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Asia Frontier Capital (AFC) - December 2020 Update

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do.” ― Mark


“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do.”

Mark Twain, American writer, humourist, entrepreneur, publisher, and lecturer.


Full Year 2020Since
AFC Asia Frontier Fund USD A1,338.63+5.6%+5.1%+33.9%
AFC Frontier Asia Adjusted Index2 +6.5%+7.9%+17.5%
AFC Iraq Fund USD D565.61-5.6%-9.8%-43.4%
Rabee RSISX Index (in USD) -4.8%-5.4%-55.1%
AFC Uzbekistan Fund USD F1,341.36+3.4%+22.7%+34.1%
AFC Vietnam Fund USD C2,284.19+12.8%+27.7%+128.4%
Ho Chi Minh City VN Index (in USD) +10.2%+15.2%+98.3%
  1. The NAV given is for the main share series for the relevant master fund. Investor’s holdings may be in a different share class or series or  currency and have a different NAV. See the factsheets and/or your statement for full details.
  2. The index was adjusted 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.



Happy New Year!

I would like to wish all of our investors and newsletter readers and their families good health and good returns for 2021.

Furthermore, I would like to thank all of our investors for their continued support by staying invested in one of our AFC Funds after the past few difficult years when frontier markets were not the “flavour of the month” and especially during the COVID-19 infected year of 2020. It particularly broke my heart to see that a few investors left our funds at the bottom of the market in March and April 2020. Interestingly, most of them invested at the top of the market and realized significant losses after they exited at rock bottom valuations – but this is part of the game called “investing”. It is important to note that we at AFC have always advised our investors to take a long-term view when investing in frontier markets and the past year has proven (again) that this is the right approach when investing in frontier markets and in our funds.

I am extremely proud to report that both our AFC Vietnam Fund and AFC Uzbekistan Fund reached new all-time high fund NAV’s at the end of December 2020. Notably, the AFC Vietnam Fund achieved a remarkable performance turnaround of +65% from March 2020 to the end of December 2020, which confirms that investors should take a long-term view. The fund, which celebrated its seven-year anniversary on 23rd December 2020, has achieved an impressive overall seven-year track record with a return of +128.4%, representing an annualized return of 12.4% p.a. During this period, the fund outperformed the Ho Chi Minh City VN Index (in USD) by 30.1%.

The AFC Uzbekistan Fund had its first full calendar year of performance in 2020 with a return of +22.7%. The fund has an annualized return since inception in March 2019 of +18.2% and has a Sharpe ratio of 1.35.

Our AFC Asia Frontier Fund ended 2020 with a gain of 5.1% after being down 19.9% at the end of March 2020. This reflects the exceptional stock market recovery in Asian frontier markets since the bottom of March 2020 as Bangladesh, Pakistan, Sri Lanka and Vietnam witnessed a robust post lockdown economic recovery and despite the consistent foreign selling, domestic investors made up for this with a very strong participation in the markets. You can read more on the year’s recap and outlook for Asian frontier markets in our recently released report titled “AFC Asia Frontier Fund – 2020 Review and Outlook for 2021”. It can be found at the link below:

AFC Asia Frontier Fund - 2020 Review and Outlook for 2021

Please find below the manager comments relating to each of our four funds for the month of December 2020.

Happy investing and kind regards,

Thomas Hugger

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 Vietnam Fund - Manager Comment


The AFC Vietnam Fund gained 12.8% in December with a NAV of USD 2,284.19, a new all-time high NAV, bringing the return in 2020 to +27.7% and +128.4% since inception. This represents an annualized return of +12.4% p.a. since inception. The Ho Chi Minh City VN Index in USD rose 10.2% in December 2020 bringing the performance for the year to +15.2%. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 13.55%, a Sharpe ratio of 0.85, and a low correlation of the fund versus the MSCI World Index USD of 0.56, all based on monthly observations.

2020 ended with substantial gains which were once again led by bullish sentiment, predominantly among local investors. Financials, among other sectors, pushed the indices to their highest levels this year. Unlike other countries, Vietnam’s strong momentum reflects the current outperformance of the country’s macroeconomics which are expected to remain strong in 2021. We can certainly speak of a full-blown bull market, even without foreign investors participating as they were terribly wrong and strong net-sellers throughout the year. 

Market Developments

During this time of the year, most stockbrokers and banks publish their year-end review and outlook for the next year. We would argue, similar to what was written in a recent article by The New York Times, that these forecasts are often wrong, similar to long-term weather forecasts. In December 2019 for example, the median analyst consensus on Wall Street was that the S&P 500 would rise a mere 2.7 percent in the 2020 calendar year, while the stock market marked substantial gains of 16.3% as of 31st December 2020. Not to mention of a change in forecasters’ sentiment after the market tanked sharply on COVID-19 news when a full year decline of 11% was expected – of course exactly at the time when the market hit the low for the year. That doesn’t mean that we want our readers to stop reading economic and market news and outlooks, but we merely would like to highlight that these are just an interesting source of information – nothing more. We believe that instead of predicting market or economic numbers, it is wiser and more efficient in terms of performance to go along with positive developments in the economy, society and politics.

After so many years of being bullish on these aspects in Vietnam, we are watching closely if there are any changes to be noticed in this respect. 2020 proved once again that Vietnam was not only able to continue its positive upward trajectory, but it actually outperformed most other countries in the world in terms of economic growth and the handling of the COVID-19 pandemic. No wonder the Vietnamese are proud of these achievements and are optimistic about the future (as they always are!), unlike frustrated and persistently “locked down” people in most other parts of the world. 
Therefore, the stock market was able to shrug off strong selling from foreign investors in 2020. We never looked too much at those foreign inflow/outflow numbers as locals are driving the market in Vietnam, but a return of foreign investors next year would add to local demand which would undoubtedly be positive.



(Source: Bloomberg)


It is worth mentioning that in recent months and years more and more companies have delisted from the UPCOM and Hanoi Stock Exchange and listed their shares on the much larger HCMC Stock Exchange. UPCOM was always a kind of third market with fewer regulations which was, and still is, used for new listings (IPO’s), even for big companies. Hanoi, as the capital of Vietnam, always tried to compete with the exchange in HCMC but has lost the battle over time in terms of market turnover and market capitalization. Recently, even the formerly highest weighted company of the Hanoi Stock Exchange, Asia Commercial Bank, has changed its listing to HCMC. Meanwhile, the difference between the two markets in terms of size is huge (HCMC market capitalization USD 181 bln versus Hanoi USD 9 bln), and even the UPCOM currently has a market capitalization of USD 86 bln. The price movement of the Hanoi Index has recently become so erratic that we have decided to follow only the main index HSX in HCMC for future comparisons, as this is also the stock market index followed by the media. Therefore, we will discontinue reporting price changes of the Hanoi Index on a regular basis but will continue to report important and interesting events from the exchange if and when they occur.

A second major trend we have written about many times is the change of leadership from growth to value stocks, which finally seems to be underway. As shown in the chart below, after an acceleration in the weakness of value stocks earlier this year, it looks like a long-term bottom could be in place which would be an important gamechanger for the next few years. Like any other fund, we are looking for growing companies maximizing profits for our investors, but at the same time, we like to sleep well with the positions we hold. When the stock market environment went sour during the spring and valuations of our stocks went from “cheap” to “super-cheap”, we re-evaluated the risks in our positions, but otherwise were pretty relaxed given the attractive valuations. We would have had a much harder time being optimistic if we had been invested in loss-making or highly-priced stocks which were the favourite investments of many funds around the world. Of course, we enjoyed seeing the sharp rebound in stock prices in recent months, and our valuations recovered as well, but even with the substantial gains since the low in March, the AFC Vietnam Fund average harmonic P/E is currently only at 8.9x.


Relative price change MSCI value/growth stocks

(Source: Bloomberg)


With so many undervalued stocks in our portfolio, the NAV of the fund would need to increase 100% from today for the fund valuations to be in line with the market average, which itself is not expensive compared to other markets. We are well-positioned with our holdings to participate in a further “catch-up” with the small- and mid-cap segments where indices already reached a new all-time high whereas the VN-Index is still 9% below its high reached in April 2018.


VN Index from March 2015 to December 2020

(Source: Bloomberg)


The valuation of the Vietnamese market is still quite attractive with a PER of 17.6x compared to other countries such as Singapore (21.0x), Malaysia (23.0x), Thailand (24.7x), Philippines (28.4) or Indonesia (28.5x).


Asian valuations – PER

(Source: Bloomberg)


Although the overall market valuation in Vietnam is currently around 17.6x, we see significant differences among various segments, with for example PER’s of small- and mid-cap stocks only averaging at around 12.1x and 14.1x respectively, against 8.3x for The AFC VIetnam Fund.


Vietnam valuation by segments – PER

(Source: HSX, AFC research)


This is why small- and mid-cap indices both performed strongly in 2020 versus the HCMC index (VNI) (small-caps +37.8%, mid-caps +36.3% and VNI +14.9%). This lured a record number of new local investors into the market. According to SSI Securities, the largest stockbroker in Vietnam, the total number of new brokerage accounts opened in 2020 reached more than 369,000.


New opened accounts by month in 2020

(Source: SSI, VSD, AFC Research)


With the help of these new local investors, the market growth momentum and liquidity improved significantly. 


Vietnam average daily trading volume (USD mln)

(Source: HSX, AFC Research)


In December, the market liquidity improved further and reached an average of USD 470 mln per day on par with other ASEAN markets such as Thailand, Indonesia, Malaysia, or the Philippines.


Average daily trading value by markets (USD mln)

(Source: Bloomberg)


While the above developments will hopefully benefit the Vietnamese stock market’s performance in 2021, another long-term positive development can be seen from investments being driven by social and environmental forces.

ESG - Environmental / Social / Governance

There appears to be a growing opinion in the investment industry, mainly in the US and Europe, that companies that fit ESG criteria are well equipped to manage risk and operate in a sustainable manner in the future and are therefore attractive investments in their own right. But this ESG topic is only just starting to gain attention in frontier and emerging markets. Because we think that long term benefits for the country and its people are substantial, we decided to start integrating environmental, social and governance (ESG) factors into our investment process.



(Source: AFC Research)


We are focusing on the above mentioned eight factors and score each company between 0-10 (10 being the best and 0 the worst score).

  • Resource use- reflects the performance and capacity to reduce the use of materials, energy or water, and find more eco-efficient solutions by improving supply chain management.
  • Emissions - measures the commitment and effectiveness towards reducing environmental emissions in its production and operational processes.
  • Workforce - measures the effectiveness of job satisfaction, human rights, a healthy & safe workplace, competitive compensation, diversity and equal (gender) opportunities and development opportunities for its workforce.
  • Community - measures the commitment to contribute to charities, infrastructure and education projects and support of underprivileged members in the society. 
  • Product responsibility - reflects the capacity to produce quality goods and services, integrating the customer’s health and safety, integrity and data privacy.
  • Management - measures the commitment and effectiveness towards following best practice corporate governance principles.
  • Shareholders - reflects the effectiveness towards equal treatment of shareholders and the use of anti-takeover measures.

We are then using a rating methodology from MSCI to translate these scores into ratings between CCC to AAA (AAA being the best and CCC the worst value).


(Source: MSCI, AFC Research)


After our initial rating, companies are contacted and sent a self-assessment form to value and score their achievements in each of these eight ESG factors. Where we see significant differences between their score and ours, we adjust the numbers according to the discussion with the respective management of these companies. We think this an important step, since these companies will realize that ESG is important, especially for international investors, and we hopefully can motivate them to adapt and improve in this aspect.

It is great to see that there are a few companies already making a great effort to improve their behaviour in regards to ESG, but there are of course other companies which have still lots of room for improvement, to say the least.

Vietnam is certainly in a very early stage of ESG awareness compared to the developed world. Still, we see that more and more companies are starting to report on ESG, along with the government who implements rules in their Stock Exchange guidelines. As this theme is gaining traction, we feel that early movers are rewarded in their performances, not to speak of the positive impact on society and the environment. The younger generation of investors in particular is increasingly looking into these topics as well.



Is Vietnam a currency manipulator?

The most recent declaration from the US Treasury department that Vietnam, along with Switzerland, is now classified as a currency manipulator is in reality just further proof of the strong performance of the Vietnamese economy. As a developing country, with an inflation rate of 3%-4%, the Trump administration cannot seriously expect strong appreciation of the currency from Vietnam, especially when its currency is one of the most stable in the world against the USD. The three points which led the US Treasury Department to this conclusion were 1) a high trade surplus (that is always the initial goal of low-income economies), 2) high accumulation of foreign reserves (that has been true for Vietnam over the past 1-2 years, but it is occurring from a low base and is mainly a result of high FDI – foreign direct investments), and 3) a high Vietnamese current account surplus (which is usually a sign of an economically successful country, as one can also see this for example in Germany, Switzerland or previously Thailand). Vietnam (with its border to China) is becoming an important political partner for the US in the region, while at the same time, the relationship between the US and the Philippines is fading. The new Biden administration is more likely to find an agreement with Asian economies instead of isolating the US even more in this important part of the world. Nevertheless, this discussion will continue for some time and will further support the currency’s stability, especially in a weak USD environment globally.


2020 USD Index and Vietnamese Dong

(Source: Bloomberg)



Vietnam once again showed its ability to proactively adjust its economic policy when needed and act completely different from what people often expect from a communist country. Vietnam and the UK successfully negotiated an FTA (free trade agreement), eliminating 99% of tariffs between the two countries after seven years from the current level of 65%. Key export items may benefit from the deal, including electronic products, textile and footwear, machinery, wood and wood products and fishery products. Together with EVFTA, the agreement with the UK will enable Vietnam to increase trade with Europe considerably. Currently, the UK is one of the largest export markets for Vietnam, behind the USA, China and the EU.


Top export products to the UK (USD bln)

(Source: GSO, AFC Research)


UK is one of the largest export markets for Vietnam (USD bln)

(Source: GSO, AFC Research)


With the successful handling of the COVID-19 crisis, Vietnam is on track to become the second-largest manufacturing country in the world after China. Many enterprises, such as Apple, Uniqlo, Hangzhou Ciec Group, Foxconn, Pegatron, and Lotte, are looking for business partners in Vietnam to lower the production costs of their products. Furthermore, Vietnam’s local consumer demand is recovering strongly while most other countries in the world are likely to continue to struggle with COVID-19 for the foreseeable future. 


GDP growth by country in 2020 and 2021 (%)

(Source: DBS)


Conclusion for 2021

While we refrain from any forecasts and always want to remind our investors to expect the unexpected (just think back to January 2020!), we have remained consistent with our positive stance towards Vietnam being the single best investment idea since our inception in December 2013. While diversification should always be a major investment criterion within a portfolio and especially within emerging and frontier markets, we are now maybe even more convinced for the next seven years than we have been for Vietnam in the past seven years.

At the end of December 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (8.1%) – an insurance company, VNDirect Securities Corp (4.5%) –an online brokerage firm, LienViet Post Joint Stock Commercial Bank (4.1%) – a bank, Dinh Vu Port Investment & Development JSC (4.1%) – owner/operator of the Dinh Vu Port, and Tien Phong Commercial Joint Stock Bank (3.6%) – a bank.

The portfolio was invested in 49 names and held 2.5% in cash. The sectors with the largest allocation of assets were financials (36.6%) and industrials (21.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.89x, the estimated weighted harmonic average P/B ratio was 1.31x, and the estimated weighted average portfolio dividend yield was 5.20%.

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AFC Asia Frontier Fund - Manager Comment



The AFC Asia Frontier Fund (AAFF) USD A-shares increased by 5.6% in December 2020 with a NAV of USD 1,338.63, closing the year with a 2020 performance of +5.1%. In December 2020, the fund underperformed the AFC Frontier Asia Adjusted Index (+6.5%), the MSCI Frontier Markets Asia Net Total Return USD Index (+8.0%), the MSCI Frontier Markets Net Total Return USD Index (+5.7%) but outperformed the MSCI World Net Total Return USD Index (+4.2%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +33.9% versus the AFC Frontier Asia Adjusted Index, which is up by +17.5% during the same period. The fund’s annualized performance since inception is +3.4%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.76% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.55, all based on monthly observations since inception.

Asian frontier markets ended the year with a strong rally after witnessing an exceptional turnaround in performance since the bottom of March 2020. The fund closed the year with a gain of 5.1% after being down 19.9% at the end of March 2020, gaining 31.3% since March 2020. 

Gains in December 2020 were seen across the board and were led by a Mongolian coking coal producer whose stock price increased by +149% this month, benefitting from an increase in coking coal prices due to a Chinese ban on Australian coking coal imports.

The VN-Index in Vietnam continued its strong run with a rally of 10.2% with large caps, mid-caps, and small-caps all participating in the rally. The main performance contributor for the fund in Vietnam was an industrial park developer which witnessed a +53.9% increase in its stock price since it is a direct beneficiary of the manufacturing shift into Vietnam thanks to its sizeable land bank in the manufacturing hub of Northern Vietnam.

Vietnam’s macroeconomic strength was reflected in the fourth quarter GDP growth of 4.48% which is a significant improvement from the first three quarters of the year and a sign of the very well managed response to the pandemic which has allowed the economy to recover much faster than almost all of its frontier and emerging market peers. Once again, exports posted very strong growth with December showing a growth of 17.6% YoY.



(Source: Bloomberg)


Though the U.S. Treasury labelled Vietnam as a currency manipulator, we believe the possibility of any wide-ranging tariffs on Vietnamese exports to the U.S. look slim as a new administration will take charge in January 2021 as well as due to a developing geopolitical relationship between both countries.



(Source: SSI Securities, 2020 is an estimate)


The DSE Broad Index in Bangladesh gained 11% with the market witnessing a broad-based rally as lower interest rates entice domestic investors into the equity market. Gains for the fund in Bangladesh were driven by a pharmaceutical company whose stock price increased by 10.5% in December leading to a stock price appreciation of 139.1% in 2020 for this company.

The Colombo All Share Index in Sri Lanka gained further with an increase of 8.5% this month on the back of very attractive valuations, lower interest rates and an anticipation of an earnings recovery after two years of very soft earnings growth. For the fund, December gains in Sri Lanka were broad based.

Sri Lanka opened its international airport to tourists at the end of December 2020 and it received its first group of tourists since March 2020. The Maldives, which opened its international airport to tourists in July 2020, has seen an increasing trend in arrivals, especially during the year-end holiday season. This should be positive for the fund’s holding in a Sri Lanka listed resort operator which generates most of its revenues from the Maldives.



(Source: Bloomberg)


Economic indicators in Pakistan continue to improve with exports showing another month of robust growth with December exports growing by 18.3% YoY, while passenger car sales in November grew by 48% YoY. The current account also remains very healthy with November being the fifth month in a row to show a current account surplus, thus leading to greater stability in the Pakistani Rupee. Gains for the fund in Pakistan were led by a passenger car assembler whose stock price increased by 29.2% in December.



(Source: Topline Securities)



(Source: Topline Securities)


In Kazakhstan, the uranium producer the fund holds, saw an increase of 27.2% in its stock price thanks to increasing acknowledgment among governments, specifically in Western countries, that nuclear power is necessary in order for them to achieve their carbon neutral and climate change targets. This should, over the coming 12 to 24 months, see uranium prices re-price higher, towards the average cost of production, which will directly benefit the company.

As we have written in various previous manager comments, digital finance and mobile financial services are taking off in a big way in Asian frontier markets especially after the pandemic given the still high usage of cash in Asian frontier economies. The digital finance subsidiary of a Myanmar conglomerate which the fund holds, reported a doubling of transaction value on its platform in 2020 to USD 8.7 bln which translates into 11.5% of Myanmar’s GDP. However, there is still much more room to grow compared to more developed mobile financial frontier economies like Kenya where transaction values are almost equal to 100% of GDP.

The best performing indexes in the AAFF universe in December were Bangladesh (+11.0%) and Vietnam (+10.0%). The poorest performing markets were Iraq (−4.8%) and Cambodia (+0.3%). The top-performing portfolio stocks this month were a Mongolian coking coal producer (+149.0%), a Mongolian junior copper miner (+66.7%), a Vietnamese industrial park developer (+53.9%), a Mongolian junior gold miner (+36.4%), and a Mongolian iron ore miner (+36.3%).

In December, the fund bought a Pakistani consumer appliance manufacturer and added to existing positions in Mongolia and Vietnam and partially sold existing positions in Bangladesh, Mongolia, Pakistan, and Vietnam.

At the end of December 2020, the portfolio was invested in 74 companies, 2 funds and held 5.8% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (8.1%), and a pharmaceutical company in Bangladesh (4.7%). The countries with the largest asset allocation were Mongolia (19.6%), Vietnam (16.3%), and Uzbekistan (12.8%). The sectors with the largest allocation of assets were consumer goods (28.0%) and industrials (13.9%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.72x, the estimated weighted harmonic average P/B ratio was 0.86x, and the estimated weighted average portfolio dividend yield was 4.02%.

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AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund (Non-US) Class F shares returned +3.4% in December with a NAV of USD 1,341.36, a new all-time high, bringing the return since inception (29th March 2019) to +34.1%, outperforming the Tashkent Stock Exchange Index, which is down 16.4% in USD terms in the same period. For the whole of 2020, the fund returned +22.7% versus the Tashkent Stock Exchange Index which was down by 9.3% in USD terms in the same time. On an annualized basis, the fund returned +18.2% with a Sharpe ratio of 1.35.

December rounded out a great overall year for Uzbekistan. The country has benefitted greatly from its decision to not institute an indefinite shutdown of its economy in response to COVID-19 and let the virus spread naturally, a contradiction to most Western countries, and as a result is expected to report positive GDP growth for the year of 0.6%. 2020 appears to also have been the breakout year for the local capital markets with broad performance among listed companies, and continued robust earnings growth, though the performance did not show up in the index due to several flaws which include not adjusting for share splits and dilution.

AFC Uzbekistan Fund valuations as of 31st December 2020:

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


Estimated weighted harmonic average P/B:


Estimated weighted portfolio dividend yield:



A breakout year in the capital markets

2020 appears to have been the breakout year for the Tashkent Stock Exchange as increasing market participation and continued strong earnings growth saw the market capitalization of the exchange increase to USD 5.1 bln, in light of a 10.2% depreciation in the Uzbek Som versus the US Dollar.

The rate of currency depreciation slowed year over year to 10.2% in 2020 versus 14% in 2019. Though the currency would have been much more stable and in line with our expectations for a 5% to 7% depreciation had oil prices not crashed in April 2020 which led the currencies of two of Uzbekistan’s largest trading partners—Russia and Kazakhstan—to fall precipitously; during April the Uzbek Som depreciated 5.6% as a result. Save for this one-off occurrence, the currency performed much as expected and we anticipate that the depreciation rate will continue to moderate over the coming years as the Central Bank of Uzbekistan has greater ability to lower its policy rate from the current 14% as inflation trends closer to its 10% target (inflation reached 11.1% in 2020).



(Source: AFC Research, Tashkent Stock Exchange)


USD:UZS 1-Year Chart

(Source: Bloomberg)


The annual presidential speech

Every year at the end of December, the President of Uzbekistan gives a speech to the Oliy Majlis (Parliament), discussing what the government achieved over the previous year and plans for the following year. President Mirziyoyev’s recent address, held on 29th December 2020, designated 2021 as the “Year of support for youth and health restoration”.

What was of specific interest to us in this speech, which lasted nearly three hours and was broadcast in Uzbek, Russian and English, were the economic and privatization targets. The government remains focused on achieving 10% or lower inflation, prominent state-owned companies including the gold producer Navoi Mining and Metallurgical Kombinat (NMMC) and UzbekNefteGaz are expected to issue Eurobonds, at least one state-owned bank is expected to be fully privatized, the oil and gas sector will be transitioned to public private partnerships and mineral licenses will be auctioned off to investors.

Notably, the extensive restructuring of UzbekNefteGaz will continue, and in due course, the company will only be responsible for the transportation of gas, while it will market the gas itself separately. State-owned UzAvto which has a de facto monopoly in the automobile industry (through its production of Chevrolet vehicles) will see its monopolistic powers decrease as new automakers compete in the market as it was announced that the auto plant, Roodell ADM-Jizzakh, in Jizzakh region, will invest an estimated USD 70 mln between 2021 and 2023 to establish annual production capacity of 100,000 Lada and Renault cars.

Strengthening corporate governance in the capital markets

On corporate governance in the capital markets, from 1st January 2021 all listed companies on the Tashkent Stock Exchange will be required to file IFRS-compliant annual and semi-annual financial results. Ahead of this change, many of our portfolio companies and all listed banks had reported 2019 IFRS-compliant annual results. The strengthening of corporate governance and transparency among local companies is vital to ensure companies comply with the existing securities law and that minority shareholders are protected. Strong enforcement by the forward-thinking regulatory body, the Capital Markets Development Agency (CMDA), led by former European Bank for Reconstruction and Development banker, Atabek Nazirov, has contributed enormously to this progress, though of course with much more to be accomplished.

Wrapping up this month’s update, below are two photos Scott Osheroff took in the last week of December 2020 while skiing at the Amirsoy Mountain Resort, 90 minutes away by car from Tashkent, which don’t do justice in showcasing just how beautiful Uzbekistan is in winter.



(Source: AFC Research)



Source: AFC Research


At the end of December 2020, the fund was invested in 27 names and held 2.0% in cash. The markets with the largest asset allocation were Uzbekistan (96.6%) and Kyrgyzstan (1.4%). The sectors with the largest allocation of assets were materials (62.5%) and consumer (15.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.98x, the estimated weighted harmonic average P/B ratio was 0.92x, and the estimated weighted average portfolio dividend yield was 9.53%.

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The AFC Iraq Fund Class D shares returned −5.6% in December with a NAV of USD 565.61 underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost 4.8% during the month. For the whole of 2020, the fund lost 9.8% while the index was down 5.4%, and since inception, the fund lost 43.4% while the RSISUSD is down 55.1%.

For Iraq and its equity market, the year ended the same way it began, with a bang that is much louder than its effect. The official IQD exchange rate versus the USD was reset from 1,190 to the new USD rate of 1,460 on Sunday 20th December 2020 – or a de facto devaluation of 22.7%.

Since the AFC Iraq Fund’s FX rate for the monthly NAV valuation, as well as that of its benchmark, are based on the parallel market FX rate, which has been trading at an increasing premium versus the official rate throughout the year, the effect has been smaller than the full 22.7% devaluation as the fund’s monthly NAV’s have been absorbing these increasing premiums throughout the year.

The fund’s estimated 4.4 percentage points of under-performance relative to its benchmark for the year came on the back of two years of very strong outperformance. It was up 6.7% and up 3.6% in 2019 and 2018 respectively, outperforming its benchmark by 8.0 and 18.6 percentage points respectively. The 4.4 percentage points of underperformance for 2020 was partly caused by the timing of the last trading day of the month for the Iraq Stock Exchange (ISX) in December, which was 24th December. The index bases its price in USD on the IQD/USD exchange rate on the last trading day for the ISX, while the fund’s NAV reflects the exchange rate on the last business day of the month which was 31st December 2020. Typically, such a disparity in pricing dates makes only a minor difference to performance, however, this year it had a negative effect of around three percentage points on the fund versus its benchmark given the volatility of the parallel market’s exchange rate as discussed below. This disparity in exchange rates should be corrected in January 2021.

The IQD’s parallel market’s FX price increased throughout the year, from 1,203 at the start of 2020, reflecting several factors. Starting with the momentous events at the beginning of the year that raised the spectre of a US-Iran proxy war fought in the country, followed by the full lockdown from mid-March and the rolling lockdowns that cut the working weeks to four days throughout the summer, and finally by the rumours of a devaluation as last reported on here in October. By the end of November, the IQD parallel market FX rate was about 1,250 IQD to the USD and throughout December increased to about 1,300, just before the devaluation was made official. However, after initially increasing to about 1,470, trading at a premium to the official price, it began to decrease in the following days to about 1,390, trading at a discount to the official price, before rising higher than the official exchange rate as the month concluded.



(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, AFC Research, data as of 31st December 2020)


The last time the IQD went through a significant devaluation was in the early 1990s in response to the United Nations (UN) embargo following the invasion of Kuwait, and before that during the Iraq-Iran war in the 1980s. The official exchange rate, last fixed at USD 1 = IQD 0.31 in 1982, remained the same until the rate and the rules governing the currency’s convertibility changed following the US invasion in 2003. However, the parallel market rate, or what was referred to pre-2003 as the black-market rate, declined meaningfully during the 1980s to about USD 1 = IQD 1.86, and nosedived to about USD 1 = IQD 3,000+ by 1995 as the government resorted to printing money to meet its expenditures as its oil revenues came to an end following the UN embargo in response to the invasion of Kuwait. The UN’s “Oil-for-Food programme” in 1995 improved the rate somewhat but it remained at these elevated levels until 2003. Following the invasion, new IQD notes were issued to replace the old notes and the rate began to recover with the earliest Central Bank of Iraq (CBI) data showing an average new official rate of USD 1 = IQD 1,949 in October 2003. The stabilisation of the country in the following years brought with it a meaningful recovery in the exchange rate as can be seen from the above chart. 

However, the current devaluation is very different from those of the past. The primary reason was to stretch the government’s oil revenues to cover more of its expenditures and thus to preserve the country’s foreign reserves. Nevertheless, a by-product of the devaluation was to address the country’s loss of competitiveness versus its major trading partners whose currencies depreciated significantly versus the USD, and hence the IQD over the years as argued in the government’s reform program, known as the “White Paper”. This argument was vindicated somewhat by the subsequent strong rally of the Iraq Stock Exchange (ISX), as discussed below. Iraq’s still meaningful oil revenues estimated at USD 42.3 bn based on an estimated average Iraqi oil price of USD 38.54 per barrel in 2020, and USD 51.5 bn in 2021 based on an estimated average Iraqi oil price of USD 42.0 per barrel, with foreign exchange reserves of USD 54.9 bn as of early December should preclude the necessity for a further devaluation. The AFC Iraq Fund’s CIO, Ahmed Tabaqchali, was among the experts who were consulted on the government’s White Paper and appeared in a number of government and other videos supporting the necessity of the reforms of the White Paper. Subsequently, Ahmed Tabaqchali was speaking on several regional and local TV channels on the benefits of the devaluation for the country’s traded goods and services sectors. 

The equity market reacted extremely positively to the news of the devaluation, with the Rabee Securities RSISX Index rallying 8.7% in local currency terms in the five days between the announcement of the devaluation and the closing of the month. Among the top gainers in the same five days were Baghdad Soft Drinks (IBSD) up 19.6%, National Bank of Iraq (BNOI) up 9.5%, Asiacell (TASC) up 5.9%, and Bank of Baghdad (BBOB) up 5.1%. The most promising aspect of the rally post devaluation has been the significant increase in turnover following a very subdued start to the month, as well as the increased foreign buying as can be seen in the two charts below.



(Source: Iraq Stock Exchange (ISX), AFC Research as of 24th December)



(Source: Iraq Stock Exchange (ISX), AFC Research as of 24th December)


While the devaluation is an adverse event, the reaction of the equity market and the increased foreign participation indicates that the change is positive for equities. While the missing pieces of Iraq’s re-rating are many and will take time to materialise, this positive reaction to the devaluation suggests that the event might start the process of Iraq’s re-rating – which from a long-term perspective is extremely positive for the equity market and therefore also for the AFC Iraq Fund.

Away from the devaluation drama and the market’s action, Christmas was more special than usual this year as parliament voted unanimously to establish Christmas as an annual national holiday, making permanent the government’s decision two years earlier. Parliament’s vote was preceded by a Vatican announcement that Pope Francis will visit Iraq in March 2021, the first visit by a pope to Iraq and the first visit by the current pope since the pandemic began. 

Iraq’s leaders attended Christmas Mass, including the President and the Prime Minister, calling for the protection of Iraq’s Christian minority and reaffirming the continuity with Iraq’s Christian past – before the sacking of Baghdad by the Mongols in 1258 and the Tamerlane in 1410, the city was a major world centre of Christianity in which “… the Iraq-based Church of the East had bishops and monasteries as far east as Beijing” (Source: Heirs to Forgotten Kingdoms). Yet probably the most poignant was the Prime Minister’s visit to the church of “Our Lady of Salvation”; an Assyrian Christian church that survived two terrible terrorist attacks in 2004 and 2010, with the last one an attack at a Sunday Mass that led to over 52 deaths – the story and photographs were covered in AFC’s Iraq travel report to Baghdad in 2018.


Tahrir Square, at the heart of Baghdad and the focus of political activities, celebrated Christmas this year with a giant Christmas tree.

(Source: Photo by Iraqi photographer Ziyad Matti)


As of the end of December 2020, the AFC Iraq Fund was invested in 14 names and held 10.9% 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 (86.9%), Norway (1.6%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (48.1%) and consumer staples (19.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.26x, the estimated weighted harmonic average P/B ratio was 0.67x, and the estimated weighted average portfolio dividend yield was 3.93%.

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

With kind regards,
Thomas Hugger
CEO & Fund Manager

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