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Asia Frontier Capital's 2020 Review and Outlook for 2021 for the AFC Asia Frontier Fund

AFC Asia Frontier Fund: 2020 Review and Outlook for 2021

Dear Investors and Newsletter Readers,

2020 is ending on a positive note as we are close to having a medical solution to the worst health crisis the world has seen in a century. The AFC Asia Frontier Fund has witnessed a significant recovery in performance since March 2020 and the fund currently has a 5.1% gain for 2020, or a 31.3% gain after being down 19.9% at the end of March 2020.

Asian frontier markets have rallied very strongly since March 2020 on the back of a well-managed pandemic, a swift post lockdown economic recovery and significantly lower interest rates. We expect Asian frontier markets to continue to rally in 2021 as attractive valuations re-rate on the upside as earnings growth witnesses a very strong recovery and more importantly, global factors like less antagonistic China-U.S. tensions, very low global interest rates and lower oil prices support macro stability and investor sentiment across our investment universe. 

Furthermore, with global economic growth recovering, we expect Asian frontier markets to benefit in 2021 as investors rotate into markets and stocks which are under-owned and in the value category, both categories that Asian frontier markets fit into. The AFC Asia Frontier Fund’s P/E ratio at only 7.5x is at the bottom of the cycle, and we expect that these positive factors will continue to re-rate fund performance in 2021.



(Source: Asia Frontier Capital, P/E and dividend yields are averages for each year)


Below you will find our 2020 Review and Outlook for 2021 for the AFC Asia Frontier Fund, and we hope you find it useful. We would like to thank you for your investment and your interest in our monthly newsletters and travel reports.

If you have any questions on this report or on our markets, you can reach us on This email address is being protected from spambots. You need JavaScript enabled to view it. .

We would like to wish you and your family a safe and happy holiday season and best wishes for 2021 from all of us at AFC.


2020 Review

2020 has been a year like no other. It began with the outbreak of COVID-19 across the globe, leading to panic in financial markets and countries closing down their borders and shutting down their economies. At the start of the pandemic there were a lot of concerns regarding both the healthcare and economic impact of the pandemic on developing economies like Asian frontier countries.

As we approach the end of the year, Asian frontier countries have performed exceptionally well in managing both the health and the economic impact of the pandemic. Compared to other developing and developed countries, Asian frontier countries have amongst the lowest COVID-19 cases and deaths per capita. Though early lockdowns did help in keeping infections low, a young population appears to be a critical factor in managing the pandemic in Asian frontier countries.



(Source: Bloomberg, Worldometer, as of 15th December 2020)



(Source: Bloomberg, Worldometer, as of 15th December 2020)



(Source: United Nations Population Division)


The ability to keep infections under control has allowed Asian frontier markets to reopen their economies early, leading to a swift recovery in all major economic metrics. Industrial production, exports, worker remittances, auto sales and cement sales have all seen a sharp recovery in Bangladesh, Pakistan, Sri Lanka, and Vietnam. Though earnings growth took a hit in the second quarter, which was the peak of countrywide lockdowns, we have observed a robust recovery in earnings growth in the third quarter, especially in Pakistan and Sri Lanka with many companies surpassing their pre-pandemic levels of net profits. 



(Source: Bloomberg, Topline Securities, Central Bank of Sri Lanka, Bangladesh Export Promotion Bureau, rebased to 100, Sri Lanka data available till October 2020)



(Source: Bangladesh Bank, State Bank of Pakistan, Central Bank of Sri Lanka, rebased to 100, Sri Lanka data available till October 2020)



(Source: Topline Securities)



(Source: Topline Securities)



(Source: Bloomberg)


With a relatively well-managed pandemic response, it is unsurprising that countries like Bangladesh, Uzbekistan and Vietnam will post positive GDP growth in 2020. Additionally, most stock markets in Asian frontier countries have also posted a robust recovery since the March 2020 bottom with Bangladesh, Kazakhstan, Pakistan, Sri Lanka and Vietnam closing the year in the green.

Besides a well-managed pandemic response and improving economic indicators, one of the other key reasons for the better stock market performance in Asian frontier markets was the aggressive easing of interest rates by central banks. These significantly lower interest rates allured domestic investors into the stock market, which compensated for the aggressive foreign selling which frontier markets (and especially Asian frontier markets) have suffered from for more than 2 years.



(Source: International Monetary Fund)



(Source: Bloomberg)


Pandemic under control, economic recovery and interest rate cuts – Asian frontier markets have rallied strongly since March 2020 with a majority of them in the green for 2020

(Source: Bloomberg, % change in USD Index values between 31st March 2020 – 15th December 2020)


Portfolio Review

The fund’s return also saw a marked improvement from the bottom of March 2020 and has gained 31.3% in the past nine months, and has a positive return of approximately +5.1% for 2020. Returns in 2020 and especially since March 2020 have been broad-based and led by Bangladesh, Sri Lanka, Uzbekistan, Pakistan, Vietnam, Mongolia, and Kazakhstan.

In Bangladesh, returns were driven by a pharmaceutical company whose stock price is up by more than 100% this year as it has reported earnings growth much better than peers. Its valuation is still at a discount to other Bangladeshi pharmaceutical companies, and it will be the key distributor of the AstraZeneca-Oxford University developed vaccine in Bangladesh through its partnership with the Serum Institute of India. This company is the fund’s largest Bangladeshi holding.

The fund’s Sri Lankan holdings have returned +15.3% in USD terms in 2020 which is significantly ahead of the Colombo All Share Index return of +5.0%. Attractive valuations, political stability, economic reopening and lower interest rates drove returns which were led by four companies, namely, a latex glove manufacturer, two consumer and healthcare conglomerates, and a leisure company. The fund’s investment in the AFC Uzbekistan Fund has also helped performance in 2020 with the AFC Uzbekistan Fund up by +19% in 2020 as very attractive valuations continue to drive local and foreign investors into the stock market.

In Pakistan, the fund’s holdings have increased by +25.2% in USD terms which again is significantly ahead of the KSE100 Index’s +2.5% USD return in 2020. A 625 basis point cut in the State Bank of Pakistan’s benchmark interest rate in 2020 positioned the fund well as it had high exposure to cyclical names in the auto and cement sectors, both of which saw powerful rallies. These are the two sectors we have been most bullish on since the fourth quarter of 2019.

A robust economic recovery due to a very well managed pandemic response led cyclical stocks to drive returns in Vietnam too. A transportation company and a construction contractor are up by almost 100% since the end of March 2020, while an auto holding company, a mall operator, and an industrial park developer the fund holds have seen an increase of 82%, 58% and 48% in their respective stock prices since the end of March 2020.

Mongolian returns this year were driven by resource companies. A coking coal producer has seen an increase of almost 100% in its stock price this year as China restricts Australian coking coal imports and most of the fund’s copper and gold explorers have rallied by more than 100% this year on the back of an increase in copper and gold prices. The fund has two positions in Kazakhstan, a bank and an uranium producer, both of which contributed positively to returns in 2020.

The key purchases made by the fund in 2020 were in Sri Lanka as the fund increased its weight to the country as valuations are extremely attractive, earnings are expected to grow from a low base, and there is much needed political stability. The fund purchased a consumer and healthcare conglomerate whose businesses are seeing a turnaround from the twin impacts of the 2019 Easter Sunday attacks and the pandemic. This stock is up more than 50% since the purchase in July 2020.

At the end of November 2020, the fund also purchased a Sri Lankan-listed resort operator which generates most of its revenue from its Maldivian resorts but also manages resorts in Sri Lanka. We believe the Maldives and Sri Lanka could see an increase in long-stay European travellers once the vaccination process gets underway, which will be positive for the resort company’s occupancy levels. The stock price has increased by 25% since the fund’s purchase.

Another tourism-related company the fund purchased is a casino operator in Cambodia which will be the only major Asian casino operator to report net profits in 2020 despite the impact of the pandemic on international travel. Phnom Penh continues to have a large expat community which frequents this company’s gaming facilities and any incremental increase in international tourist arrivals can provide further impetus to the company’s profitability.

In Pakistan, the fund invested in the Pakistani subsidiary of a global consumer healthcare company which is the leading player in key growing OTC (over the counter) categories like cold and flu, health supplements and oral care. The company’s brands are very well respected amongst consumers, and its key product segment volumes are growing by 12-15%, which is ahead of overall industry growth.

The fund also purchased one of the leading consumer appliance companies in Pakistan as a recovery in consumer spending and lower interest rates drives demand for home appliances, a segment which has a lot of growth potential in Pakistan as disposable incomes and urbanisation increase in Pakistan.

In Vietnam, the fund purchased the country’s leading beer producer as the brewery is witnessing a post-pandemic recovery in its volumes and is also getting more aggressive in launching new products. Its profit margins continue to show a significant improvement as the new management team controls the cost structure rigidly. The stock price has gained 80% since its bottom in March 2020.

The fund also invested in the London-listed GDR of the leading uranium producer globally which has its operations in Kazakhstan. With a structural deficit in primary global uranium production, compounded by a shift towards renewable energy in Western economies, we believe this company can benefit from increased demand for its product while it is also well positioned to benefit from an expected rebound in pricing as uranium prices must rise from the current USD 30 per pound to the USD 60 to USD 70 range in order to incentivize new global production to alleviate the ongoing deficit.

On the sell-side, the fund exited a Bangladeshi consumer food company and Pakistani cement producer during the year, taking profits on both. In Sri Lanka, the fund realised a gain of 156% within four months by exiting its holding in a latex glove manufacturer since we believe that future news flow about vaccines and vaccinations would most likely cap any significant upside in the stock price from here.

In Vietnam, the fund sold its holding in an industrial park developer as we believe its business model was shifting too much towards regions of Vietnam which are not the main recipients of manufacturing-related foreign direct investments. The fund also exited a Vietnamese construction company after its stock price rallied very quickly by 50% from its bottom in March 2020, while also disposing of the investment in an airport operator in April 2020 due to the prolonged negative impact of the pandemic on its business model. Though we have entered some travel and tourism companies in the latter part of 2020, this airport operator still trades at rich multiples, even under an assumption of normalised earnings. The fund further disposed a Mongolian duty-free shop operator in April 2020.

As a result of selective buying and selling, the fund’s turnover also remained low and we continue to follow our long-term approach of remaining invested in companies we like. The stocks which drove returns since the bottom of March 2020 were led by some new positions but predominantly by companies the fund has held since before the pandemic struck.

Overall, compared to initial fears, Asian frontier markets have done much better than expected in terms of both economic performance and stock market performance which has resulted in a fund return of +5.1% for 2020.

Portfolio fundamentals remain stable in a volatile environment




Return on Equity

Equity ratio

3 Year Earnings CAGR







(Source: Bloomberg, as of 30th November 2020)


2021 Outlook

There are several key near-term positives as well as longer term trends which bode very well for the future of Asian frontier economies and its stock markets:

A new U.S. President

Joe Biden’s win of the U.S. presidential election will be in our view positive for Asia since there will be more certainty as to how the U.S. will shape its relations with China. More importantly, there is an expectation of less hostile antagonism from both sides even though China-U.S. issues are here to stay. Improved China-U.S. relations and a more multilateral approach from the U.S. should be positive for stock markets in Asia as most Asian countries have a close trading relationship with both China and the U.S. and since the tensions over the last few years have harmed investor sentiment in the region. 

Vaccine rollout

The announcement of multiple successful and viable vaccines towards the end of 2020 is a major positive for stock market sentiment and economic recovery in 2021. Even though it will take 12-24 months to vaccinate a majority of the world population (there is a possibility of distribution and supply chain bottlenecks), the arrival of the vaccines marks the possible beginning of the end of the pandemic.

With prospects for a significant recovery in economic and earnings growth in 2021, we continue to favour cyclical stocks since we believe they will outperform the broader market. In particular, cyclical stocks like auto, banking, cement, modern retail and travel sectors should do well in 2021 as earnings for these sectors grow from a very low base, and valuations for companies in these sectors remain attractive.

Very low interest rates

In addition to a new U.S. president and the rollout of vaccines, global interest rates are expected to remain very low as central banks look to support the ongoing economic recovery. This will provide additional positive support for equities which should maintain positive investor sentiment in Asian frontier markets.

Low oil prices

Though crude oil prices have increased since the announcement of vaccines, crude oil at USD 45-50 per barrel against crude oil at USD 70-80 per barrel in 2018 is a hugely positive factor since most Asian frontier countries are net oil importers and low oil prices will help in managing their current account balances, inflation, and interest rates which should translate into a continuation of positive investor sentiment.


Low global interest rates and low oil prices will be a strong tailwind for Asian frontier markets

(Source: Bloomberg)



(Source: Asia Frontier Capital, Tellimer)


Manufacturing shift to Asian frontier countries

Regardless of whether there is less tension between China and the U.S. or more, the manufacturing shift into Asian frontier markets began long before the U.S.-China trade war and will continue apace for the following reasons:

  • Companies are increasingly looking for a China + 1 supply chain strategy, especially after the pandemic displayed the vulnerability of supply chains
  • Asian frontier countries are geographically well-positioned into regional supply chains
  • Significantly lower wages in Asian frontier markets relative to China: minimum wages in Vietnam are still 38% lower than that of China, and Bangladesh’s minimum wage is 65% lower compared with China’s minimum wage
  • Asian frontier countries like Bangladesh and Vietnam offer a large and young workforce. Bangladesh and Vietnam have a labour force of 71 mln and 58 mln, respectively
  • China focusses on shifting its manufacturing sector up the value chain, especially in the fields of technology

Geopolitical competition

The geopolitical competition between China and U.S/India/Japan is benefitting Asian frontier countries with China and Pakistan recommitting to the China Pakistan Economic Corridor “CPEC”. At the same time, India is keen to make infrastructure investments in Sri Lanka, the U.S. and Japan are building closer trade ties with Bangladesh, and China, India and Japan want to develop Myanmar’s infrastructure. These investments in infrastructure and trade ties are providing further impetus to the economies of Asian frontier markets.

Digital finance

Asian frontier countries continue to be predominantly cash-based economies, but COVID-19 has accelerated the shift to non-cash and digital transactions. We believe this trend will continue, especially with the continued penetration of affordable smartphones and the growth of 4G services. The fund, for example, has an investment in a Bangladeshi bank which owns a stake in the largest mobile financial services company in Bangladesh as well as an investment in a Myanmar conglomerate which owns the leading mobile financial services platform in Myanmar.

GDP and earnings growth recover and valuations remain very attractive – Sri Lanka could be the dark horse of 2021

With economic growth recovering across the Asian frontier universe, earnings will also witness a strong recovery, and with valuations remaining very attractive, we believe Asian frontier markets will continue to re-rate, led by cyclical stocks in the auto, banking, cement, modern retail, and travel sectors.



(Source: CT CLSA Securities, SSI Securities, IMS Securities, Bloomberg, average earnings growth for companies under broker coverage)



(Source: International Monetary Fund)


Value stocks have underperformed growth stocks over the past decade but there is now a rotation into value

(Source: Bloomberg, % change in Index values between 31st December 2009 - 15th December 2020)


Value stocks have begun outperforming growth stocks over the past few months 

(Source: Bloomberg, % change in Index values between 30th September 2020 - 15th December 2020)



(Source: Bloomberg, P/E ratios based on positive earnings)



(Source: Asia Frontier Capital, P/E and dividend yields are averages for each year)


If the country manages its external repayments situation, which appears more likely in the near term, then we believe Sri Lanka can be the dark horse of 2021 as valuations remain very attractive and earnings will recover very strongly from two years of sub-par growth due to the impact of the 2019 Easter Sunday attacks and COVID-19, while the political situation has improved significantly as a majority led government is now in power. Furthermore, any incremental inflow of foreign tourists into the country can make a big difference to Sri Lanka’s foreign exchange reserves and current account, which will also be very positive for investor sentiment. Additionally, two key factors which impact its external account, global interest rates and crude oil prices, are in the country’s favour which should put less pressure on external finances and the Sri Lankan Rupee compared to 2018.

To conclude, Asian frontier markets made a robust comeback from the lows of March 2020, and we expect this rally to continue into 2021 as multiple tailwinds align with each other. Furthermore, a rotation into markets and stocks which are “under-owned” and in the “value” category will, in our view, support the momentum in Asian frontier markets as these markets fit both these categories.

For your further information, please find below a 2020 recap of some of the top news links on Asian frontier markets.


I hope you have enjoyed reading this annual review and outlook for the coming year. If you would like any further information, please get in touch with me or my colleagues.

The AFC Team wishes you and your family all the best for the upcoming Festive Season and a very successful 2021.

With kind regards,
Thomas Hugger
CEO & Fund Manager

This email address is being protected from spambots. You need JavaScript enabled to view it.

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