missing transparency in order to be able to assess those risks. Sudden credit quality problems are a common issue around the globe and of course also in developing countries like Vietnam. Some banks are still dealing with their bad loan problems from the past crisis, which must also sound familiar to some investors in Europe.

We are not against investing in Vietnamese banks, but we are very carefully evaluating the risk/reward ratio in this sector, although in Vietnam like in most other markets, financials are index heavyweights. Besides the problems foreign investors face, banks like all other sectors seem to only be loved if they are big and show growth, regardless of valuation. We discussed this phenomenon already in our last report, but one chart shows very well how far this “growth bubble” has gone now - and cycles are called cycles because they are changing over time…


(Source: Goldman Sachs)


The tide might turn very soon, or not, but we are prepared with good value stocks in our portfolio and in the meantime, we show a low risk profile in our fund, as can be seen from our fund statistics.

Airline business becomes hotter and hotter

Bamboo Airways officially joined the aviation market a few months ago to become the fifth airline in Vietnam, after Vietnam Airlines, Jetstar Pacific, VASCO and Vietjet. The attractive airline market seduces many investors to jump in, both local and international. With a population of nearly 100 mln people, Vietnam’s aviation industry is one of the most attractive and fastest growing sectors for the following reasons:

  • The rapidly rising middle class has a huge impact on higher mobility
  • Tourism in Vietnam is booming and there were more than 15 mln arrivals of international visitors in 2018.
  • The market for private airlines in Vietnam is still very young and shows huge potential. Until a few years ago, the three state owned airlines had a monopoly and were considered expensive and not very innovative and dynamic, unlike the new players now entering this market.
  • With the topography of Vietnam and no real alternatives to flying, air travel is the only reasonable way to move around the country. The train system is old; and we mean really old and inefficient with 2 day’s travel time from the north to the south. A highway from Hanoi to Saigon is planned but will take some – and in practice – many years to be finished. And seriously, who wants to go almost 2,000 km between the two biggest cities by car for whatever reason?

Bamboo Airways, which belongs to FLC Group, a real estate and development company, which is listed on the Ho Chi Minh City Stock Exchange, recently announced that they are targeting a 30% domestic market share by 2020, which sounds very ambitious. They also plan to raise USD 100 mln through an IPO in order to fuel their aggressive expansion plans. Bamboo Airways now operates 10 aircraft on 25 domestic and international routes. They also expect to be the first Vietnamese carrier to operate direct flights to the U.S. in late 2020.


Bamboo Airways

(Source: Bamboo Airways)


According to the Civil Aviation Administration of Vietnam, Vietjet (VJC) had 44% of the domestic market in the first half of 2019, followed by Vietnam Airlines with 35.9%, Jetstar Pacific with 13.9%, Bamboo Airways with 4.2% and VASCO 2%.


Domestic Airline Market share in 1H/2019

(Source: CAAV, AFC Research)


Vietnam Airlines currently operates around 100 aircraft, Vietjet 68, Jetstar Pacific 15, Bamboo Airways 10 and VASCO 5.

Besides Bamboo Airways, Vingroup has also announced their plans to set up Vinpearl Air and the tour operator Vietravel plans to launch its own airline Vietravel Airlines, both by 2020. AirAsia, the Malaysian low-cost carrier, also has plans to increase their flights to Vietnam. It seems that the Vietnamese aviation space is very sought-after, but is Vietnam’s already overloaded aviation infrastructure ready to take on this challenge?

Ho Chi Minh City’s and Hanoi’s airports are already crowded, running at more or less full capacity (HCMC more than Hanoi), and new airlines are therefore setting up their base in 2nd and 3rd tier cities like Quy Nhon, which is where Bamboo Airways is based. With intensifying competition, pricing pressure led some airlines to try and get rid of expensive, experienced foreign pilots and recruit local pilots in large numbers, who are simply not available overnight. Bamboo Airways is currently setting up an aviation academy while other companies are also investing in that field to battle shortages of not only pilots, but also airplane maintenance staff and air traffic controllers.

Shortages in almost every respect are the main reason why domestic flights are notoriously re-scheduled, delayed or simply cancelled. If you have ever booked domestic flights in Vietnam you will probably know very well what we mean!


GDP in the first nine months of 2019 reached 6.98%, the highest in 9 years, according to General Statistic Office of Vietnam. It expanded in the third quarter by 7.31%, compared to 6.82% in the first quarter and 6.73% in the second quarter. Exports rose 8.2% in the first nine months of 2019 from the same period in 2018, while imports climbed 8.9%.


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


At the end of September 2019, the fund’s largest positions were: Agriculture Bank Insurance JSC (5.8%) – an insurance company, Sametel Corporation (3.9%) – a manufacturer of electrical and telecom equipment, Vietnam Container Shipping JSC (3.7%) – a container port management company, Phu Tai JSC (3.6%) – a home and office furnishings company, and Idico Urban and House Development JSC (3.0%) – 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 (33.2%) and consumer goods (29.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.70x, the estimated weighted harmonic average P/B ratio was 1.06x and the estimated weighted average portfolio dividend yield was 7.38%.

 Factsheet AFC Vietnam Fund
 Presentation AFC Vietnam Fund



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AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by −2.1% in September 2019 with a NAV of USD 1,260.46. The fund underperformed the AFC Frontier Asia Adjusted Index (+5.9%), the MSCI Frontier Markets Asia Net Total Return USD Index (+0.7%), the MSCI Frontier Markets Net Total Return USD Index (−2.0 %) and the MSCI World Net Total Return USD Index (+2.1%) The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +26.0% versus the AFC Frontier Asia Adjusted Index, which is down −5.4% during the same time period. The fund’s annualized performance since inception is +3.1%, while its 2019 performance stands at −7.6%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.91%, a Sharpe ratio of 0.27 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.

Trade tensions between China and the U.S. and geopolitical uncertainties in the Middle East due to the attacks on the largest oil processing facilities in Saudi Arabia kept frontier and emerging market sentiment weak this month. Though crude oil prices surged on the day after the attacks, they have softened in the following days as slower global economic growth affected crude oil price sentiment.

Due to these global uncertainties, sentiment across frontier and emerging markets continues to remain subdued this year despite areas of strong and stable economic growth in many parts of our universe (Bangladesh, Kazakhstan, Mongolia, Uzbekistan and Vietnam) as well as very attractive valuations both for the fund as well as for markets within our universe. The AFC Asia Frontier Fund now trades at a P/E of 7.6x while equity markets such as Bangladesh, Kazakhstan, Pakistan, Sri Lanka and Vietnam are trading at a significant discount to their peers. As a result, we continue to see tremendous value across our universe.


(Source: Asia Frontier Capital, Bloomberg)


Vietnam continues to deliver robust economic growth with 3rd quarter 2019 GDP growth coming in at 7.3%, the highest so far in 2019. Exports have grown by 8.2% this year despite global trade tensions since Vietnam is benefitting from an inflow of export related manufacturing foreign direct investment (FDI). FDI has grown by 7.3% this year to USD 14.2 bln with 70% of this going towards the manufacturing sector. Tourist arrivals saw a big jump of 28.8% YoY in September which is the biggest increase in 2019. Arrivals were led by China, South Korea and Japan which together accounted for 61% of total tourist arrivals. The fund’s portfolio is exposed to all the above growth themes with investments in an airport operator, industrial parks, logistics companies, and consumer discretionary companies.

Sentiment in Bangladesh remained weak despite the second strongest GDP growth in the region while exports continue to grow by a robust 7.1% so far in 2019. Market sentiment turned positive in the latter part of the month due to various positive developments: the first was the agreement between Grameenphone (the largest telecom company in Bangladesh and the largest weight in the Dhaka Stock Exchange Broad Index) and the telecom regulator about coming to an amicable settlement regarding the outstanding fees claimed by the telecom regulator from Grameenphone and other mobile phone operators. The second was the Central Bank reversing the rule that banks have to bring down their loan to deposit ratios from 85% to 83.5% - which was one of the reasons that the banking sector faced margin pressures during the past months and the abolishment of this arbitrary rule will help banks to get their focus back towards lending.

Lastly, there are plans to form an asset management company which will buy distressed loans from the banks and this could go a long way in resolving the non-performing loan (NPL) issues facing the banking sector in Bangladesh with most NPLs however being concentrated in the books of state owned banks. Vietnam carried out a similar exercise beginning in 2013 through the Vietnam Asset Management Company (VAMC) and it helped improve the health of the banking sector, leading to a recovery in loan growth in the following years.

These measures which could resolve issues in both the telecom and banking sectors should help to improve market sentiment as both Grameenphone and the banking sector account for the majority of the weight in the Dhaka Stock Exchange Broad Index. Furthermore, with a healthier banking sector, attaining 10% GDP growth in the next few years is not unlikely as Bangladesh has all the ingredients for this to happen: rising exports, increasing FDI, improvement in infrastructure and rising consumption.

One of the fund’s holdings in Bangladesh, Golden Harvest Agro, announced that its subsidiary will be forming a joint venture with the IFC to build and operate a cold chain network in Bangladesh. Given the lack of modern cold chain infrastructure in Bangladesh this business appears to have a lot of growth potential. We remain bullish on the company’s ice-cream and dairy business while its joint venture with Jubilant Foodworks of India to operate the Domino’s Pizza franchise in Bangladesh is off to a robust start. The stock was up +6.9% during the month.


(Source: IMF)


In Sri Lanka, the run up to presidential elections intensifies as the ruling party from the current coalition government, the United National Party (UNP) announced Sajith Premadasa as its presidential candidate. With the UNP also providing a strong candidate in Sajith Premadasa, the elections could be a close race between him and Gotabaya Rajapaksa of the Sri Lanka Podujana Peramuna (SLPP). However, the current President, Maithripala Sirisena of the United People’s Freedom Alliance (UPFA), will be supporting Gotabaya Rajapaksa and this support could be a swing factor in the elections. Either way, we believe that any majority government post the 2020 parliamentary elections would be positive for the market and the economy.

The Sri Lankan Central Bank imposed lending rate caps this month as the banks have not yet passed on lower deposit costs and benchmark interest rate cuts to borrowers. Having said that, loan growth has been soft due to the upcoming elections and this move by the Central Bank was anticipated. Furthermore, with banking sector valuations extremely cheap, the fund invested in Hatton National Bank (HNB) during the month. HNB is the second largest private sector bank in Sri Lanka and has a strong presence in the retail and SME (small and medium enterprise) space. We believe banks could be significant beneficiaries in any post-election rally given the way they have corrected over the past year and also because the new government could kickstart economic growth again.

The State Bank of Pakistan did not raise interest rates at its policy meeting and this was anticipated, while consensus now feels that the Central Bank is done with raising rates and interest rates have thus peaked. With valuations and prices of many cyclical sectors at attractive levels and the possibility of rate cuts by the Central Bank in the first half of 2020, Pakistan is becoming an interesting market to look at from a value and contrarian perspective. However, for now our weight to Pakistan remains less than 2%.


Pakistan interest rates appear to have peaked as suggested by 10 year bond yields

(Source: Bloomberg)


Mongolia was the biggest detractor to fund performance this month as the overall market remained weak and a junior copper mining company cost the fund 71 basis points. The domestic economy continues to do well off of an increase in coal and other mineral exports which are bolstering growth. The equity market was weaker during the month, likely due to September being the final month for locals to trade city life for some time in the countryside before winter sets in as well as the upcoming elections. Furthermore, mainly international mining companies doing business in Mongolia saw continued weakness, likely due to the continuing efforts of some members of Parliament to nullify the Dubai Agreement, signed in 2015 between Rio Tinto and the Mongolian government, for the phase II expansion of the Oyu Tolgoi copper/gold project. Until this issue is resolved foreign investors are likely to remain wary of investing into natural resource companies in Mongolia.

The best performing indexes in the AAFF universe in September were Cambodia (+34.4%), Pakistan (+8.1%), and Vietnam (+1.3%). The poorest performing markets were Laos (4.6%) and Bangladesh (2.9%). The top-performing portfolio stocks this month were a Pakistani paint company (+9.7%), a Mongolian food products company (+9.1%), a Bangladeshi ice cream/dairy company (+6.9%), a Bangladeshi bank (+6.2%), and a Mongolian real estate company (+5.8%).

In September, we bought shares of a commercial bank in Sri Lanka, added to existing positions in Mongolia and Vietnam and partially exited positions in Laos, Mongolia and Vietnam. In Pakistan we sold the fund’s holding in a shoe company and in a Vietnamese brewery.

As of 30th September 2019, the portfolio was invested in 74 companies, 2 fund’s and held 3.5% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (8.0%) and a pharmaceutical company in Bangladesh (7.2%). The countries with the largest asset allocation are Vietnam (27.4%), Mongolia (18.2%), and Bangladesh (16.5%). The sectors with the largest allocations of assets are consumer goods (23.8%) and industrials (21.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.60x, the estimated weighted harmonic average P/B ratio was 0.80x and the estimated weighted average portfolio dividend yield was 4.19%.

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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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