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Asia Frontier Capital (AFC) - February 2020

“Only one form of contagion travels faster than a virus. And that's fear.” ― Dan Brown, American author

“Only one form of contagion travels faster than a virus. And that's fear.”

Dan Brown, American author


AFC Asia Frontier Fund USD A 1,189.10−2.8%−6.6%+18.9%
AFC Frontier Asia Adjusted Index2 7.9%7.6%+0.5%
AFC Iraq Fund USD D563.10−5.7%−10.2%−43.7%
Rabee RSISX Index (in USD) 3.7%−8.2%−56.4%
AFC Uzbekistan Fund F1,068.94+0.8%−2.2%+6.9%
AFC Vietnam Fund USD C1,94.69-3.9%-5.3%+69.5%
Ho Chi Minh City VN Index (in USD) 5.9%8.5%+57.5%
  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.

Covid-19 fears overwhelm global markets

Despite the rate of new infections coming down in China in the latter part of February, the spread of Covid-19 outside of China made markets extremely nervous. Iran, Italy, Japan and South Korea witnessed a big jump in infections in the last week of February which led to global markets correcting as the increasing number of global cases has created uncertainty regarding when Covid-19 will peak and the resulting economic impact beyond the first quarter of 2020. We believe if infections peak by March or April then we could have a return to normal economic activity in the second half of 2020.


Spread of Covid-19 has led to market nervousness – expect global central banks to act

(Source: Bloomberg, data rebased to 100)


Monetary and fiscal stimulus can help sooth markets but key metric would be number of new infections

Governments around the world, but particularly in Asia have already taken monetary and fiscal measures to help contain the near-term economic fallout of Covid-19. The People’s Bank of China cut its one and five year loan prime rates, the State Bank of Vietnam has asked banks to reduce interest payments or increase the tenure of loans to affected clients in the tourism sector, Airports of Thailand has cut rentals at its airports, Indonesia cut benchmark interest rates by 25bps while more developed markets like Hong Kong and Singapore announced expansionary budgets to support the economy. With Covid-19 spreading to countries outside Asia, we expect further monetary easing measures from global central banks – this was reflected in the emergency cut of 50 basis points by the U.S. Fed on 3rd March. However, though these moves will help businesses which are leveraged, its impact on market sentiment are questionable as global markets remain volatile despite the Fed cut and furthermore, interest rate cuts may not stimulate significant demand unless there is confidence that the virus has peaked so people can travel and commute with more confidence rather than working remotely. Hence a recovery in economic momentum in the second half of 2020 is more realistic. 


Markets can regain confidence once cases outside China peak

(Source: European Centre for Disease Prevention and Control)


Markets are providing an opportunity – we like Pakistan and Vietnam post their recent correction

The big sell-off which was witnessed in the last week of February as well as early March has provided opportunities especially in consumption and travel related stocks in Vietnam which generate strong cash flows, have well-established brands and strong balance sheets. As discussed in last month’s newsletter, these stocks tend to bounce back better once virus fears have abated, as was seen during SARS. The Pakistani economy which has less than 5% of its GDP exposed to trade with China also looks more attractive now with the Pakistan KSE100 Index correcting by -8.8% in February. Besides attractive valuations, the macro situation continues to stabilise with the current account deficit contracting significantly while earnings and interest rates bottom and peak respectively. 


Consumption related stocks tend to do better in a post-virus recovery

(Source: Bloomberg, rebased to 100)


Crude oil prices plunge on Saudi-Russian disagreements

The lack of consensus between Saudi Arabia and Russia on production cuts has led to an all-out price war with Saudi Arabia expected to increase production which will most likely lead to a free for all amongst major oil producing countries with the OPEC+ consensus in tatters as of now. WTI Crude prices corrected by more than 30% in a single day (9th March) to USD 28/barrel and are back to price levels last seen in the end of 2015. The majority of AFC Asia Frontier Fund’s country exposure is to net oil importers so these low oil prices will be a big positive for inflation and current accounts of Bangladesh, Pakistan and Sri Lanka. With inflation expected to further come down in Pakistan due to lower oil prices there is a possibility that the State Bank of Pakistan may cut interest rates in its March policy meeting.


Correction in crude oil prices huge boon for net oil importers Bangladesh, Pakistan and Sri Lanka

(Source: Tellimer)


AFC Uzbekistan 2020 Tour Postponed 

According to the latest information, Uzbekistan has not recorded any Corona Virus related cases as of the time of writing. This shows how Uzbekistan and the rest of the region is still uncorrelated with the rest of the world from an economic, financial and travel perspective, despite being in the middle of Asia!

Not only the few travel connections, but also the immediate restrictions (government sanctioned or self-quarantine requirements) on incoming visitors has helped Uzbekistan to maintain a clean bill of health. Unfortunately, these same restrictions on foreign travellers visiting Uzbekistan have forced us to postpone our AFC Uzbekistan Tour 2020 to a later date – tentatively early October 2020. We expect that the restrictions and related quarantine requirements will unfortunately not change in the immediate future and therefore find it prudent to postpone the trip.

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




Sulaimani/Erbil/Baghdad, Iraq   1st March – 30th April   Ahmed Tabaqchali
Switzerland   1st March – 20th April   Thomas Hugger
Netherlands   11th – 18th April   Peter de Vries
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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund Class F shares returned +0.8% in February with a NAV of USD 1,068.94, bringing the return since inception (29th March 2019) to +6.9%, while the 2019 return was +9.3%.

February brought with it the beginning of earnings season for the fourth quarter of 2019. Several of the fund’s holdings reported earnings with our largest holding, Kizilqum Cement, now trading at a P/E of 2.62x and P/B of 0.44x. Further, many of the fund’s holdings which saw profit-taking in January rebounded during the month. 

AFC Uzbekistan Fund valuations as of 29th February 2020

Estimated weighted harmonic average trailing P/E (only companies with profit): 4.16x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 8.43%


Government proactive on Covid-19

The Uzbek government has been proactive in avoiding having any Covid-19 cases in the country thus far. While in late January the government was already conducting temperature checks at international borders and airports, in February Uzbekistan Airways cancelled direct air travel between Uzbekistan and China and Uzbekistan and South Korea. Further, the country banned the export of face masks to ensure ample domestic supply, while sending emergency medical supplies to China. In late February Covid-19 cases were reported throughout the Middle East, namely in Iran, and after one case was reported in Afghanistan the Uzbek government considered closing its border with the country to prevent any spread of the disease. The government’s actions have thus far prevented any panic in the country aside from parents buying face masks for their children, while grocery store shelves and the bazaars are fully stocked and functioning normally.

Uzbekistan’s golden hedges

Amid the global selloff in financial markets due to the Covid-19 virus, Uzbekistan’s economy and financial markets have been well insulated from the fallout due to it having a low correlation with the global economy, which we regard as one of Uzbekistan’s “golden hedges.” This is because the country only opened in late 2016 and hasn’t had the time to thoroughly integrate with the global economy, though this will undoubtedly occur over the coming decade, just as happened in other Asian frontier markets such as Vietnam and Bangladesh.

In its early stage of growth, with the largest manufacturing and agro-industrial base in Central Asia, Uzbekistan is largely self-sufficient in many industries and is in fact a key exporter of value-added products to the region, including nuts, apples, cherries, textiles, fertilizers and etc. Therefore, the country can take its time integrating with the regional and global economy, while maintaining high growth in the process. As the pace of exports accelerates from approximately USD 14 bln in 2019, Uzbekistan’s foreign exchange reserves are likely to swell beyond their current UDS 30 bln and GDP per capita (USD 1,588 as of 2019) will be propelled higher, turbocharging the young domestic consumption story.

Uzbekistan’s second “golden hedge” is quite literally gold and its conservative fiscal policies. Being the world’s 9th largest gold producer, in February Uzbekistan reported that USD 16.59 bln of its USD 29.9 bln of foreign exchange reserves were in gold. With high debt levels in developed and emerging markets and the Covid-19 virus giving Central Banks an incentive to explore ever more extreme forms of monetary policy, such as helicopter monetary policy which is being implemented in places like Hong Kong (where on 26th February 2020 the Hong Kong government announced it would be giving HKD 10,000, or USD 1,300 equivalent, to every permanent resident over the age of 18 in order to “stimulate” the economy), gold appears to be an increasingly valuable currency.

Uzbekistan has a remarkably strong balance sheet. With GDP of USD 53.8 bln and an external debt to GDP ratio of only 40%, the country’s gold reserves at end of February stand at 33% of GDP, one of the highest such ratios in the world. As Uzbekistan continues to privatize and liberalize its economy, perhaps in time the Tashkent Stock Exchange will evolve into a safe haven of attractive asset values and high growth and dividend yields for foreign investors, something quite plausible when considering how far Uzbekistan has come from its hardline Soviet-style of rule experienced under former President Islam Karimov until 2016 when he passed away. Because Uzbekistan has transformed so greatly over the past three years, the coming three years will hopefully be as, if not more, transformative.

Navoi Mining to expand gold production

Government owned Navoi Mining is targeting an increase in annual gold production to 94 tons by 2026 with an investment of USD 4 bln. The investment will be comprised of 40 projects which will include the development of a new gold district. With proven gold reserves of 3,700 tons, and likely much more in inferred and undiscovered resource, this investment program aligns well with the government’s plan to conduct an international IPO sometime in the 2020’s.

At the end of February 2020, the fund was invested in 29 names and held 3.4% in cash. The markets with the largest asset allocation were Uzbekistan (94.0%) and Kyrgyzstan (2.6%). The sectors with the largest allocation of assets were materials (56.3%) and industrials (14.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.16x, the estimated weighted harmonic average P/B ratio was 0.70x and the estimated weighted average portfolio dividend yield was 8.43%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by −2.8% in February 2020 with a NAV of USD 1,189.10. The fund outperformed the AFC Frontier Asia Adjusted Index (−7.9%), the MSCI Frontier Markets Asia Net Total Return USD Index (−6.7%), the MSCI Frontier Markets Net Total Return USD Index (−5.9%), and the MSCI World Net Total Return USD Index (−8.5%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +18.9% versus the AFC Frontier Asia Adjusted Index, which is up by +0.5% during the same time period. The fund’s annualized performance since inception is +2.2%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.92%, a Sharpe ratio of 0.17 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.35, all based on monthly observations since inception.

Global markets witnessed a heavy correction as Covid-19 cases spread to other countries outside of China with Iran, Italy, Japan and South Korea all seeing a big jump in infections. This trend of Covid-19 cases spreading outside China has made markets very nervous with the fear being that an economic recovery could be pushed further out into 2020 but it is still too early to say whether Covid-19 peaks by end of the first quarter of 2020 or in the following quarters.

The fund’s performance this month, despite being negative, significantly outperformed all major indices which saw panic selling. On previous occasions, when global markets have seen large corrections, the fund’s performance has also been relatively better. This is due to the lower correlations of Asian frontier markets with global indices as well as the fund’s portfolio diversification. Even in Vietnam, which could face a near term economic impact due to its close trade and travel links with China, the fund’s Vietnamese holdings fell by approximately -1.4% while the Ho Chi Minh VN Index dropped by -5.8% during the month.



(Source: Bloomberg) *when MSCI World Index has dropped more than 5% in a month



(Source: Bloomberg)
Correlations are Based on monthly returns since inception of the fund on 30th March 2012
Correlations with MSCI World Index


The early impact of Covid-19 on Vietnam is being felt with February 2020 tourist arrivals falling by 22% YoY and foreign direct investment (FDI) disbursements declining by 5% YoY in the first two months of they year. Manufacturing activity also softened with February PMI (Purchasing Managers Index) coming in at a four year low of 49. In terms of the impact on GDP growth, initial government estimates suggest 2020 GDP growth could fall to 5.9%-6.3%, lower than 2019’s level of 7.0%. Though we believe that these estimates will change over the next few weeks, one thing which is very clear in Vietnam is that valuations of both large cap and small/mid cap companies have become very attractive in light of Covid-19 fears. The Ho Chi Minh City VN Index trailing twelve month P/E of 12.6x is back to its 2016 level and we like the large cap companies in the travel and consumption sectors which have been impacted by Covid-19 as the recent correction in their stock prices have made valuations very enticing.

On a positive note, the Vietnamese securities regulator approved the Diamond ETF which will only invest in fully foreign owned or close to fully foreign owned stocks. The ETF will provide a platform for foreign investors to get exposure to fully foreign owned stocks especially in the banking and consumer names without paying the dreaded “foreign premium” which in some cases can go as high as 25-30%. The Diamond ETF will start trading in May 2020 and the fund will look to get exposure in the future to fully foreign owned names through this platform.

Furthermore, the European Union Vietnam Free Trade Agreement (EVFTA) was ratified by the European Union (EU) parliament on 12th February and should go into effect by the second half of 2020. This is not only positive for Vietnamese exports since the EU is Vietnam’s second largest export market but it is also positive for the country’s garments and textile sector as products such as apparel and footwear will eventually face zero duties when exported from Vietnam to the EU. The EVFTA can also help further increase foreign investment flows as companies look to relocate to Vietnam in order to take advantage of lower duties. In addition to this, Vietnamese garment and footwear exports to the EU should have an additional benefit as the EU is set to revoke duty benefits for certain Cambodian apparel and footwear exports in August 2020. 


Covid-19 fears have made valuations in Vietnam very attractive

(Source: Bloomberg)


We continue to like the bottom up consumption story in Bangladesh due to its favourable demographics. However, the country appears to be going down the wrong path with certain policies. This month the Central Bank made it official that all loans except credit card loans will be capped at 9% from 1st April 2020 onwards. This will impact net interest margins across the banking sector and the last time an interest rate cap was introduced a credit boom started and resulted in high NPLs later.

The fund owns BRAC Bank which will be impacted by this new policy if implemented from April and this announcement cost the fund 30 bps in performance as BRAC Bank’s stock price corrected following the news. Excluding the valuation of bKash, BRAC Bank now trades at a P/B of 0.4x which is extreme and in our view fully prices in this new policy. Even on a consolidated basis, BRAC Bank trades at a P/B of 1.1x, its lowest since 2013. We think that the sustainability of such a policy is questionable while bKash continues to hold and build on its dominant position in the mobile financial services market in Bangladesh.

During the month Grameenphone made a BDT 10 bln (USD 118 mln) payment to the telecom regulator out of the BDT 20 bln (USD 235 mln) payment request which was demanded by a Supreme Court ruling in November 2019. Furthermore, the Supreme Court passed another ruling on 24th February 2020 requesting Grameenphone to pay the additional BDT 10 bln within the next three months. This combined amount of BDT 20 bln is only a part of the BDT 126 bln (USD 1.5 bln) claim made on Grameenphone by the telecom regulator. This partial payment by Grameenphone may lead to less operational hurdles being put up by the telecom regulator but the issue has still not been resolved and there remains a lack of visibility on it getting resolved in the near term. The fund does not hold Grameenphone.

With respect to Covid-19, Bangladesh could face an indirect impact as its garment sector is heavily dependent on Chinese raw materials and thus its garment exports could face some pressure at least in the first quarter of 2020.

The IMF and Pakistan reached a staff level agreement with respect to the second review of the loan program which should lead to a disbursement of USD 450 mln in April 2020 as part of the USD 6 bln loan program approved by the IMF in July 2019. However, despite having less than 5% of its GDP exposed to trade with China, the Pakistan KSE100 Index corrected by 8.8% tracking the sell-off in global markets and higher than expected inflation numbers for January did not help market sentiment either. Pakistan continues to be one of our favoured markets due to an improving macro environment as the current account deficit contracts, tax revenues increase, and earnings bottom while interest rates have reached a peak. 

Furthermore, the depreciation of the Pakistani Rupee (PKR) and incentives for exporters appears to now be having a positive impact on the country’s exports which is a healthy sign for its foreign exchange reserves and current account deficit. The big correction in crude oil prices will also provide an additional cushion for the current account as well as lower upcoming inflation numbers. We believe it is possible that the State Bank of Pakistan will cut interest rates in its upcoming policy meeting in March in light of lower inflation expectations. Therefore we continue to like cyclical stocks in the auto and cement sectors on the back of interest rate cut expectations. 


Pakistani exports beginning to grow is a good sign for the economy

(Source: Topline Securities)



(Source: IMS Securities)


Stocks in Iraq and Sri Lanka tracked the global stock market correction despite no major events in these markets.

The best performing indexes in the AAFF universe in February were Mongolia (+1.0%) and Bangladesh (+0.2%). The poorest performing markets were Cambodia (−15.2%) and Pakistan (−8.8%). The top-performing portfolio stocks this month were a Mongolian leather company (+31.5%), a Mongolian tour operator (+30.0%), a Mongolian concrete company (+23.3%), a Mongolian gold explorer (+14.7%), and a Vietnamese construction company (+11.8%).

In February, the fund exited one Bangladeshi holding and partially exited one Kazak holding and two Mongolian and Vietnamese holdings respectively and added to existing positions in Mongolia and Vietnam.

At the end of February 2020, the portfolio was invested in 76 companies, 2 funds and held 4.8% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (9.7%), and a pharmaceutical company in Bangladesh (9.3%). The countries with the largest asset allocation were Vietnam (22.7%), Mongolia (17.9%), and Bangladesh (15.3%). The sectors with the largest allocation of assets were consumer goods (24.5%) and industrials (18.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.18x, the estimated weighted harmonic average P/B ratio was 0.73x and the estimated weighted average portfolio dividend yield was 3.94%.

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AFC Vietnam Fund - Manager Comment


The AFC Vietnam Fund lost −3.9% in February with a NAV of USD 1,694.69, bringing the return since inception to +69.5%. This represents an annualized return of +8.9% p.a. The Ho Chi Minh City VN Index in USD lost −5.9%, while the Hanoi VH Index gained +7.0% (in USD terms) in February 2020. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.68%, a Sharpe ratio of 0.91, and a low correlation of the fund versus the MSCI World Index USD of 0.30, all based on monthly observations.

Rattled by other weak markets around the world, Vietnam’s markets caught the flu over fears about the economic impact of the Covid-19 (Corona virus) outbreak. After an initial sell-off, markets rebounded and traded sideways for most of the month, until a second selling wave set in. With all due respect to the current panic mode of investors, it is worth noting that despite the correction in global stock markets, the S&P 500 for example is still trading at the same level as a year ago whereas the NASDAQ with its lofty valuation is even 10% higher y/y. The Vietnamese stock markets also retreated, unsurprisingly, and ended the month sharply lower with losses of −5.8% (HCMC). All indices were sharply lower with the exception of the Hanoi Index which was pushed up by 2 companies to +7.0%.

Market Developments

February started with a bang for Vietnamese stock markets. After initially losing almost 5% on the first trading day of February on high volume, the market soon calmed down and recovered before the markets fell for a second time in the final week of trading. The world has seen epidemics in the past and usually stock prices were only affected for a very short period, usually for 1 to 2 quarters. Of course, certain industries will be impacted more than others, like the tourism sector – such as air travel and accommodation – which are always hit hardest during these epidemics/pandemics. But any dip in economic activity should be compensated for later in the year, as occurred during the SARS outbreak where the market regained lost ground within 2 quarters (see below).



Our portfolio holdings are not directly affected by this crisis as we do not own aviation stocks or companies in the accommodation sector. Depending on the future path of Covid-19, the underperformance we have seen in the more affected countries could be regained in a relatively short period of time. Let’s not forget that the US markets just hit another all-time high mid-February and European markets were at multi-year highs recently, while Vietnam along with many other Emerging Markets are still much lower YTD and are already pricing in lower than expected economic growth this year, which currently is estimated at around 6%, down from 7% in 2019; although 6% would still stand out in comparison to global developed GDP growth forecasts.

With around 12% of GDP coming from the tourism sector and 20% from the manufacturing sector, the government will most likely step in by ramping up again its almost dormant infrastructure program and therefore should be able to offset most of the damage to the economy. A Moody’s report published last week even suggests that Covid-19 will ultimately be a powerful catalyst to prompt the movement of factories from China to Vietnam, and predicts that this will ultimately boost Vietnam's annual GDP growth by 2%.



(Source: Bloomberg)


When we look back to the outbreak of SARS, which is broadly seen as the best comparison to the current virus, it took about 6 months for indices to recover to previous levels while airlines strongly underperformed during that period.



Covid-19 generates opportunities to buy at deep discounts

Covid-19 scares the whole world due to increasing numbers of infected and deceased people in China, Japan, South Korea, and most recently in Europe and the Middle East, especially Iran. However, there have been very few infected people in Vietnam so far, with only 16 cases as of 27th February, and all of them have already successfully recovered. Vietnam took immediate action and enforced very strict guidelines since mid-January and people generally behaved very responsibly. On financial markets, we observed that many investors are afraid of companies which export products such as vegetables, seafood, fruits, and other agricultural products such as rubber, rice, tapioca etc. to China.  


(Source: GSO, AFC Research)


Among those affected companies, we see a great buying opportunity, for example in Nam Viet Corp (ANV), the second largest catfish exporter in Vietnam. ANV plunged 23.6% YTD and 18.2% alone in February, and is trading now at an extremely attractive valuation with a PER of 3.2x; PBR of 0.9x and a dividend yield of 8.6%. 


Nam Viet Corp (ANV) (May 2019 to Feb 2020)

(Source: Bloomberg)


When Vietnam closed the land border to China in January, investors were afraid that ANV’s business would be severely hit, given that China is their largest export market, but it only accounts for around 20% of ANV total revenues - although ANV transports its goods via container ships and not via trucks to China.


(Source: ANV annual report, AFC research)


It seems that food scarcity in China is becoming a bigger issue and we do expect that Chinese demand for catfish will remain strong; but even if exports to China were to decline by 50% in a worst-case scenario, it would just be a 10% revenue shortfall for ANV and might be compensated by stronger demand in other markets. 


ANV financial statement (VND bln)

Key factors (VND bn)





Net revenue





Gross profit





Operating profit





Profit after tax





Net profit





Total assets










Owner's equity





ROE (%)





ROA (%)





(Source: Audited financial reports of ANV, Vietstock, AFC Research)



With 401 votes in favor, 192 votes against and 40 abstentions, both the EU-Vietnam Free Trade Agreement (EVFTA) and Investment Protection Agreement (EVIPA) were passed by European parliament. The EVFTA and EVIPA are expected to increase Vietnam's GDP by 4.6% and exports to the EU by 42.7% by 2025. Total trade between Vietnam and the EU is USD 56.45 bln in 2019, up 1.11% YoY, in which the latter exported goods worth USD 41.54 bln and imported worth USD 14.9 bln.



Vietnam will clearly benefit from this agreement in the mid-term as many tariffs are slashed to zero, including companies in the textile, footwear, furniture and seafood sector, where we also own listed companies in our portfolio. Once the deal is effective, up to 85% of Vietnamese goods and products exported to the EU will enjoy a 0% tariff immediately; this will gradually increase to 99% over the next seven years.

Necessity is the mother of invention


Some entrepreneurs in Vietnam have come up with some curious solutions to handle the current situation.


Since exports of dragon fruits to China have almost come to a standstill, a local bakery chain, Asia Bakery and Confectionery (ABC Bakery), trying to help local farmers, is promoting a recipe for a delicious dragon fruit bread by replacing 60% of the water used in making the dough with dragon fruit juice. 






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


At the end of February 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (5.9%) – an insurance company, Vietnam Container Shipping JSC (3.6%) – a container port management company, Idico Urban and House Development JSC (3.6%) – an energy, construction, and real estate business, Phu Tai JSC (3.5%) – a home and office furnishings company, and Sametel Corporation (2.9%) – a manufacturer of electrical and telecom equipment.

The portfolio was invested in 61 names and held 5.5% in cash. The sectors with the largest allocation of assets were industrials (34.5%) and consumer goods (29.5%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.17x, the estimated weighted harmonic average P/B ratio was 0.93x and the estimated weighted average portfolio dividend yield was 6.85%

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The AFC Iraq Fund Class D shares returned −5.7% in February with a NAV of USD 563.10 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned −3.7% for the month. In 2019 the RSISUSD was down −1.3% while the fund was up +6.7%.

By February’s end the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −3.7%. The fund, on the other hand, was down −5.7%, which unwound some of the sharp outperformance over the last two years during which the fund was up +3.6% in 2018 and +6.7% in 2019 versus its benchmark which was down −15.0% and −1.3% respectively.

February saw a continuation of the heavy foreign selling in January and mostly in the same foreign favoured stocks, i.e. Baghdad Soft Drinks (IBSD), Asiacell (TASC), and Mansour Bank (BMNS). However, not only was this foreign selling comfortably absorbed by local buying, but its effect on the market was much smaller than previous instances of foreign selling as can be seen from the chart below:



(Source: Iraq Stock Exchange, Rabee Securities, Asia Frontier Capital, daily data)


The most recent instance of such concentrated foreign selling was in January-February 2019, which although much smaller in absolute amounts, led to declines across the board that took the market to multi-year lows. It should be noted that foreigners were buyers too in instances of concentrated foreign selling, but that the selling then soured local sentiment and so was the main driving force behind the weakening prices which lasted even when the selling subsided.

The most promising aspect of the current market’s action is that while overall market turnover expanded meaningfully in both January 2020 and February 2020 versus the turnover of the last 12 months, it was concentrated in the stocks mentioned earlier. Ordinarily it would have been next to impossible for the usual liquidity in each of these stocks to deal with this volume of selling without significant price declines, however local demand absorbed them relatively comfortably. For January and February: TASC was −6.7% and −12.3%, IBSD was −10.3% and −11.9%, and BMNS was −3.0% and 0.0% respectively. Bank of Baghdad (BBOB), another foreign favoured stock, on the other hand was up +7.1% in February, reflecting foreign buying after experiencing heavy foreign selling in January that saw it down −6.7% then.



(Source: Iraq Stock Exchange, Asia Frontier Capital, monthly data)


The market’s action indicates that it is bottoming and that stock prices have discounted enough negatives that would comfortably include all of the current concerns - especially considering that the action in January and February comes at the end of a brutal multi-year bear market with back to back declines of −1.3% in 2019, of −15.0% in 2018, −11.8% in 2017, −17.3% in 2016, −22.7% in 2015, and −25.4% in 2014.

Foreign sellers would have had a smorgasbord of concerns to choose from: expectations of instability arising from the current political chaos in Iraq, ramifications of the US-Iran tensions, and the spill over effects of these on the Iraqi economy. Or the speed and extent of the advance of coronavirus raising fears of a worldwide pandemic, the effects of this spread on the world economy, and the subsequent consequences for oil prices - the major source of Iraq’s earnings.

However, as serious as these concerns are, the latest macro figures show that they had a short-term effect on the Iraqi economy that has subsided - at least this is the message as of end of February. The first of these macro figures is the market price of the exchange rate of the Iraqi Dinar (IQD) versus the USD, which continues to decline and converge to the official price by end of February, after recovering from mid-January onwards as reported here last month. It is now at the lower end of levels that prevailed over the last 20 months since it began diverging in October following the countrywide demonstrations, and spiking following the events at the start of the year as can be seen below:



(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital)


More importantly the premium of the IQD-USD exchange rate for physical USD notes has returned to the lower end of its normal range of 2−4% over the market price of the USD (red line in chart above). This premium widened significantly during the spikes in the market rate for USD earlier in the year but settled down to about an 8% premium by the end of January, and then to under the 2−4% range by the end of February. All of this argues that the FX market is indicating that the disruptions to economic activity over the last few months have subsided considerably. Although the counter argument would be that the decline in the premium is a function of weakening demand in the cash dominated local retail and trade markets. But then the volumes in the Central Bank of Iraq (CBI)’s daily currency auctions, which are a function of bids or orders for USD, have been mostly at the same levels that prevailed over the last 20 months or so and thus it’s difficult to argue that end demand has weakened, but this counter argument cannot be dismissed yet.

The uncertainties, and differing interpretations of the health of the economy, will continue to persist until other macro data for January, February and beyond are released by the CBI over the next few weeks. Whichever interpretation prevails, preliminary data on the deposit component of the monetary base M0 (i.e. commercial bank’s reserve deposits with the CBI) show a meaningful drop in January from the levels of the last few months as can be seen below. A decline in banking reserves held with the CBI would be due to drops in customer (consumer, business and government) deposits held with these banks.



(Source: Central Bank of Iraq, Asia Frontier Capital, data as of end of January 2020)


This drop argues that the significant geopolitical events early in the year had a meaningful negative impact on the economy in January. Although the deposit component of the monetary base M0 by end of January recovered from the larger drop seen in the middle of the month, the preliminary nature of this data precludes any definite answer. Moreover, updated CBI figures would be overall figures which would not broken down into consumers, businesses or government deposits. Moreover, it’s equally difficult to see if this was a phenomenon for January and that February would begin to witness a recovery or if it would be an extension of January.

Until newer data suggests otherwise, the most likely explanation is that the disruptions to economic activity, and in particular to the cash-dominated retail and trade markets, led to a decline in deposit formation as cash was used by companies/corporates to fund operations in an environment of declining sales. Partially supporting this argument is CBI data as end of November 2019 for private sector deposits and loans, which shows continued growth in deposits and loans, with deposits ahead, as can be seen from the chart below. 



(Source: Central Bank of Iraq, Asia Frontier Capital, data as of end of November 2019)


Earnings data from two of the leading banks, National Bank of Iraq (BNOI) and the Commercial Bank of Iraq (BCOI), support the continuation of these trends into end of 2019. BCOI reported a drop of −4% in loans in 2019 over 2018, but deposits increased by +9% in the same period. While, BNOI reported a +120% increase in loans in 2029 over 2018, and deposits increased by 32% in the same period. The difference in performance reflects the different positions of each bank and its growth strategy - which would be seen as other leading banks report over the next few weeks.

Quarterly earnings data, especially for BNOI which has been leading the banking sector in 2019, lend credence to linking the divergence between the market price of the USD from the official price, that began in October of 2019, to the disruptions to economic activity from the start of countrywide demonstrations then. These quarterly data show a sequential slow-down or decline in these metrics by the fourth quarter (Q4). Loans increased by +2% in Q4 over Q3, +22% in Q3 over Q2, and +39% in Q2 over Q1. Deposits on the other hand declined −14% in Q4 over Q3, increased +20% in Q3 over Q2, and +22% in Q2 over Q1 − while Q4 numbers would be affected by year-end requirements for closing the books, which in Iraq are both cumbersome and time consuming. Nevertheless, the decline in deposits in Q4 would argue that the use of cash, through deposit withdrawals, by companies/corporates to fund operations might have started earlier than January as argued in an earlier paragraph.

Overshadowing the economic data is the continued political paralysis and the inability of the political class to deal with the demands of the five-month long youth-led protest movement. In the last few weeks an unsustainable holding pattern has developed in which the nationwide demonstrations persist, in passion if not in the same intensity of earlier months, while the repression apparatus of the state and the sub-actors continues to take its toll in casualties- both in death and injuries. For now, the political class’s existential fear from the demonstrations has subsided enough for it to return to the old political squabbles as can be seen from the difficulties that the prime minister-designate faced in forming a government. These proved too difficult to surmount which eventually forced him to withdraw his nomination. This means a new search began for the illusive candidate that would square the circle- i.e. satisfy the protest movement’s demands for change, while preserving the status quo for the political elite.

The political class’s existential fear from the demonstrations will continue to ebb and flow, and thus these political uncertainties are likely to continue. However, the economic consequences would be the same whether a new government forms under another prime minister-designate, or if the current caretaker government continues to limp on. These consequences would be that no new budget will be passed and thus the government continues to implement the current spending parts of 2019’s expansionary budget. While it is difficult to estimate the medium-term effects of the disruption to the world economy from the coronavirus and thus on oil prices, the government has enough fire power to continue this expansionary budget at least for 2020. This firepower is in the form of a likely year 2019 surplus of USD 2-4 bln for a total of a three-year surplus of USD 25-27 bln - more than enough to compensate for any shortfall in oil revenues during 2020.

Drops in oil revenues in 2020 are likely to happen given the severe drop in global oil prices over the last few weeks as seen in February’s export data. Oil exports in February were about USD 5.1 bln down from USD 6.2 bln in January, reflecting a drop in Iraqi oil price from USD 60.14 per barrel in USD 51.37. However, exports increased to 3.887 mln barrels per day (bpd) in February, up from 3.694 mln bpd in January and therefore revenues from oil exports would be about USD 5.5 bln, and not USD 5.1 bln, if February had 31 days and not 29 days making for better month-on-month comparisons. 

The collapse of the OPEC+ production cut talks on Friday 6th as well as the ensuing price war, led to a collapse in oil prices that brought back memories of the last such price war in 2014, and with it new predictions for extremely low prices going forward. While the effects of the coronavirus on the world economy will be profound in Q1/2020, yet there is so much uncertainty regarding the extent and the continuation of these effects in the rest of the year. Different uncertainties then did not stop predictions calling for oil prices to go under USD 10/bbl and stay there forever, and as such the current assumptions merit a rethink. On reflection, a number of thoughts regarding the Saudi-Russian price war amongst themselves and against shale producers emerge: The stated reason to stop the shale market share growth seems to contradict all recent research that suggests that the shale industry’s growth has peaked - especially with the end of financing that provided past growth; while both combatants on paper have the resources to wage the price war, yet the effects of the 2014 price-war on both were profound which led to an up to an unimaginable alliance in the first place. Given that effects of a new price war will be equally profound, it seems logical that political considerations will ensure that such war does not last, and that just as political reasons led to the price war, that subsequent ones will end it.

As of the end of February 2020, the AFC Iraq Fund was invested in 14 names and held 0.3% 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 (1.3%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (53.3%) and communications (19.8%). The fund's estimated weighted harmonic average trailing 12 months P/ E ratio (only companies with profit) was 12.78x, the estimated weighted harmonic average P/B ratio was 0.59x and the estimated weighted average portfolio dividend yield was 6.18%.

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I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
CEO & Fund Manager

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