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Asia Frontier Capital (AFC) - April 2020

“Buy when everyone else is selling and hold until everyone else is buying. That's not just a catchy slogan. It's the very essence of

“Buy when everyone else is selling and hold until everyone else is buying.
That's not just a catchy slogan. It's the very essence of successful investing.”

Jean Paul Getty - American-born British petrol-industrialist,
and the patriarch of the Getty family.


Year to dateSince
AFC Asia Frontier Fund USD A1,062.52+4.2%-16.6%+6.3%
AFC Frontier Asia Adjusted Index2 +17.9%-19.6%-12.5%
AFC Iraq Fund USD D464.19-11.3%-26.0%-53.6%
Rabee RSISX Index (in USD) -12.6%-25.5%-64.6%
AFC Uzbekistan Fund USD F959.25-3.1%-12.3%-4.1%
AFC Vietnam Fund USD C1,558.09+12.7%-12.9%+55.8%
Ho Chi Minh City VN Index (in USD) +17.0%-20.9%+36.2%
  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.

Rebound in Asian frontier markets led by Pakistan and Vietnam

With markets anticipating lockdown-easing in parts of the U.S., Europe and Asia, global markets had a good rebound this month. Asian frontier markets also did well with Pakistan and Vietnam being the second and third best performers globally in April as Vietnam reopened its economy on 23rd April on the back of a very well managed virus response while other Asian frontier markets like Pakistan are gradually reopening parts of their economy. 

The strong rebound in Vietnam and Pakistan was not only due to investors anticipating a reopening of economies, but also due to very attractive valuations. Pakistan’s market capitalisation to GDP ratio is approximately 15%, and is back to levels last seen in 2009, reflecting the tremendous value on offer in Asian frontier markets which is creating once in a decade buying opportunities as mentioned in our previous newsletter.



(Source: Bloomberg)



(Source: IMS Securities)




We hope you and your loved ones are safe and healthy in these times of Coronavirus and while measures are being relaxed in several places where we work, we at Asia Frontier Capital continue to operate both onsite, as well as remotely (currently from 6 different countries), taking into account social distancing and desinfection practices. From the onset of the COVID-19 crisis we have had continuous and uninterrupted access to our systems from all of our offsite locations and we have been able to continue managing all of our funds smoothly and communicate with our counterparties to receive and give timely information and updates.

Below please find the manager comments relating to each of our 4 funds for the month of April 2020.

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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AFC Travel

Thomas Hugger, Ruchir Desai, and Peter de Vries are based in Hong Kong, while Andreas Vogelsanger is based in Bangkok and Ahmed Tabaqchali in London and Iraq. If you have an interest in meeting with our team at their homeports or during their travels, please contact Peter de Vries at This email address is being protected from spambots. You need JavaScript enabled to view it..

Switzerland May 2020 Thomas Hugger
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AFC Vietnam Fund - Manager Comment


After the sharp declines global markets experienced in March, we saw a massive recovery in most stock markets. Investors are now seeing the first hard facts in terms of economic numbers which show the strongest decline in economic activity since at least the recession in 2009, but the restart of most economies and “flattening of the curve” has now been achieved in many countries and investors are hoping for a fast recovery in the second half of the year. The broad-based rally pushed the stock indices in HCMC up 16.1% and Hanoi up 15.3%, with strong gains also seen in smaller stocks, while the Vietnamese Dong was +1.5% versus the USD. Most of our portfolio holdings were also able to show sizeable gains last month which resulted in a gain for the AFC Vietnam Fund of 12.7% in April with a NAV of USD 1,558.09, bringing the return since inception to +55.8%. This represents an annualized return of +7.2% p.a. In USD, the Ho Chi Minh City VN Index in USD gained 17.0%, while the Hanoi VH Index rose by 16.2% in April 2020. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.78%, a Sharpe ratio of 0.49, and a low correlation of the fund versus the MSCI World Index USD of 0.55, all based on monthly observations.

Market Developments

It is interesting to notice how different the world looks like after just one month. Coincidentally, the lows of global stock markets were reached around the end of last month when we showed how much damage had already been done in one of the steepest declines in history. Just a few weeks ago – and around 2.4 mln infections and 180,000 deaths later - most markets were able to recover 30% to 50% of their previous losses. Governments around the world are increasing the capacity of their massive economic stimulus programs on an almost weekly basis. Loosening restrictions on businesses and private lives and hopes for a yet-to-be developed vaccine and/or treatment helped to support markets. This brought buyers back, helping global markets to recover from extremely oversold territory. We share the hopes of investors, but technically we are still in a very young bear market where strong bounces are normal and as we suggested last month, another pullback is likely before we can see a major bottom. The odds of another down-leg will be determined by the development of future infection rates, re-activation of economies by governments and preliminary assessments of economic damage to the private sector and consumers. We now understand a lot more about the virus and the economic damage than we did just 1-2 months ago, but it is still too early for a more precise outlook. But what we do expect in terms of market developments – other than in the initial crash a few weeks ago – is that any further retracement of the recent week’s gains will be now much more selective as investors can better sort possible winners from losers, both in terms of sectors and countries.



(Source: Bloomberg)


Unlike other rallies in Vietnam over the past few years, this time the recovery was very broad based; even when accounting for the flaws in both stock indices in HCMC and Hanoi, with the HSX Index being very concentrated in Vingroup-stocks and banks, and two banking stocks in Hanoi being the main drivers for the index gains in April. We have seen price jumps in many small- and mid-cap stocks recently, some of which gained 30% to 80%. Those gains were driven by a new influx of capital from local first-time investors which more than compensated for continued foreign selling. We are also seeing a spike in new brokerage accounts being opened, with 32,000 in March alone, a development we have been waiting a long time for but certainly did not expect to happen during this bear market. In controlling risks, we used the massive jump in liquidity and sharp rally to reduce or exit positions in selected smaller stocks. We will reinvest this cash in bigger companies on renewed weakness given that many companies are currently trading back at similar valuations than before the crash.


Noi Bai Cargo Terminal Services JSC since 1 January 2019

(Source: Bloomberg)


Vietnam successfully controls COVID-19 

Vietnam became one of the first countries in the world to ease social-distancing measures on 23rd April. The government has reported 270 infections since the start of the outbreak and so far has reported no deaths. Unlike other low-income countries with minimal diagnostic capacity, Vietnam has conducted more than 200,000 tests. 




YouTube Awareness Video

Based on historical mistrust against the Chinese, the government started an awareness campaign as early as January, and in February a song was written to educate people. Posted on YouTube (see at the left), the video of the song went viral across borders with over 40 mln hits so far.



Two larger outbreaks in March in Hanoi and HCMC were successfully contained and there were very few infections from returnees who are automatically transferred into state quarantine for 14 days upon arrival from overseas; HCMC for example, hasn’t had any infections since 7th April. After the social distancing campaign ended on 23rd April, the country is now almost completely back to normal with people back to work, schools open again after being closed for 3 months and cafes and restaurants open, while there are still a few limitations left for some entertainment places like karaoke or massage parlours.


A street coffee store in HCMC

(Source: Thanhnien News)


On the weekend of 25th and 26th April, people in coastal provinces such as Ba Ria Vung Tau (120 km east of HCMC) and Danang finally went out and relaxed at the beach as normal.


Locals are flocking to the beaches

(Source: Thanhnien News)


The fact that Vietnam has been able to restart its economy in a much faster manner than other countries will certainly lead to a faster recovery of the domestic economy. According to a survey, Vietnamese are the most optimistic citizens for a fast recovery, but the successful containment could hinder Vietnam from opening its borders anytime soon, in fear that another wave of imported infections would destroy all the work the country has accomplished. As long as the government (as well as others) is not willing to open its borders with other countries with low infections, any strong recovery in the tourism and aviation industry will be impossible and will also hinder the process of the potential shift in production from China to Vietnam. No tourist on their average one-week vacation will travel to Vietnam when a 14-day quarantine is imposed if international flights will be started again under these circumstances. The same problem faces business leaders when they want to set up companies or factories which most likely will never happen through remote (online video) Zoom sessions. In our view it is a tricky decision to take, if Vietnam does not want to lose the race to gain substantial market share in global manufacturing.

While many unknowns and hurdles exist for Vietnam, as for any other country in the world, the current crisis will not derail the long term rise of Vietnam – the consensus is just the opposite - the country will come out of this crisis stronger and we believe that Vietnam will prove once again that it is one of the few winners in the long run. For example, the further liberalization of much of Asian trade engendered by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership will continue to benefit the country. As foreign companies look for more low-cost manufacturing bases outside China, Vietnam is an obvious candidate.

Many international firms see a risk of being too dependent of Chinese supply chains and therefore are trying to diversify. According to A.T. Kearney, there is a strong trend of US enterprises moving out of China, with Vietnam being one of the key beneficiaries. The consulting company said that of the USD 31 bln in U.S. imports in 2019 that shifted away from China, around 46% was absorbed by Vietnam. 

Recently, the Japanese government announced an aid package of USD 2.2 bln for Japanese enterprises to move out of China. They were encouraged to move back to Japan or other ASEAN countries and Vietnam is one of the main destinations in ASEAN where hundreds of large Japanese companies are already doing business.

Although all estimates have to currently be taken with a fair amount of skepticism, recent IMF forecasts show the possible damage to several economies. According to the IMF, Vietnam is expected to grow at 2.7% in 2020 and recover to 7.0% in 2021.


GDP growth in 2020 by country estimated by IMF

(Source: IMF)


The Vietnamese government recently announced an economic stimulus package, mainly to reduce taxes and fees for enterprises. The State Bank of Vietnam also provides a special loan program for companies to borrow funds at 0% in order to pay salaries for their employees.

Incredible valuation

Last month the Ho Chi Minh Index fell by 24.9%, from 882.19 to 662.53, and hence brought valuations of some companies to very attractive levels. Also, in our portfolio we have many holdings which have no debt on their balance sheet, or even net cash. One extreme example is Doan Xa Port (DXP), which has a net cash balance of VND 303 bln as of 31st March 2020, compared to its market cap of VND 270 bln, while its shares currently trade at 6.5x earnings and 30% below book value! DXP is a small port operator in Hai Phong Province, the main exporting hub of North Vietnam. One of the reasons for this incredible valuation is that investors are worried that COVID-19 will affect smaller ports much more than larger ports. However, we visited DXP before the crash and are in regular contact with the CEO, who updates us on the company’s strategy and progress. DXP is mainly focusing on smaller domestic ships, rather than the big export vessels. DXP was therefore not affected by the recent sharp declines in international trade and was even a small beneficiary when other domestic ships switched to smaller ports in order to reduce costs. Its revenues in the first quarter of 2020 therefore increased against the trend by around 8% and net profit jumped by 35% while most other ports had negative growth. But one of the most important factors is the company’s cash position which amounts to around 75% of its total assets. DXP’s healthy balance sheet puts the company in quite a comfortable position, despite the pandemic, and leaves it with lots of options, such as the ability to acquire a competitor, payout a high extraordinary dividend or a share buyback. But whatever option the company chooses, DXP is definitely in a very good position to survive the current crisis unscathed while some of its competitors will struggle to survive.


Doan Xa Port

(Source: Doan Xa Port JSC)


Another good example of an attractively valued company with great prospects is Agriculture Bank Insurance (ABI). It is the cheapest listed insurance company in Vietnam with a P/E ratio of 3.5x and a P/B ratio of 0.9. In the first quarter of 2020 the company reported net profit growth of 30% from VND 63 bln to VND 81.9 bln. Over the last four years, ABI’s net profits increased by 199% from VND 81 bln in 2015 to VND 242 bln in 2019. ABI’s net profit is expected to reach VND 300 bln in 2020, staggering growth of 24%! The main reason for this incredible growth in 1Q 2020 is a new regulation which was approved by the Ministry of Finance whereby the company is now allowed to target clients for its agriculture credit risk insurance products with the maximum size of loans increasing to VND 300 mln, up from VND 200 mln. This new regulation helps ABI to substantially increase the number of its target clients from Agriculture Bank. Furthermore, ABI’s balance sheet looks extremely healthy with more than VND 2,000 bln cash, equivalent to over 75% of total assets. We are very confident that this company is in a very good position to survive this current crisis unscathed.

We always see high valuations and weak balance sheets as the biggest danger when investing in stock markets in general, but especially in markets such as Vietnam. Being invested in conservative companies, as we do, outside the main indices, reduces the risk of big price swings due to inflows and outflows of index-trackers. We therefore show fewer losses in downturns, but also show less gains in recoveries over the short term. On a longer-term time horizon, one of the most important factors is the difference in valuations. The valuation of our top 5 positions (ex-banks) is significantly more attractive compared to the top 5 index positions (ex-banks). The average P/E ratio of our top 5 holdings is only 5.3x compared to 20.1x of the top 5 index stocks. It is also important to assess the level of bank debts of the various companies since failing to repay their bank loans or interest in Vietnam is a serious offence with far reaching consequences.

Top 5 AFC (ex-banks)



Bank Loan/
Total Assets



Top 5 Index (ex-banks)



Bank Loan/
Total Assets

Total Assets 













































DVP 4.4 0.5 0% 61%   SAB 24.0 5.7 4% 61%
Average 5.3 0.7 3.5% 37.0%   Average 20.1 4.0 13.1% 31.3%

(Source:, AFC Research, Companies audited reports)



(Source:, AFC Research, Companies audited reports)


The current release of Q1 results are important as always, but unlike the usual focus on earnings which will be only fully affected in the second quarter, investors are mainly having a look at the liquidity and debt situation of the various companies which shows the probability of surviving a longer term crisis in case COVID-19 is here to stay. Besides the incredibly cheap valuation of our portfolio, it is important to highlight that our high dividend yields are most likely secured even in the current environment, and the bank loan ratio of the top 5 index stocks is almost 3x higher.


Current EPS growth forecast for 2020

(Source: Citi Research, Factset)


Analysts will still need to lower their profit estimates tremendously with all the headwinds from the sharp drop in economic activity. The top down estimate revisions of 40%-60% seem to be more realistic when we look at first quarter releases from companies around the world. In Vietnam we saw weaker results as well, but in many cases not as bad as we expected. Our expectations for the second quarter are quite inconsistent as certain sectors will feel the full brunt of the crisis (e.g. export oriented companies to Europe and the US), while others are already showing a recovery (like domestic oriented retail companies). 

With more than half of our companies having reported their 2020 first quarter earnings, we now can make our first careful estimates of the impact of the economic crisis for 2020 full year earnings which could be around -15%. This is certainly a meaningful decline, but in perspective of this extraordinary worldwide “economic” crisis, certainly not very worrisome, given the outstanding valuations we see in our portfolio.

One example of a long-term beneficiary is one of our holdings, FPT Corporation, a blue-chip software powerhouse in Vietnam with a strong focus on expanding its overseas business. Despite short-term headwinds, FPT’s outsourcing business could emerge as a long-term beneficiary after the COVID-19 crisis as clients could diversify away from Chinese and Indian competitors whose operations and project delivery abilities have been disrupted by the COVID-19 outbreak. Currently FPT is trading at a very favourable 12x earnings and has a long-term top-line growth rate of around 20%.


FPT Corporation since 2014

(Source: Bloomberg)




(Source: GSO, VCB, State Bank, AFC Research)


At the end of April 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (5.8%) – an insurance company, Vietnam Container Shipping JSC (4.4%) – a container port management company, Idico Urban and House Development JSC (4.1%) – an energy, construction, and real estate business, TanCang Logistics and Stevedoring JSC (3.0%) – a logistics company, and Dinh Vu Port Investment & Development JSC (2.8%) – owner/operator of the Dinh Vu Port.

The portfolio was invested in 54 names and held 16.0% in cash. The sectors with the largest allocation of assets were industrials (31.2%) and consumer goods (24.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.33x, the estimated weighted harmonic average P/B ratio was 0.82x and the estimated weighted average portfolio dividend yield was 7.87%.

 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 increased by 4.2% in April 2020 with a NAV of USD 1,062.52. The fund underperformed the AFC Frontier Asia Adjusted Index (+17.9%), the MSCI Frontier Markets Asia Net Total Return USD Index (+13.1%), the MSCI Frontier Markets Net Total Return USD Index (+6.7%), and the MSCI World Net Total Return USD Index (+10.9%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +6.3% versus the AFC Frontier Asia Adjusted Index, which is down by 12.5% during the same period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.28% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.49, all based on monthly observations since inception.

Global markets witnessed a strong rally after last month’s deep correction. Extremely attractive valuations and the COVID-19 infection curve approaching a peak in Europe, the U.S. and parts of Asia led to investor optimism that economies will partially reopen for business in May. Asian frontier markets had a strong month as well with the Pakistan KSE100 Index and the Vietnam VN Index being the second and third best-performing markets globally in April.

Though Pakistan remains in a partial lockdown, certain industries such as construction have been allowed to restart operations and this includes cement plants. On the macro-level, near term worries over the balance of payments have been put to rest as the country received USD 1.4 bln from the IMF through its Rapid Financing Instrument set up to assist countries facing the negative impact of the pandemic. This development along with the continued low oil price led to the Pakistani Rupee to appreciate versus the USD by 3.2% in April, in contrast to many other frontier and emerging market currencies which declined.


Pakistani Rupee appreciated in April despite concerns over external funding – IMF funding and low oil prices helping sentiment (% change)

(Source: Bloomberg)


The State Bank of Pakistan also stepped in, further cutting benchmark interest rates by 200 basis points, taking the cumulative cuts since 2019 to 425 basis points. A combination of these factors led to a market rebound and as we have mentioned previously on many occasions in past newsletters, once the interest rate cycle turns, interest rate sensitive sectors like autos and cement should do much better than the overall market. 

The pandemic has significantly brought forward these interest rate cuts but the fund’s automotive and cement stocks did very well this month which resulted in the fund’s Pakistani holdings gaining 34% in USD terms v/s the KSE100 Index’s gain of 20.8% in USD terms. We believe that these positives are reflected in some cement stocks and as a result, we exited one of our Pakistani cement holdings which was up 46.2% in April which led to a profit of 28.8% since our purchase in November 2019.

Pakistan was doing well with its IMF-led reform agenda before the pandemic and we believe it has the right leadership both at the political level and at the Central Bank to see through the near term uncertainties as the current establishment was very recently able to get through managing a crisis during the 2018 foreign exchange/current account led issues. Hence, being battle-ready should help the country to recover once the pandemic has passed.


Interest rate sensitive sectors like automotive and cement outperformed the index in Pakistan (% change)

(Source: Bloomberg)


Vietnam is winning appreciation for its handling of the pandemic as it has been able to keep the number of cases to a low 270 with zero fatalities. This proactive, strict and disciplined approach has allowed the government to reopen the economy from 23rd April after announcing a nationwide lockdown on 1st April. Domestic flights have resumed operations but not to their pre-pandemic frequencies while malls and food and beverage outlets have also been allowed to open for business. 


Vietnam has had lower cases than regional countries and its infection curve has flattened

(Source: Bloomberg, logarithmic scale)


Historically attractive valuations, the infection curve peaking and the reopening of the economy led to a 16.1% gain for the Ho Chi Minh VN Index. The rally was broad-based but consumption-related stocks did better than the overall market as they took the biggest hit when the pandemic first hit. The fund’s Vietnamese holdings were well positioned for this rebound in consumption stocks with an automobile holding company, a beer producer and a mall operator outperforming the index with gains of 35.7%, 32.5% and 20.6% respectively.

The Vietnamese government will also be focussing more on infrastructure investments this year to support economic growth. This news led to the two construction-related companies the fund holds to gain 39.5% and 32.3% during the month, also much ahead of index performance. Overall, it was a good month for the fund’s Vietnamese holdings with most the holdings outperforming the VN Index by a large margin.


Vietnamese consumer stocks outperformed the index in April in anticipation of the economy reopening (% change)

(Source: Bloomberg)


During the month, the fund took advantage of the rally in Vietnam to exit the country’s largest airport operator. The business model in the long term for airports is solid but in the near-term airports, not only in Vietnam but in the region, could face significantly lower international passenger volumes due to travel restrictions and/or fear of travelling internationally. Until there is a vaccine or an internationally recognised system which can allow only healthy travellers to board flights, international passenger numbers will take some time to get back to pre-pandemic levels. Therefore, airports could face margin pressures as international passengers provide much higher margins than domestic travellers and also contribute heavily to retail spending within airports.

The fund’s biggest positon, Bangladesh based Beximco Pharmaceuticals, helped performance as well as the stock gained 10.8% during the month since the pharmaceutical industry has been deemed essential during the countrywide lockdown. Furthermore, in early May the company received regulatory approval to produce the generic version of Remdesivir, the drug which has shown potential in treating COVID-19 patients. This is a very big positive for the company as it could also export this drug to other markets once it meets domestic needs. 

The fund owns the London listed GDR of Beximco Pharmaceuticals which is trading at a 40% discount to the local listing in Dhaka and currently trades at a trailing twelve months P/E of 7.7x.

The fund’s Mongolian holdings also did very well this month despite weakness in the benchmark index, the MSE Top 20 Index which lost 3.0% this month. The fund’s Mongolian gold and copper plays had a very strong month as gold and copper prices strengthened and the fund’s biggest position in Mongolia, a cashmere producer, gained 15.2% this month.

We sold our entire holding in a duty-free shop operator which the fund had held since March 2013. When the fund began to accumulate this company’s shares, no Mongolian broker really knew what the company was exactly doing and even today Bloomberg’s company description reads as follows: “The company owns and operates retail clothing stores. The company’s products consist of clothing made from wool, cashmere and leather”.

However, in reality, the company operated, when the fund started to invest, one duty-free shop each at the Ulaanbaatar Trans-Siberian railway station and at the Mongolian-Russian border with the shops selling liquor, perfume and tobacco. After the majority of shares were sold to a prominent Mongolian conglomerate, the company opened one more shop in the still operating “old” airport where the shop is in the farthest corner on the second floor of the departure hall. The average purchase price for the fund was about MNT 24,800 and we exited the entire position at MNT 80,000 after collecting total dividends of up to MNT 42,435 per share since the purchase. This reflects the gains that can be made in frontier markets by investing in under-researched and ignored companies despite concerns about “liquidity”.

The best performing indexes in the AAFF universe in April were Pakistan (+20.1%) and Vietnam (+16.1%). The poorest performing markets were Iraq (−10.4%) and Mongolia (−3.0%) while the stock markets in Bangladesh and Sri Lanka remained closed due to the countrywide lockdowns. The top-performing portfolio stocks this month were a Mongolian junior gold miner (+100.0%), a Pakistani automotive battery company (+49.8%), another Mongolian junior gold miner (+43.3%), a Vietnamese construction company (+39.5%), and a Vietnamese automobile holding company (+35.7%).

In April, the fund exited a Mongolian duty-free shop operator, a Pakistani cement company and a Vietnamese airport operator and added to existing positions in Vietnam and partially exited positions in Mongolia.

At the end of April 2020, the portfolio was invested in 69 companies, 2 funds and held 4.5% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (10.4%), and a pharmaceutical company in Bangladesh (9.3%). The countries with the largest asset allocation were Vietnam (21.6%), Mongolia (19.2%), and Bangladesh (15.6%). The sectors with the largest allocation of assets were consumer goods (25.2%) and industrials (17.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.70x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 3.71%.

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AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned −3.1% in April with a NAV of USD 959.25, bringing the return since inception (29th March 2019) to −4.1%, while the 2019 return was +9.3%.

April was a quiet month in Uzbekistan, like in many parts of the rest of the world, as the quarantine in the country was extended to 10th May since the number of infections rose sharply during the month, peaking at 2,519 (bear in mind that the population of Uzbekistan is 34 mln). Though, in the past several weeks the government has been testing 10,000 people per day and active cases have been in decline, currently 499. During the last week of April, the government permitted a gradual reopening of the economy with businesses including construction markets, auto dealerships and parts suppliers, notaries, dry cleaners and craftsmen to reopen and personal cars to be back on the road from 07:00 to 10:00 and 17:00 to 20:00, while taxis can again operate 24-hours.

With Uzbekistan in quarantine for the full month of April, volume at the stock exchange was lighter than usual and the Uzbek Som experienced a decrease of 5.4% versus the USD. The reason for the decline of the Uzbek Som was that the Central Bank lowered its policy rate from 16% to 15% in order to stimulate growth and ease pressure on borrowers, which is discussed in further depth below.

AFC Uzbekistan Fund valuations as of 30th April 2020:

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


Estimated weighted harmonic average P/B:


Estimated weighted portfolio dividend yield:



Global cost-push inflation to bolster Uzbekistan’s medium-term macro story

The global economy has undergone a deflationary collapse, with Central Banks trying their hardest to re-inflate bubbles through money printing in an attempt to pave over the cracks caused by COVID-19. Looking beyond the current crisis when things begin to normalize it is becoming increasingly likely that we will be entering a period of heightened inflation, already being seen in food prices globally. With regionalisation gaining traction (i.e. Japan announcing it will provide USD 2.2 bln in subsidies for factories looking to relocate out of China), strained supply chains (multiple meat processing plants in USA are shuttered due to COVID-19 outbreaks) and the coming labour demands as economies reopen and dedicated hygiene staff are required to spray sanitizer on customers hands at supermarkets, malls and schools and sanitize public spaces, all of these events are inherently inflationary.

Looking at this “costlier” economic situation on the horizon, we have spent a lot of time questioning whether Uzbekistan will benefit from this new environment and if so how. The answer we have concluded is: Yes! Uzbekistan will benefit and the country could be one of the major (Asian) beneficiaries of global inflation pressures due to its self-reliance, courtesy of its large domestic agricultural and manufacturing industries, cheap and abundant labour pool and endowment of commodities.

Uranium to benefit Uzbekistan’s economy

Having written about the benefit gold provides Uzbekistan in last month’s fund update, uranium is another commodity which contributes sizeably to Uzbekistan’s economy with the country supplying 4.5% of global production. Uranium is the main material in the global nuclear reactor fleet (there are 450 reactors operating globally with 54 under construction, helping the industry to grow 2% per year), and since the nuclear meltdown at the Fukushima Daiichi power plant in Japan in 2011 the price of uranium has fallen from over USD 70 per pound to the high teens in 2016. The uranium price collapse led to significant underinvestment and inhibited new mine production as western countries focused on shutting down their power plants with nuclear energy falling out of favour. However, this negative sentiment has receded in recent years as nuclear energy is the only carbon-free source of baseload power. The price slump led Cameco Corporation, a Canadian uranium producer, and Kazatomprom, Kazakhstan’s state-owned uranium producer, to announce production cuts and mine closures in 2017.

Fast forward to 2020 and the uranium market was already in a deficit to the tune of roughly 30 to 40 mln pounds, while annual demand stands at approximately 200 mln pounds. On 7th April 2020 Kazatomprom, with 41% of global market share, announced it would be curtailing production for three months at all of its sites and decrease its onsite worker headcount to comply with lockdowns in Kazakhstan. Similar shutdowns have also occurred with Cameco Corporation in Canada and mining operations in Namibia, accelerating the deficit to around 80 mln pounds today. This supply shock, compounded by severe under-investment in the industry over the past decade, has led to a structural shortage where existing mine production, and idle capacity available to come online, is now insufficient to meet the demand of the growing industry. This means either prices must rise to incentivise new mine development or 14% of global electricity supply is at risk of shutting down.

During this virus period Uzbekistan’s uranium mines, located in the Navoi region, specifically around the city of Uchkuduk, have been running uninhibited and with their first quartile cost of production are poised to benefit from the uptrend in prices, estimated to contribute up to an additional USD 500 mln to GDP, as prices have already risen 42% from their recent low on 23rd March, 2020 and 34% YTD.


1-year uranium price

(Source: Bloomberg)


As cost-push inflation comes to the fore due to demand for goods where investment in production has been insufficient in recent years, Uzbekistan is poised to benefit, either through the ability to supply its domestic demand for goods (food and consumer electronics) or being a net-exporter of goods (uranium, gold, steel, produce) which will support the economy and see the country’s already robust USD 30 bln foreign exchange war chest grow yet further.

Central Bank & finance news

The first quarter saw Uzbekistan’s GDP grow 4.1%, down from 5.7% but still robust when considering China, Uzbekistan’s second largest trading partner, was in lockdown for most of the quarter.

In response to the softness in the economy brought on by the spread of COVID-19, on 14th April the Central Bank of Uzbekistan lowered its policy rate from 16% to 15% as part of a multi-pronged approach by the government to stimulate the economy. Unlike in western countries, Uzbekistan is very traditional in that it still has positive interest rates and cares more about returning to a trade surplus than relying on helicopter money to stimulate the economy. In fact, during the month, Russian economist Sergey Guriev suggested that the government follow the USA and implement helicopter monetary policy to which President Mirziyoyev immediately shot down as a foolish and unsound idea.

The decrease in the Central Bank policy rate however did cause the Uzbek Som (UZS) to depreciate against the USD by 5.4% during the month. However, the currency is still much stronger relative to the majority of its peers in Central Asia and the Caucuses as Russia, Kyrgyzstan and Kazakhstan saw their currencies depreciate by 19.7%, 13.3% and 11.3% respectively while UZS is down only 6.5% YTD. Due to Uzbekistan’s free-floating currency and diversified economy (~55% of whose GDP is generated by SME’s while ~70% of Kazakh and ~50% of Russian GDP is generated from government) the currency should remain an outperformer relative to its peers. Further, while the collapse in oil prices hurt Russia and Kazakhstan, Uzbekistan was impacted to a much lesser degree as its main hydrocarbon export is natural gas which saw much less demand destruction. It is also worth re-iterating from the March fund update that by the middle of the 2020s, Uzbekistan is focused on stopping gas exports altogether and will instead focus on expanding domestic processing capacity of value-added products including plastics, CNG and fertilizers for export.


Free-floating Uzbek Som dramatically outperforms its peers

(Source: Bloomberg)


TBC Bank receives full banking license

During the month the Central Bank issued Georgian bank TBC a full banking license. TBC plans to roll out a digital banking solution in June which should be attractive to consumers both due to competitive rates and the ease of physical distancing rather than walking into a traditional bank branch. As discussed before, TBC’s plans for the aggressive rollout of its digital banking platform should help to stimulate a competitive spirit among local banks, improving customer service, rates and efficiency, all of which should be welcomed by customers.

Company news

In April, two of the fund’s top five portfolio holdings reported positive developments in their businesses:

The Uzbek Commodities Exchange (URTS), a platform similar to COMEX or NYMEX, announced on 1st April 2020 that it conducted the first forward (derivatives) contract in Uzbek history. The contract was for delivery of UZS 27.5 bln (~USD 2.7 mln) worth of sugar 60 days forward. This is very significant as during our meetings with management we had been informed that the exchange was working on developing a derivatives trading business for the exchange, which has come online ahead of schedule and this will obviously be very good for future earnings growth. Prior to the introduction of derivatives, the exchange was merely a digital bazaar with every buyer intending to take physical delivery of a particular commodity. The exchange also reported first quarter 2020 earnings which grew 8% year over year while book value grew 232% yoy. URTS currently trades at a trailing 12 month P/E of 7.34x and P/B of 1.41x, which is inexpensive when considering the growth potential of the existing physical trading business as well as the commencement of derivatives trading, the latter of which opens the door for hedgers and investors which will drive further commission revenue.

The fund’s largest holding, Kizilqum Cement (QZSM) also had good news during the month, reporting first quarter 2020 earnings on 21st April which were very strong. The company saw 103% earnings growth year on year. Currently, QZSM trades at a trailing 12 month P/E of 2.33x, P/B of 0.42x and 1.18x cash (the company has no debt). The broader construction industry largely continued operating during the quarantine, and while some softness in second quarter numbers is expected, they should hold up relatively well, especially as infrastructure projects are brought forward to help stimulate the economy. Additionally, on 24th April 2020 the Uzbek government announced a ban on all imported cement for the remainder of 2020 in order to support domestic producers.

At the end of April 2020, the fund was invested in 28 names and held 2.6% in cash. The markets with the largest asset allocation were Uzbekistan (94.5%) and Kyrgyzstan (2.9%). The sectors with the largest allocation of assets were materials (56.0%) and industrials (16.2%). 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 0.62x and the estimated weighted average portfolio dividend yield was 4.92%.

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The AFC Iraq Fund Class D shares returned −11.3% in April with a NAV of USD 464.19 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned −12.6% for the month. Year to date the RSISUSD was down 25.5% while the fund lost 26.0%.

Iraq, like other countries, went into full lockdown on 16th March and it was only partially lifted just before the fasting month of Ramadan – in which activity is normally subdued. Unlike many countries, Iraq went a step further in that its lockdown included its whole financial sector. In particular, the Central Bank of Iraq (CBI) and the banks that it regulates suspended most activities during the lockdown. In turn, this negatively affected the availability and circulation of the USD in the country’s cash dominated economy – where about 85% of the currency in circulation is outside the banking system.

The CBI conducts five daily USD auctions every week to facilitate foreign trade transactions (transfers or green bars in the chart below) and to satisfy the need for physical USD for Iraqis travelling abroad (cash or red bars in the chart below). The closure of this facility over the lockdown period, and its much-reduced frequency following that, have naturally resulted in an unmet need for USD and hence a rise in its price in the market versus its official price. Typically, the market price of the USD is at a premium to official prices, but spikes higher during periods of uncertainty or crises – the last of which were the momentous events at the start of the year that raised the feared spectre of a US-Iran proxy war fought in the country. This premium began to spike, and stayed at elevated levels, as the lockdown came into full effect as can be seen from the chart below.



(Source: Central Bank of Iraq (CBI), Asia Frontier Capital. The CBI did not provide market prices between 16th March and 21st April, so the chart assumes gradual increases in prices in this period)


Consequently, this affected the market price of the physical USD which normally trades at a further premium of 2-4% over the premium discussed above (i.e. the gold/brown line in the above chart). This extra premium widened, as it does during spikes, and is now about 8-10% and remained at these elevated levels by the CBI’s ceasing of its offering of physical USD in its currency auctions from mid-March (above chart). In a country in which the dissemination of economic updates is poor and trust in the government is very low, rumours come to the fore and drive perceptions and subsequently fears. One such rumour that dominated perceptions was that sharply falling oil prices were resulting in major USD shortages at the government level and it was thus conserving its reserves by stopping the flow of physical USD. This line of thinking has some merit as it takes its cue from a similar pattern during 2014-2017’s twin crises of the ISIS conflict and the collapse in oil prices. However, then the CBI restricted the supply of the USD during its auctions but didn’t stop either transfers or cash offerings. As it turned out, the physical USD offerings were halted as no foreign travel was taking place, given that they are meant to satisfy the needs of individuals’ foreign travels. 

Rumours of a USD shortage aside, the weakening of demand in the economy is evident as seen from the smaller volumes of transfers in the currency auctions during late April, and from the “Community Mobility Reports” provided by Google. These are based on data from mobile phone users who have opted-in for “Location History” on their Google accounts. These users provide a reasonable population sample given the high levels of mobile penetration in Iraq (chart below) – more so given the high combined Samsung/Huawei market share, a proxy for Google’s Android system, which is about 75% in mobiles – and thus should provide a reasonable picture of economic activity during the lockdown.



(Source: Statista)


While every sector of the economy has felt the effects of the lockdown, the informal sector – dominated by retail trade, transport and hospitality – which accounts for the bulk of private-sector economic activity in Iraq – has been particularly hard hit as can be seen from the chart below, which shows changes in activities compared to the baseline between 3rd January 2020 and 6th February 2020.



(Baseline is the median, for the corresponding day of the week, during 3rd January – 6th February, Source: Google, data as of 30th April 2020)


However, the decline in activities are likely to have been more precipitous than shown in the above chart as activities in the retail, transport and hospitality sectors were subdued during the baseline period given the chilling effects of the dramatic events at beginning of the year. More so, these events came on the back of a slowdown induced by the continued countrywide demonstrations from October 2019.

The Iraq Stock Exchange (ISX) resumed trading on 26th April, after closing on 16th March, and in-line with government guidance of reduced commercial activity, it reduced trading days to three days per week from five. However, the board of governors of the ISX, in a misguided attempt to calm market fears, lowered the daily stock price limit downs to 5% from 10%, but kept the upside limit at 10%. Inevitably it did the exact opposite of its intended purpose, as the same low trust in the authorities fuelled rumours that the market authorities were hiding some major negative news. The new limit-down limits served as magnets for sellers during the remaining three trading days of the month between 26th-30th April with prices obligingly closing down 5% on each of these days. As often happens in frontier markets, buyers disappear for several days as sellers chase down small bids and drive prices to very attractive levels, while prices tend to recover as buyers return to pick up bargains, which seems to be taking place in early May.

For the three days that made the trading month of April, the Rabee Securities RSISX USD Index (RSISUSD) was down 12.7%, while the fund was down 11.3%, outperforming the index. The argument made here last month that “Iraq's equity market was discounting neither an economic nor a corporate earnings recovery, it's difficult to see why it should decline as other markets have elsewhere”, is stronger now, especially given that the market by end of April 2020 is now down 75% from the 2014 peak. 

As of the end of April 2020, the AFC Iraq Fund was invested in 14 names and held 0.5% 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 (97.8%), Norway (1.1%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (57.6%) and communications (17.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.12x, the estimated weighted harmonic average P/B ratio was 0.41x and the estimated weighted average portfolio dividend yield was 5.98%.

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We hope that  you and your family are staying healthy and safe during this challenging time.

With my best wishes,
Thomas Hugger
CEO & Fund Manager

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