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.