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Asia Frontier Capital (AFC) - January 2020 

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ― Warren Buffett

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

― Warren Buffett

AFC Asia Frontier Fund USD A 1,223.58−3.9%+22.4%
AFC Frontier Asia Adjusted Index2 +0.3%+9.1%
AFC Iraq Fund USD D597.26−4.8%−40.3%
Rabee RSISX Index (in USD) −4.7%−54.7%
AFC Uzbekistan Fund F1,060.64−3.0%+6.1%
AFC Vietnam Fund USD C1,764.06−1.4%+76.4%
Ho Chi Minh City VN Index (in USD) 2.6%+67.7%
  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.
  4. Fund was launched on 29th March 2019

2019-nCoV fears gripped the market

The recovery in investor sentiment from U.S. – Iran tensions was short lived as the 2019 Novel Coronavirus (2019-nCoV) which originated in Wuhan, China became both a national and an international emergency. Though the mortality rate so far is not as high as the 2003 SARS outbreak, more important is the acceleration in the number of infections since the outbreak was made public. A slowdown in the rate of infections would be good not just for the Chinese economy but also for the global economy and for investor sentiment. China’s role in the global economy is much larger now than it was in 2003 as China now accounts for 15% of global GDP compared to 4% in 2003. Therefore any prolonged impact from the 2019-nCoV can have near term repercussions for the global economy.


Mortality rate of 2019-nCoV low but a slowdown in infections would calm markets

(Source: Business Insider, South China Morning Post, Centre for Disease Control and Prevention)
(2019-nCoV data as of 10th February 2019)


Travel and trade flows could get impacted in the near term

Not surprisingly, global equity and commodity markets did not react very well to the news of this pandemic. The two near term implications will be felt on tourism and trade. China is the world’s largest outbound tourism market with 150 mln outbound travellers recorded in 2018. Due to the fear of contagion there is likely to be a lower number of Chinese travellers and the government has already banned outbound tours. A lower number of Chinese tourists will be a near term negative for various economies that are reliant on tourists, especially Asian economies. Within our fund universe, Cambodia, Laos, Maldives, Myanmar, Sri Lanka and Vietnam could see lower tourist arrivals at least in the first quarter of 2020. 



(Source: Bloomberg, country tourism authorities)



(Source: Bloomberg, country tourism authorities)


The other near term impact from a continuing fall out of the 2019-nCoV will be on trade flows. China is amongst the largest trading partners for many global economies, particularly in Asia. With Wuhan under lockdown and other parts of China also seeing an elongated Lunar New Year break, the slowdown in intermediate goods flowing out of China could impact the supply chains and manufacturing activities of other countries. The chart below shows that all the major economies globally are dependent on the supply of Chinese intermediate goods. 


There could be some near term disruption to global manufacturing activities

(Source: Bloomberg)




Declining crude oil price is big positive for Bangladesh, Pakistan and Sri Lanka

A positive spillover of the correction in commodity prices is that lower crude oil prices will benefit our larger markets like Bangladesh, Pakistan and Sri Lanka which are all net oil importers. Lower crude oil prices will further ease their current account deficits which have already been contracting over the past year and will also help ease inflation concerns in light of higher food prices over the past few months.


Correction in crude oil prices is very positive for Bangladesh, Pakistan and Sri Lanka

(Source: Bloomberg)


Markets have recovered from such events in the past – this provides a buying opportunity

Though the stock markets may be fearful in the near term, we view any correction due to the 2019-nCoV as an opportunity to accumulate positions in good companies during this period of uncertainty. Stock markets, consumption, travel and economic growth have recovered in the past from such incidents, be it virus or security related. The chart below reflects this as the consumer discretionary sector in Asia Pacific outperformed the Hang Seng Index and the Straits Times Index once the recovery from the SARS outbreak was in place. The current events have only made valuations in our markets more attractive!


Consumer Discretionary stocks outperformed in the post-SARS market recovery

(Source: Bloomberg)



(Source: Asia Frontier Capital, Bloomberg)

Below please find the manager comments relating to each of our 4 funds for the month of January 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 February – 1st June   Ahmed Tabaqchali
Zurich, Geneva, Basle, Zug,
  25th March – 20th April   Thomas Hugger
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AFC Vietnam Fund - Manager Comment


The AFC Vietnam Fund lost −1.4% in January with a NAV of USD 1,764.06, bringing the return since inception to +76.4%. This represents an annualized return of +9.7% p.a. The Ho Chi Minh City VN Index in USD lost −2.7%, while the Hanoi VH Index lost −0.3% (in USD terms) in January 2020. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.52%, a Sharpe ratio of 1.02, and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.

Market Developments

The stock market in Vietnam had a very special start to the year. Lunar New Year began on 23rd January, shortening the number of trading days in the month. There was very little turnover in all market segments which was accompanied by a decline in the various indices in the first few days and especially in small caps which were under immense pressure. The Vietnam Small Cap Index lost more than 8% since Christmas 2019, and from a technical angle now trades in tremendous oversold territory, which was in the past often a major turning point.


Vietnam Small Cap Index from April 2014 to January 2020

(Source: Bloomberg)


Mid-month, blue chips started to turn positive, mainly due to the strong performance of banking stocks, while mid-caps followed a few days later. This was followed by small-caps starting to bottom out just before the Tet holiday break. When markets continued trading after the holidays, a 5.5% plunge followed, after other markets around the world corrected in previous days on news of the Coronavirus 2019-nCoV. Vietnam reported only 2 infections as of 30th January, but the government temporarily closed the border to China and took other actions to reduce infection risks. Of course, we are also watching the developments and checking our portfolio, but with no direct exposure to the tourism industry, we currently see only a few companies very mildly affected, with other companies potentially even profiting from the current situation. That also shows in the performance of our portfolio, especially during the last two trading days, where our losses were very limited. However, all epidemics over the past several decades had only a short-term impact on financial markets.



We see the recent development as a possible major turning point as a new wave of value investors are now looking into Vietnam, just as we did 6-7 years ago. During the past 2 years all frontier markets were confronted with heavy redemptions leading to massive outflows in funds of all names and sizes. Not only Vietnam, but the whole frontier universe has seen selling pressure with even the biggest funds losing up to 80% of their assets. Naturally, these liquidations trickled through to most individual stocks, as we have unfortunately also had such experiences in some of our holdings. While ETF investing compensated for the selling in index heavyweights, a lack of buyers in the rest of the market led to valuations which now are too cheap to ignore – something which also astonished us when we analyzed Vietnamese stocks for the first time in 2012/2013 with similar valuations as today. 

Meanwhile, most companies have already reported their results for the final quarter of 2019 which showed overall good progress in our portfolio companies. With most full year earnings now available, we see amazingly undervalued stocks, something we can only dream of in developed markets. With an average P/E of just 7x and more than 10% of our holdings trading between just 2.5 to 5 times earnings, new investors are now discovering this value after an easing in trade tensions between the US and China. As soon as the selling from “old” investors stops, we should see big jumps in those stocks, similar to what we experienced between 2012 and 2014 when value stocks rose independently from the major indices. 

To visualize this tremendous value, we only need to look at the valuation of our current top 5 positions:



(Source: Viet Capital Securities, AFC Research)


All stocks offer dividend yields between 3.6-10.6% with a strong balance sheet and tremendous re-valuation potential. We have to keep in mind that even after gaining 100% in these stocks, valuations would still be at a discount to the market while still trading with a decent dividend yield! This is exactly what we experienced in the last investment wave a few years ago when we were the “new” investors...

The reason for our underperformance in January against the main index (HSX) was the sell-off in small caps earlier in the month but, as mentioned in previous reports, this index has a composition of mostly expensive banks and Vingroup-stocks. Despite very attractive valuations in the small- and mid-cap segment, many investors, including ETF’s (which have no other choice), are still chasing the same few stocks, regardless of their high and unattractive valuations. Currently, just 31 companies out of more than 1,600 listed stocks have a market capitalization of more than USD 1 bln – and many of these 31 stocks only became “Unicorns” (companies with a market cap larger than 1 bln) due to their excessive valuations. 

Listed Stocks by Market Capitalization (in mln USD)

(Source:, AFC Research)


Vietnam got more aggressive in solar energy in 2019

According to the ASEAN Post, Vietnam is the leading solar power country in South East Asia with a total installed capacity of 4,450 MW, comprising 44% of total ASEAN capacity. The Vietnamese Government is strongly promoting and supporting renewable power investments such as solar and wind power.


Solar installation process in ASEAN 2018-2019 (MW)

(Source: ASEAN Post, Renewables Now, IRENA, IEEFA)


However, the power industry is now facing challenges with insufficient power transition capacity. According to the Ministry of Industry and Commerce, the national power transition lines have only absorbed one third of total solar power capacity. Most transition lines are overloaded and some key lines are operating at 360% of capacity. It is estimated that it will take years or even decades for Vietnam to build up and improve its power transition lines. 

There are very few investment opportunities in the green energy segment in Vietnam, but one of our companies, Sametel Corp (SMT) realized that this creates an interesting business opportunity for micro solar plants and therefore transformed its business from a fiber optic cable producer to a micro solar plant manufacturer. Within just a few quarters of restructuring its business, 80% of its Q4/2019 revenues were already generated from its new solar business and with a much higher profit margin than its former main business. Demand shifted from huge solar power plants with hundreds of MW capacity to supply micro solar power systems to the many factories in Vietnam which consume a lot of power and want to have their own small solar power panels on their factory roofs. These solar power systems not only help factories to reduce their power bills, but also generate revenue from selling excess electricity back to Electricity of Vietnam Group (EVN). SMT provides various services from consulting and solar power system installations. According to Mr. Canh, CEO of SMT, the company recently completed a 1MW project for a seafood factory in Soc Trang Province. This rooftop solar system cost around VND 17 bln and its lifetime is expected to be around 30-40 years with an investment payback period of around 8 years. One of the Vietnamese government’s subsidies is that excess electricity from such factories can get a 20 year off-take agreement from EVN at a fixed price of USD 9 cents per kWh which compares to only USD 5 cents per kWh for hydro power plants.


SMT completed solar power project in Soc Trang Province

(Source: Sametel)


Tet holiday in Vietnam

Tet holiday, usually called Traditional Lunar New Year, is the most important annual event for Vietnamese people. All family members will gather on the first days of the New Year to greet and send wishes and lucky money to each other. In order to prepare for Tet holiday, people bake a “Chưng” cake, which is made from sticky rice with green bean and pork filling, wrapped in banana leaves and boiled for 24 hours. For the first time in many generations, this year’s “Chung” cake is prepared differently. Instead of using pork people used chicken or fish, due to the sky rocketing price of pork.


Livestock price (thousand VND/kg)

(Source: Vietnam Livestock Department, AFC Research)


During the 2019 Tet holiday, pork prices were around VND 30,000 to 50,000 per kilogram, but this year, due to the African swine flu, prices in supermarkets around Ho Chi Minh City shot up to around VND 150,000 per kilogram, around 3 times higher than last year!


Traditional Chưng cake for Tet holiday

(Source: VnExpress, FPT Online, AFC Research)




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


At the end of January 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.0%) – an insurance company, Vietnam Container Shipping JSC (3.9%) – a container port management company, Phu Tai JSC (3.8%) – a home and office furnishings company, Idico Urban and House Development JSC (3.6%) – an energy, construction, and real estate business, and National Seed JSC (3.0%) – a producer of agricultural seeds.

The portfolio was invested in 59 names and held 4.1% in cash. The sectors with the largest allocation of assets were industrials (32.8%) and consumer goods (29.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.57x, the estimated weighted harmonic average P/B ratio was 1.00x and the estimated weighted average portfolio dividend yield was 6.95%

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AFC Uzbekistan Fund - Manager Comment



The AFC Uzbekistan Fund Class F shares returned −3.0% in January with a NAV of USD 1,060.64, bringing the return since inception (29th March 2019) to +6.1%, while the 2019 return was +9.3%.

On 24thJanuary 2020 President Mirziyoyev gave his annual speech to parliament where he highlighted several areas of focus for the coming years as Uzbekistan continues its opening up. This included increasing the quality of education, directing half of the government’s budget surplus into infrastructure projects, decreasing/selling stakes in 3,000 state-owned enterprises (SOE’s) and transitioning 37 more types of goods from being regulated by the government to the free market.

During the month we saw an increase in liquidity in several of our portfolio companies, which we expect to continue to increase, though the final days of the month saw profit taking is some of our portfolio holdings which led the NAV of the fund to decline.

AFC Uzbekistan Fund valuations as of 31st January 2020:

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


Estimated weighted harmonic average P/B:


Estimated weighted portfolio dividend yield:



The Urbanisation Tipping Point:

When considering the economics of most frontier markets, specifically in Asia, migration to cities is a key driver of GDP growth as population density leads to a large labour force, spurring the rise of an industrial manufacturing base and an ensuing boom in consumer spending which helps to form a middle class. Well, during the Soviet Union a concept called the “propiska system” (English: inscription) prevented the freedom of movement. Say for example you lived and worked in a rural town in Belarus where you had your "propiska", and you wanted to move to Moscow without a job. Unless you found an unofficial way to make a living you would probably move back to Belarus after a few weeks, for without a "propiska" you couldn’t get a job, your children couldn’t go to school and you couldn’t use the medical care system. After the Soviet Union's collapse, most of the “new” succession countries dismantled this system, but it remained in Uzbekistan. A similiar (and also controversial) system is still used today in China, called the "hukou" which designates between agricultural (rural) and non-agricultural (urban) status.  

During President Mirziyoyev’s annual speech to Parliament, he discussed the “discrimination” which the propiska system creates, preventing the freedom of movement domestically. It is widely assumed that sometime this year the system will be either liberalized or eliminated. The result will likely be a boom in migration into major urban centres (i.e. Tashkent, Samarkand, Bukhara, Namangan, Fergana, etc.) which will drive demand for real estate and help to centralize manufacturing around these cities as the pool of cheap labour intensifies, a big plus for our cement, steel and other materials holdings. As the cost of capital falls from the mid 20 percent range and inflation is tamed through the Central Bank’s 2020 transition to an inflation targeting regime (with a focus for 10% inflation in 2021) Uzbekistan has many of the ingredients needed to follow the path of middle class success stories such as Vietnam and Bangladesh, whose respective GDP per capita in 2019 were USD 2,739 and USD 1,906, compared with Uzbekistan’s GDP per capita of USD 1,588.   

TBC Bank issued preliminary banking license:

During the President’s annual address, he mentioned that “If we do not sell banks, there will be no development.” More directly, if state bank participation in the economy is not curbed, the lack of competition will stifle the sector which is so integral to Uzbekistan’s development. The timing of his comments were serendipitous as dual listed TBC Bank, listed in London and Georgia, was issued preliminary permission to establish a local commercial bank by the Central Bank of Uzbekistan on 21st January 2020.  

With TBC’s technological infrastructure, which has helped it grow rapidly in recent years in the area of consumer lending, its entrance into Uzbekistan could be the catalyst for modernization of the antiquated sector, giving local banks a much-needed wake up call.

With 30 banks in Uzbekistan, over the past few years the financial services industry has benefited from largely protectionist measures with only four local subsidiaries of international banks—Ziraat Bank from Turkey, KDB from Korea, Tenge Bank from Kazakhstan and Saderat from Iran having a presence in the country. With what has been a historically closed market, banks had little incentive to digitize, provide good customer service and eliminate bottlenecks as there was more than enough business preventing the need to invest to compete. 

With foreign banks entering the market—Halyk Bank’s entrance in 2019 through its local subsidiary Tenge Bank in 2019 and now TBC—the banking landscape is set to change as foreign banks have access to cheaper capital than their domestic peers and also are more likely to be willing to fight for market share. TBC in particular offers an edge of scalability through its plans for a digital banking platform focused on consumer finance which will decrease friction for clients and enable it to expand its presence nationwide, focusing on customer service and a diverse product offering, rather than a nationwide physical branch buildout. 

In spring 2019 TBC acquired a 51% stake in Payme, the largest fintech mobile application in Uzbekistan. With over 1.3 million users, it enables users to sync bank and stock brokerage accounts, pay utility bills and top up internet and mobile credit, etc. 

The banking sector is one we are watching closely and if TBC receives its full banking license, the sector could present some further opportunities for the fund.

At the end of January 2020, the fund was invested in 29 names and held 2.8% in cash. The markets with the largest asset allocation were Uzbekistan (94.4%) and Kyrgyzstan (2.8%). The sectors with the largest allocation of assets were materials (54.8%) and industrials (16.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.27x, the estimated weighted harmonic average P/B ratio was 0.71x and the estimated weighted average portfolio dividend yield was 8.52%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by −3.9% in January 2020 with a NAV of USD 1,223.58. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−3.3%), the AFC Frontier Asia Adjusted Index (+0.3%), the MSCI Frontier Markets Net Total Return USD Index (-0.1%), and the MSCI World Net Total Return USD Index (-0.6%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +22.4% versus the AFC Frontier Asia Adjusted Index, which is up by +9.1% during the same time period. The fund’s annualized performance since inception is +2.6%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.90%, a Sharpe ratio of 0.21 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.33, all based on monthly observations since inception.

The New Year began on a very volatile note for global equity markets with the month beginning with U.S.-Iran tensions over the killing of Iran Revolutionary Guard General Qasem Soleimani while at the end of the month the outbreak of the Novel Coronavirus in China as well as reported cases in multiple other countries led to a pessimistic stock market environment. Depending on how long it takes to control this pandemic there will likely be global economic repercussions due to the importance of China’s economy as well as its interlink with the global economy with respect to supply chains and travel. 

Within our fund universe, the larger market which is most exposed to China in terms of trade and tourism is Vietnam and there could be a near term impact on the Vietnamese economy as discussed further below. Countries within our universe which are least exposed to trade and tourism with China are Bangladesh and Pakistan and not surprisingly, both markets ended the month in the green with the Dhaka Stock Exchange Index and the KSE100 Index increasing by 0.4% and 2.2% respectively. This is another indication of the lower correlation of Asian frontier markets amongst each other as well as with global markets.

Sentiment in Pakistan remained fairly positive as the State Bank of Pakistan held its benchmark interest rate as expected. However, inflation for January 2020 came in higher than estimated due to higher food prices. We discussed in our 2019 Review and Outlook for 2020 that higher food prices could delay the Central Bank from cutting interest rates. Expectations for interest rate cuts have now moved towards the second half of 2020 compared to the earlier consensus of end of the second quarter of 2020. Cyclical stocks continued to rally with cement stocks doing well as domestic cement volumes have held up despite slower economic growth. One of the Pakistani cement companies the fund owns is Lucky Cement which was up +11.3% this month. 


Falling interest rates and improving economy have historically led to a rally in the KSE100 Index

(Source: Bloomberg)


In Sri Lanka, the new government has taken further action possibly to attract more foreign investment as well as kick start economic growth. After announcing tax concessions in November 2019, the government announced wide ranging corporate tax cuts this month which will have a positive impact on almost all sectors of the economy. These two rounds of tax concessions in November 2019 and January 2020 should be very positive for earnings growth and the fund is well exposed to banking, consumption and telecom stocks, all of which should benefit from these tax concessions. However, with a large fiscal deficit and a high debt to GDP ratio, the government would need to execute these new tax plans effectively. 

On balance though, 2020 should be a better year for the Sri Lankan economy as business and consumer sentiment remains high post the presidential elections. Furthermore, the Central Bank of Sri Lanka cut benchmark interest rates by 50 bps which should also be positive for market sentiment. This interest rate cut is not a significant surprise for us as we wrote in our 2019 Review and Outlook for 2020 that central banks in our universe will be more dovish in order to support economic growth. 

Tax cuts will boost earnings growth in Sri Lanka

(Source: CT CLSA Securities)

Bangladesh witnessed a volatile month with the Dhaka Stock Exchange DSEX Index trading down -9.4% by the second week of January with the usual worries regarding the banking sector and regulatory issues surrounding the biggest mobile phone operator in Bangladesh, Grameenphone. The market then recovered significantly to close the month in positive territory with a +0.4% gain. There were two major reasons for this (1) Valuations are now extremely attractive with the MSCI Bangladesh IMI Index trading at a P/E of 10.1x, a five year low, which brought in local buyers including company insiders as per stock exchange announcements. (2) There may be some road towards a compromise between Grameenphone and the telecom regulator as Grameenphone has made a request to pay a part of the claimed dues over a twelve month period – this led to a big improvement in market sentiment as well. 

As discussed previously, on a bottom up basis companies continue to be fundamentally stable and are growing earnings. Beximco Pharmaceuticals, the fund’s biggest position, declared earnings growth of 17.5% for the December 2019 quarter. However, despite declaring very good results the stock was down -7.6% this month which hurt overall fund performance. The fund owns the London listed GDR of Beximco Pharmaceuticals which currently trades at a 35% discount to the local listing in Dhaka.


Poor policy making reflected in valuations – Bangladesh markets and P/E at 5 year low

(Source: Bloomberg)


Before the start of the Lunar New Year holidays, the Vietnam Ho Chi Minh VN Index was up +3.2% for the month but the outbreak of the Novel Coronavirus changed sentiment dramatically once markets reopened for trading with the VN Index losing -5.5% in the last two trading days of the month. This impacted fund performance the most during the month.

The Novel Coronavirus pandemic can have a short term negative impact on the Vietnamese economy due to its close links with the Chinese economy. (1) At the end of 2019, Chinese tourists accounted for 32% of total tourist arrivals into Vietnam and Chinese arrivals have also been amongst the fastest growing, with a cumulative growth of 24.4% between 2014-2019. This growth is much higher than the 18% cumulative growth for total tourist arrivals into Vietnam for the same period and a slowdown in tourist arrivals could impact retail sales as well as the broader tourism sector. (2) Vietnam depends on raw materials from China for its manufacturing sector with China accounting for majority of Vietnamese imports – any prolonged pause to economic activity in China could impact supply chains which Vietnam is dependent on thus impacting manufacturing activity. (3) Chinese companies have been relocating manufacturing operations to Vietnam in order to overcome uncertainties over future trade tensions and therefore China has become one of the larger foreign direct investors into Vietnam – in 2019 China was the third largest foreign direct investor in terms of commitments. With travel and decision making in China expected to be delayed in the near term, Vietnam could see a short term slowdown in foreign direct investment.

Negative short term market sentiment in Vietnam in our view will open up tremendous buying opportunities across both large cap and small/midcap names, as has been seen in the past, the markets recover from any major pandemic. We believe that the current virus related fears have given very good buying opportunities particularly in certain beverage, modern retail and tourism stocks and we continue to be positive on our Vietnamese holdings. 



(Source: General Statistic Office of Vietnam)



(Source: SSI Securities)


Other major detractors to performance this month were Mongolia, Iraq and Uzbekistan. The best performing indexes in the AAFF universe in January were Pakistan (+2.2%) and Kyrgyzstan (+1.6%). The poorest performing markets were Iraq (−4.7%) and Mongolia (−4.0%). The top-performing portfolio stocks this month were a Mongolian junior gold mining company (+28.6%), a Mongolian real estate company (+15.2%), a Mongolian coal miner (+14.4%), a Mongolian trading company (+14.2%), and a Pakistani cement company (+11.3%).

In January, price weakness in a Vietnamese beer producer gave the fund an opportunity to initiate a position in this company. During the month, the fund also partially exited one Mongolian and one Vietnamese holding and added to existing holdings in Mongolia and Vietnam.

As of the end of January 2020, the portfolio was invested in 77 companies, 2 funds and held 3.2% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (9.5%) and a pump manufacturer from Vietnam (8.4%). The countries with the largest asset allocation were Vietnam (23.0%), Mongolia (17.6%), and Bangladesh (16.6%). The sectors with the largest allocation of assets were consumer goods (25.2%) and industrials (17.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.10x, the estimated weighted harmonic average P/B ratio was 0.76x and the estimated weighted average portfolio dividend yield was 3.87%.

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The AFC Iraq Fund Class D shares returned −4.8% in January with a NAV of USD 597.26 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned −4.7% for the month. In 2019 the RSISUSD was down −1.3% while the fund was up +6.7%.

The year for Iraq and its equity market started with two momentous events that raised the feared spectre of a US-Iran proxy war fought in the country and all of the instability that would come with it. In quick succession, the US’s assassination in Baghdad of Iran’s top general was followed by the Iranian missile attacks on Iraqi military bases housing US military units. Initially the market shrugged them off, discounting the possibility of military conflict as unlikely, but by January’s end, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down –4.7%.

However, this decline masks two contradictory trends. The first of which was heavy selling in foreign favoured stocks, such as Baghdad Soft Drinks (IBSD), Asiacell (TASC), Bank of Baghdad (BBOB) and Mansour Bank (BMNS). This was most likely foreign selling, by either Iraq-focused equity funds or most probably by frontier market funds with small weights in Iraq, likely over concerns of potential political instability following the two momentous events. These stocks were down between -3% to -10%. This trend was contrasted by heavy buying in local favoured small cap cyclical stocks that had a stunning rally by early January, but which cooled off by month end as foreign selling in IBSD, TASC, BBOB and BMNS picked up steam. But this was not before posting solid month end gains on the back of strong performances in 2019 as discussed in December 2019. Certain stocks in particular had impressive performances during the month as shown in the table below (figures rounded):


January performance of selected stocks: 

(Source: Iraq Stock Exchange, Asia Frontier Capital)


These conflicting trends are in-line with the 2019 themes as discussed in the “2019 Market Review and 2020 Outlook” in which the market’s bottoming action was seen through its improved dynamics throughout 2019. The first improved dynamic was its discriminating nature – in that negative developments in certain stocks were confined to these stocks and did not spread to others in the sector or to the overall market. The second improved market dynamic was the broadening of breadth, and in particular, the market’s focus on the hopes of an earnings recovery for some of the industrial stocks even before any signs of such recovery can be detected in their earnings reports during 2019.

The fears that prompted the heavy foreign selling might be justified on the grounds of instability arising from the current political chaos in Iraq and the spillover effects of these on the Iraqi economy. The countrywide demonstrations continued unbated in the face of unprecedented violent state crackdowns, however, this youth-led protest movement continues to shape events in the country. Since October these ranged from forcing the political elite to implement reforms that would threaten their interests, to its influence on the choice of the current prime minister designate replacing the forced out prime minister. The prime minister designate faces considerable challenges in the short time that will require him to produce changes, satisfying the protest movement’s demands for change, while preserving the status quo for the political elite. In addition to balancing the conflicting demands of the protest movement and the political elite, he would need to navigate any potential re-escalation of tensions between the United States and Iran. 

Yet, as these events are being played out, their effects – real and feared – can be seen in the action in the exchange rate of the Iraqi Dinar (IQD) vs the USD. The market price of the USD versus the IQD by month end returned to levels that prevailed over the last 20 months after spiking higher following the events at the start of the year. This is highlighted in the chart below.



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


Such spikes have happened before, during periods of geopolitical crisis in the summer of 2019 which included the tanker hits and the attacks on Saudi oil installations; and during local political crises such as the elections in May 2018, and more recently the nationwide demonstrations that started in October 2019. The current spike was probably a response to sharply increased local demands for physical USD notes as flight to safety prompted this demand. Cash transactions dominate activity in the local retail and trade markets where the IQD-USD exchange rate for physical USD notes trades at a slight premium to the market price (in red) in the above chart. This premium widened during the spikes in the market rate for USD but settled down to about an 8% premium versus the usual 2 - 4% premium. This wider premium likely reflects local traders’ hoarding of physical USD notes in preparation of a possible future, real or imagined, shortage – but these fears have moderated significantly from the start of the year.

While the FX market is suggesting that the disruptions to economic activity have subsided, other data is needed for a full evaluation of their effects. The first of this data would be broad money or M2, as a proxy for economic activity due to its sensitivity to oil revenues (chart below), in which the most recent data from the Central Bank of Iraq (CBI) indicate continued growth.



(Source: Central Bank of Iraq, Iraq’s Ministry of Oil, Asia Frontier Capital)
(Note: M2 as of Oct. with AFC estimates for Nov. & Dec., Oil revenues as of Jan.)


Actual M2 data as of October shows robust growth with a year-over-year increase of +10.7%, while estimates show a moderation of year-over-year growth in December to less than half of that. However, it should be noted that December estimates are based on preliminary data on the deposit component of the monetary base M0 as of mid-January. These in turn show a decline from earlier figures, but there is not enough data to suggest if it’s the start of a declining trend or a normal seasonal decline. Combining the declining deposit component of M0 with the spike in the market exchange rate of the USD might be interpreted as capital flight. Yet the exchange rate as end of January suggests that it was a short-lived phenomenon. A more likely explanation than capital flight is 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 to fund operations. 

While geopolitical and local political events are playing out, the equity market’s action, in particular its contrasting trends in January supports the thesis that the stock market is bottoming following a multi-year bear market with back to back declines of –1.3% in 2019, –15.0% in 2018, –11.8% in 2017, –17.3% in 2016, –22.7% in 2015, and –25.4% in 2014.

As of the end of January 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 (97.2%), Norway (1.8%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (51.0%) and communications (21.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.41x, the estimated weighted harmonic average P/B ratio was 0.58x and the estimated weighted average portfolio dividend yield was 6.19%.

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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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