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Asia Frontier Capital (AFC) - July 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 A1,171.64+4.9%−8.0%+17.2%
AFC Frontier Asia Adjusted Index2 +8.5%11.9%4.1%
AFC Iraq Fund USD D592.27+11.4%−5.6%−40.8%
Rabee RSISX Index (in USD) +8.2%−6.4%−55.5%
AFC Uzbekistan Fund USD F1,038.57+3.2%−5.0%+3.9%
AFC Vietnam Fund USD C1,632.94+0.8%−8.7%+63.3%
Ho Chi Minh City VN Index (in USD) 3.1%16.9%+43.0%
  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.

Sri Lankan parliamentary elections held, Pakistan leads returns in July and Iraq rallies

Very attractive valuations and continued momentum across Asian frontier markets led to a 4.9% gain for the AFC Asia Frontier Fund in July, taking the fund’s returns to +14.9% from the low in March 2020. Since the end of March, all the fund’s major markets have contributed to these gains which reflects the very attractive bottom-up opportunities available in the fund’s universe as well as the post lockdown economic recovery in Asian frontier markets.

In November 2019, after the Sri Lankan presidential elections, we discussed the possibility of the Rajapaksa-led SLPP (Sri Lanka Podujana Peramuna) winning a majority in the 2020 parliamentary elections on a Bloomberg Radio interview with co-manager of the AFC Asia Frontier Fund, Ruchir Desai. During the same interview we also discussed that Pakistan is a market to watch with a specific focus on cyclical stocks in the auto and cement sectors. Since August 2019, the Pakistan KSE-100 Index has outperformed peers while Pakistan auto and cement stocks have outperformed the KSE-100 Index as well. You can read more on this below and in the AFC Asia Frontier Fund manager comment and also catch up on this Bloomberg Radio interview:

Rajapaksa-led party sweeps Sri Lankan parliamentary elections

The Sri Lankan parliamentary elections were held on 5th August 2020 and the Rajapaksa-led SLPP (Sri Lanka Podujana Peramuna) recorded a sweeping victory, winning 145 seats out of a total of 225 parliamentary seats. Furthermore, allies of the SLPP which won 5 seats will give the new government a “supermajority” in parliament as they together will control two-thirds of seats in parliament. The United National Party (UNP) which led the previous coalition government won only 1 seat reflecting the voters’ need for change.


(Source: Election Commission of Sri Lanka)

SLPP: Sri Lanka Podujana Peramuna, SJB: Samagi Jana Balawegaya, ITAK: Illankai Tamil Arasu Kachchi, JJB: Jathika Jana Balawegaya, UNP: United National Party


This election result is a very big positive for the country as the previous coalition led government which was in power between 2015-2019 was plagued by indecision and infighting which impacted overall business and investor sentiment. The country was in need of a majority led government and with this election result, much needed reforms and infrastructure projects which have been delayed can be kick-started again which should be positive for business and investor sentiment.

Furthermore, renewed focus on infrastructure projects should also help bring in greater foreign direct investments with China, India and Japan all keen to invest in the country for economic as well as geopolitical reasons and we do not expect the new government to tilt foreign policy towards any specific country but expect a more balanced approach. Though concerns remain regarding the country’s debt levels and tax policies, a majority government should lead to swifter decision making which should help tackle some of these issues.

Since 2015, Sri Lanka has underperformed both in terms of economic growth and stock market performance due to the coalition nature of the previous government. A majority and stable government can go a long way in kick-starting reforms and economic growth once again. Sri Lanka’s P/E multiple has contracted since 2015 and today’s P/E valuation of 11.1x is very attractive. Once the new government can display its commitment to decisive, consistent and forward-looking policies, Sri Lanka could revert to its previous P/E multiple of 14-15x which is an upside of 25% to 35% from the current level.


Sri Lanka saw its P/E multiple and GDP growth contract under the previous coalition government

(Source: Bloomberg)


The issue in Sri Lanka was never “bottom up” as many well-run companies continue to be fundamentally stable, attractively valued and have good management teams. The issue was “top down” but with a “super-majority” government in power now, this presents a huge opportunity for Sri Lanka to meet its potential given its strategic geographic location. The AFC Asia Frontier Fund has increased its weight to Sri Lanka over the past year as we were expecting some of these political changes and have exposure to the consumer, banking and telecom sectors which should do well as economic growth recovers in the future.



(Source: Bloomberg, in USD terms)


Pakistan was the 2nd best performing market globally in July

A significantly improved COVID-19 situation in Pakistan led the KSE-100 Index to be the second-best performing market globally in July. Besides the 625 basis points in the policy interest rate cuts by the State Bank of Pakistan (SBP) during 2020 which has led to very positive investor sentiment, all three COVID-19 metrics of new cases, recoveries and deaths have shown a marked improvement which has not only freed up hospital capacity but has also given a boost to business and stock market sentiment.



(Source: Bloomberg, in USD terms)



(Source: Bloomberg)


Since its low in August 2019, the KSE-100 Index has outperformed major Asian peers as well as the MSCI Frontier Markets Index and the MSCI Emerging Markets Index. Despite this rally, the KSE-100 Index is still trading 22% below its May 2017 peak and in USD terms the index trades 52% below its May 2017 peak. Valuations still remain attractive with Pakistan trading at a P/E of 9.0x only. 


Pakistan has outperformed peers since its low in August 2019

(Source: Bloomberg, % change in prices since 30th August 2019)


There are worries that the recent Eid celebrations during the last week of July could lead to a spike in new cases but the recent decline in both new and active cases is significant so reverting to historical numbers will hopefully not occur as the government has continued to remain strict with its social distancing measures.

Iraq rally also helped fund performance

The AFC Asia Frontier Fund’s performance was also supported by its exposure to the AFC Iraq Fund which was up 11.4% during the month as Iraq also sees a continued rebound in activity as the economy continues to reopen post the pandemic-induced lockdowns. Since their low’s in April 2020, the AFC Iraq Fund and the benchmark Rabee Securities USD Index are up 27.6% and 25.8% respectively. 


We hope you find this update useful and as the saying goes: “Life is a marathon, not a sprint”. Your portfolio should also have long term investments in promising regions and industries.

The entire AFC team would like to wish you and your family good health and stay safe.

If you have any questions about our funds or would like to receive additional information, please be in touch with our team at This email address is being protected from spambots. You need JavaScript enabled to view it. .



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AFC Travel

London   2nd – 30th August   Ahmed Tabaqchali
London   17th August   Thomas Hugger
Zurich    31st August – 1st September   Thomas Hugger
Sulaimani/Baghdad, Iraq   1st September – 15th December   Ahmed Tabaqchali
Lucerne / Zug   2nd September   Thomas Hugger
Geneva / Lausanne   3rd September   Thomas Hugger
Basle   4th September   Thomas Hugger
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The AFC Iraq Fund Class D shares returned +11.4% in July with a NAV of USD 592.27 outperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned +8.2% for the month. Year to date, the RSISUSD is down 6.4% while the fund has lost 5.6%.

The extreme summer heat in July, much hotter this year than usual, and rising COVID-19 infections were supposed to keep a lid on the market’s activities. But the reverse happened as a revived banking sector led to increased trading activity and rising prices across the board. The Rabee Securities RSISX USD Index (RSISUSD) was up 8.4% for the month, and up 25.8% from the multi-year lows in April 2020, but the index is still down 6.4% for the year. The fund was up 11.4% for the month, up 27.6% from the April 2020 lows, and is now down 5.6% for the year.

The revival of the banking sector was driven by the Bank of Baghdad (BBOB) and the National Bank of Iraq (BNOI) – among the top-quality banks in the country. Both reported very strong first half 2020 results (H1/2020) ) which were discussed over Zoom conference calls – a first for these companies and for the Iraq Stock Exchange (ISX) (links on the ISX organised calls for BBOB & BNOI in Arabic & English). BBOB was up 28.6% for the month on the back of an increase of 12.9% in June, while BNOI was up 36.0% for the month, but was flat in June.

The unaudited results of the two banks highlight different aspects of the recovery in the banking sector, each reflecting the different dynamics of the two banks. For BBOB, the gradual recovery continues from the hangover following the heady expansion during the boom years up to 2014. Customer deposits for H1/2020 were up 4.1%, following the recoveries of 2.4% and 5.2% in 2019 and 2018 respectively. Its loan book continues to decline, decreasing 4.5% in H1/2020, on the back of declines of 7.6% and 4.5% in 2019 and 2018 respectively. The results are consistent with the new management’s focus over the last few years on addressing the company specific issues and structural weaknesses that were exposed by the crisis of 2014-2017. Management’s success can be seen from H1/2020 pre-tax earnings which were 6.6% higher than the full year 2019 pre-tax earnings – which could indicate a doubling of full year pre-tax earnings should the second half of the year be a replay of the past.

For BNOI, growth continues to accelerate with customer deposits continuing to increase – up 66.2% in H1/2020, on the back of increases of 32.0% and 2.7% in 2019 and 2018 respectively. The loan book on the other hand was up 26.7% in H1/2020, following an increase of 119.9% in 2019 versus a contraction of 42.8% in 2018. Results were driven by management’s focus on growing the bank’s retail business where BNOI is emerging as a market leader. BNOI’s pre-tax earnings were 14.6% higher in H1/2020’s than those for the whole of 2019 which could lead to 130% growth for FY2020 if BNOI maintains the same momentum. The success of BNOI’s retail strategy in attracting sticky consumer deposits, and subsequently growing its retail loan book, demonstrates the potential opportunity from banking adoption in cash-dominated Iraq.

While the two banks benefited from strong execution by new management teams, both were helped by the recovery in private sector deposits and loans that began in 2018, as can be seen from the Central Bank of Iraq (CBI) data as of end of March (chart below).



(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital, data as at end of July 2020)


The data does not reflect the effects of the lockdown that began mid-March on deposits and loans – both of which would likely have deteriorated, especially deposits as the private sector would have used deposits to finance operations. Nevertheless, the data as of March is encouraging given that the economic slowdown for Iraq began with the start of nationwide demonstrations in October 2019, and was then made worse by the events in early 2020 with the US assassination of Iran's top general in Baghdad and the subsequent Iranian rocket attacks on Iraqi military bases. The upshot is that any post-lockdown decline would take place from a higher base, which should alleviate the negative effect on banks.

Another tailwind for the banks in H1/2020, and probably for the rest of the year, is the increased spread between the official and market price of the exchange rate of the Iraqi Dinar (IQD) versus the USD, which benefits the banks’ FX spreads and thus their earnings. Interestingly, this is the mirror image of what occurred in 2018 (chart below) that hurt their earnings and led to accelerated selloffs in the sector.



(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses,
Asia Frontier Capital, data as of end of July 2020)



Typically, the market price of the USD trades at a premium to the official price, but spikes higher during periods of uncertainty or crises. The crisis of 2014-2017 led to a prolonged period of high premiums which was a boon to bank earnings during the difficult phase in which deposits declined and non-performing loans rose sharply. The end of conflict and a recovery of oil prices resulted in sustained premium declines which hurt banks’ earnings disproportionately as the sector’s recovery was yet to take place. The momentous events at the start of the year that raised the feared spectre of a US-Iran proxy war fought in the country, led to a spike in the premium, followed by a further spike to more elevated levels as the lockdown came into full effect. These elevated levels continued even though the full lockdown came to an end, as the government's newly imposed rolling curfews on Thursday-Saturday as part of its COVID-19 containment efforts meant that the five-day working week has been cut down by one day, to Sunday-Wednesday.

The banks were not the only ones performing much better than feared, as both Pepsi bottler, Baghdad Soft Drinks (IBSD), and mobile phone operator, AsiaCell (TASC), declared strong dividends. IBSD increased its dividend by 50% year-over-year to yield 5.6%, and the stock rallied 11.1% for the month. TASC on the other hand, maintained its high dividend of the last few years and declared a 14.3% dividend yield. This compares to yields of 12.2%, 12.0% and 14.3% for the last three years. TASC was up 14.4% for the month.

The market’s recovery over the last two months notwithstanding, arguably the claim made here in May still stands: that the 'worst-case' prognosis for Iraq in the wake of the carnage brought about by COVID-19 was not as bad as originally feared, however the market still continues to price it in.

As of the end of July 2020, the AFC Iraq Fund was invested in 14 names and held 7.2% 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 (91.1%), Norway (1.1%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (51.6%) and communications (18.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 14.58x, the estimated weighted harmonic average P/B ratio was 0.59x and the estimated weighted average portfolio dividend yield was 5.42%.

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AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares increased by 4.9% in July 2020 with a NAV of USD 1,171.64. The fund underperformed the AFC Frontier Asia Adjusted Index (+8.5%) but outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−1.6%), the MSCI Frontier Markets Net Total Return USD Index (−0.7%) and the MSCI World Net Total Return USD Index (+4.8%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +17.2% versus the AFC Frontier Asia Adjusted Index, which is down by 4.1% during the same time period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.56%, and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.50, all based on monthly observations since inception.

The fund’s gain in July 2020 takes returns to +14.9% since the bottom of March 2020. The year to date return of the fund at −8.0% is also significantly ahead of the MSCI Frontier Markets Index return of −16.4%. This outperformance is primarily due to stock selection and a benchmark agnostic approach which the fund has followed since inception.

This month the Pakistan KSE-100 Index witnessed a very strong rally of 14.1%, making it the second best performing market globally in July. Lower growth in COVID-19 case numbers and significantly lower interest rates led to a big boost in market confidence. We have written in previous manager comments that the 625 basis points cut in policy benchmark interest rates by the State Bank of Pakistan so far in 2020 can be a major trigger for investor sentiment especially in cyclical stocks. Though this month’s rally was broad based it was led by cyclical stocks in the auto and cement sectors. The share prices of the two passenger car companies the fund holds rose by 43% and 36% respectively and the fund’s cement holding increased by 26% this month.


New COVID-19 cases have eased in Pakistan since mid-June – a big positive for market sentiment

(Source: Bloomberg)


Investor sentiment beginning to react to very aggressive interest rate easing

(Source: Bloomberg)


On a macro level, the current account deficit has decreased sharply from 4.8% of GDP in FY19 to 1.1% of GDP in FY20 which reflects the benefits of lower oil prices for the Pakistani economy. Other economic indicators are also showing a marked improvement post lockdown with domestic cement sales for the month of July increasing by 36% YoY indicating a recovery in economic activities. Though passenger car sales dipped between April-June, the relaxation of lockdown conditions has also led to pent up demand based on our recent discussion with management teams of auto companies while banks have begun to offer very attractive auto financing loans.



(Source: International Monetary Fund, Topline Securities)


The KSE-100 Index is still 22% below its peak reached in May 2017 in local currency terms and we believe that there is still room for the market to increase further as lower interest rates lead domestic investors to look for higher yielding asset classes like equities while Pakistan remains heavily under-owned by foreign investors relative to their other frontier market exposures. Furthermore, in USD terms the KSE100 Index is 52% below its May 2017 peak which reflects the heavy devaluation of the Pakistani Rupee which has already occurred. 


Pakistan KSE100 Index still 22% below peak of May 2017 despite recent rally and valuations are attractive relative to history

(Source: Bloomberg)


In USD terms, the Pakistan KSE100 Index is 52% below its May 2017 peak

(Source: Bloomberg)


Very attractive valuations for the fund’s third biggest holding, Beximco Pharmaceuticals, the first producer worldwide of the generic version of the COVID-19 drug Remdesivir, led to a gain of 39.4% in its stock price this month. Despite this rally, the London listed GDR, which the fund holds, still trades at a 32% discount to the local listing in Dhaka. Bangladesh is also benefitting from lower oil prices as its current account deficit declined to 1.5% of GDP in FY20 from 2.7% of GDP in FY19 and furthermore this decline in the current account deficit has helped the country’s foreign exchange reserves to rise to USD 37 bln covering almost 9 months of imports, a comfortable position to be in, in light of the pandemic related stress to frontier and emerging economies.



(Source: International Monetary Fund, BRAC EPL)


The strengthening gold price led to another positive month for some of the fund’s Mongolian junior mining companies. This month, a gold explorer the fund holds gained 66.7% on the back of not only appreciating gold prices but also a successful large fund raising to finance the construction work for the mine and further exploration.

Vietnam witnessed a correction as it is currently going through its second wave of local COVID-19 transmission. The VN-Index declined by 3.2% as the first local case in almost 100 days was announced in the central coastal city of Da Nang on 24th July. Since then over 200 local cases have been announced with most of them being restricted to Da Nang but local cases have also been reported in Hanoi and Ho Chi Minh City. It will not be surprising to see the case count increase over the next few weeks as the domestic economy had reopened fully and Da Nang being a tourist centre did witness lots of domestic travellers arrive from and return to various parts of Vietnam.

Parts of Da Nang have been put under full lockdown while Hanoi and Ho Chi Minh City have ordered bars to close while large group gatherings have also been banned. It is too early to say whether there will be a full country lockdown but given the government’s quick action in isolating existing and suspected cases as well as aggressive contact tracing, any countrywide lockdown should not last more than a few weeks based on the experience from the first wave of cases where the lockdown lasted three weeks from 1st April till 23rd April 2020.

In any event, lockdown or no lockdown the increase in cases could be negative for near term business and consumer sentiment and the fund partially reduced its exposure to two consumer companies as they had both rallied by more than 50% from their March 2020 lows. However, longer term the country’s ability to manage the pandemic in a much better way relative to most countries globally will help it attract investments and tourists when we are in a more normalized situation.


Rise in new local COVID-19 cases in Vietnam in last week of July
led to a correction in the VN-Index

(Source: Bloomberg)


Stringency Index in Vietnam picked up post new local COVID-19 cases

(Source: Bloomberg)


The best performing indexes in the AAFF universe in July were Pakistan (+14.1%) and Iraq (+8.2%). The poorest performing markets were Vietnam (−3.2%) and Laos (−1.3%). The top-performing portfolio stocks this month were a Mongolian junior gold miner (+66.7%), a Pakistani paint company (+55.8%), a Pakistani truck manufacturer (+48.0%), a Pakistani passenger car manufacturer (+43.0%), and a Bangladeshi pharmaceutical company (+39.4%).

In July, the fund bought a Sri Lankan latex glove manufacturer, added to existing positions in Mongolia, Sri Lanka and Vietnam and reduced its exposure to existing holdings in Bangladesh, Mongolia and Vietnam.

At the end of July 2020, the portfolio was invested in 73 companies, 2 funds and held 6.0% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (10.6%) and an investment company in Myanmar (4.6%). The countries with the largest asset allocation were Mongolia (20.4%), Vietnam (18.1%), and Iraq (11.1%). The sectors with the largest allocation of assets were consumer goods (25.0%) and industrials (16.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.73x, the estimated weighted harmonic average P/B ratio was 0.84x and the estimated weighted average portfolio dividend yield was 3.34%.

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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund Class F shares returned +3.2% in July with a NAV of USD 1,038.57, bringing the return since inception (29th March 2019) to +3.9%, and the Year to Date return to −5.0%.

Uzbekistan re-entered quarantine on 10th July, with virus cases having risen to 9,697, and it is expected to remain in place until at least 15th August 2020. Meanwhile, the economy continues to function under this new normal and its effects have had little impact on overall earnings of the fund’s portfolio companies. In fact, many companies experienced strong year on year growth for the second quarter of 2020 and several companies announced dividends for fiscal year 2019 which translate to double-digit yields.

AFC Uzbekistan Fund valuations as of 31st July 2020

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.36x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 6.34%


Operating under a second quarantine

On 10th July the government re-initiated quarantine as cases had been steadily rising from the first re-opening in late April/early May. Currently, active cases stand at 9,697. However, unlike the quarantine in March 2020, this one could best be termed “quarantine light”, for the only parts of the economy that appear to be affected are restaurants, coffee shops, salons and select agriculture and industrial businesses.

Passenger vehicles can be on the road between 07:00 and 10:00 and 17:00 and 20:00, except on weekends, while taxis can operate all day during the week. Thus, most people still go to the office and construction sites are hives of activity, as are the bazaars (open during the week but closed on the weekend). Quarantine was expected to last only until 1st August, but it became clear to us on 10th July, after extrapolating out the rising case count, that three weeks would not be long enough to “flatten the curve”. Indeed, the government has extended the quarantine until 15th August and one should not be surprised if it is extended by an additional week.


Life continues as normal at a bazaar in central Tashkent at 15:00 on 29th July 2020

(Source: Asia Frontier Capital)


When considering the state of the world and that life is unlikely to regain a semblance of normalcy possibly as far into the future as the second half of 2021, we may see a bifurcated approach among countries regarding the handling of this virus. Some countries will follow the path of Brazil, Sweden and Turkey which have let the virus spread naturally, accepting the fact that it is so widespread globally that the genie cannot be put back into the proverbial bottle. In the process these countries are limiting the impact on their economies, which is still quite significant nonetheless. The other group of countries are likely to undergo a prolonged period of repeated closings and re-openings.

At present, it appears Uzbekistan has chosen the second approach, though the government appears to be attempting to keep quarantine restrictions as non-invasive as possible in order to protect the incomes and livelihoods of its citizens. The most likely reason for the country choosing this approach is in an attempt to not overwhelm the fragile and ill-equipped healthcare system. So, until the government can ensure that healthcare infrastructure is no longer at risk of being overwhelmed, this period of closings and re-openings is expected to continue. We would therefore expect a third quarantine period to take place sometime in October or November.

The practicality of Uzbekistan’s Gold reserves

As many Asian Central Banks understand the value of gold and continue to increase their holdings, western Central Banks have largely done the opposite and sold large chunks of theirs in recent years. While gold is regarded by some economists and business people as an archaic relic, Uzbekistan is an important case study for why gold is so valuable for emerging economies.

The first half of 2020, like in many countries, was a challenge for Uzbekistan in relation to exports, which fell 7% year on year. Meanwhile, imports rose 3.6% due to the continued re-industrialization of the country and strong demand for animal protein, specifically beef. When excluding the country’s USD 2.12 bln in gold sales, the current account deficit stood at USD 6.52 bln. Now, accounting for the gold which was sold during the period, the current account deficit narrowed by 32.6% to USD 4.4 bln. Gold is an important commodity the government uses to decrease the current account deficit, and as global trade slows, with increasing competition for a shrinking global economic pie, Uzbekistan has a guaranteed way to make sure its current account deficit, expected to move into surplus in the mid-2020’s on the back of rising exports and a decrease in machinery imports, does not get out of hand; if it so wished it could sell enough gold today to move the country into a trade surplus. This puts Uzbekistan in a very unique position, providing strong support to the country’s finances in what will be a long road on the way back to normalcy in the global economy.

At the end of the first half 2020, Uzbekistan’s foreign exchange reserves stood at USD 32.32 bln, of which USD 19.60 bln was gold, equivalent to 11 mln ounces (the Central Bank of Uzbekistan continually replenishes its gold reserves through purchases of physical gold in local currency from state-owned mines). As of 31st July 2020, these 11 mln ounces of gold are valued at USD 21.73 bln or 41.77% of GDP.

Portfolio company performance

The fund’s portfolio companies showed broad performance during July, though the standouts were cement producers. Due to the first nationwide quarantine, initiated on 16th March 2020, Uzbekistan customs increased the time to clear goods at land borders where it took up to 28 days for imported cement to go through. The issue has been resolved as it now only takes 2 to 3 days to clear customs, but this bottleneck amid continued strong domestic demand led the price of PC-400 bulk cement (the most common type of cement produced in Uzbekistan) to rise from UZS 458,000 on 1st January 2020 to UZS 800,000 on 30th June, a 74.67% increase. Qizilqum Cement (QZSM), the fund’s largest holding at 33% of AUM, and the largest producer of PC-400 cement, saw its share price appreciate by 22.8% during the month. QZSM's strong performance for the month however was met with softness in some of the fund’s other holdings, merely due to low liquidity into month end, which impacted July performance by an estimated −3.6%.

QZSM had its best quarter since we first visited Uzbekistan in May 2018. Second quarter 2020 earnings per share were UZS 314.35, or a 103% increase year on year. QZSM ended the month trading at a P/E of 2.48, P/B of 0.54 and an EV/ton basis of USD 7.25 (this compares very favourably to the replacement cost of capacity of USD 110 to USD 120/ton).

The fund also benefitted from performance in a cooking oil company (whose raw material is cotton seeds) and one of the two Kyrgyz companies the fund holds—an airport operator. The cooking oil company ended the month +27% and announced a 2019 dividend which equates to a yield of 10.2%. The Kyrgyz airport operator also announced a strong 2019 dividend which translates to a yield of 14.1%.

At the end of July 2020, the fund was invested in 28 names and held 4.1% in cash. The markets with the largest asset allocation were Uzbekistan (93.6%) and Kyrgyzstan (2.3%). The sectors with the largest allocation of assets were materials (59.2%) and industrials (14.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.36x, the estimated weighted harmonic average P/B ratio was 0.69x and the estimated weighted average portfolio dividend yield was 6.34%.

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AFC Vietnam Fund - Manager Comment



The AFC Vietnam Fund gained 0.8% in July with a NAV of USD 1,632.94, bringing the return since inception to +63.3%. This represents an annualized return of +7.7% p.a. The fund outperformed both the Ho Chi Minh City VN Index, which lost 3.1%, and the Hanoi VH Index, which lost 1.9% (in USD terms) in July 2020. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.62%, a Sharpe ratio of 0.54, and a low correlation of the fund versus the MSCI World Index USD of 0.55, all based on monthly observations since inception.

Market Developments

If stock market movements are sometimes described as a rollercoaster, then July 2020 can definitely be referred to as one. As of the first trading day in July, we saw strong buying interest on the Ho Chi Minh City Stock Exchange which pushed the market up to 6% mid-month. Followed by lower stock market turnover and correcting stock prices, pointing to an exhaustion of buying interest from local investors, this suddenly turned into outright panic selling on 24th July when the first COVID-19 infection was registered in the central city of Danang after 99 days of no community infections nationwide. Compared to almost any other country, Vietnam still has very few infections but most people were already thinking that their country would stay “clean” forever.

While we have been expecting a stock market correction for some time, the trigger for this came – as is usually the case – in a totally unexpected manner. 


Foreign market participation rate over the years

(Source: HOSE, AFC Research)


The strong reaction from local investors on the stock market to the comparably low numbers of new infections is totally understandable as thoughts of COVID-19 had almost been eradicated from people’s minds since Vietnamese people were proud to be one of the few larger countries in the world winning the war against the virus. Therefore, the “jump” in the number of daily new infections from 0 to 56 on 31st July is seen as more meaningful than a rise in daily infections in Germany from 600 to 1,000 cases, not to speak of the US where a rise from 50,000 to 70,000 does not seem to bother too many people, especially not investors. The real risk from this current outbreak in Danang is to which extent the virus has now been spread by travellers, most of whom arrived by plane and were then transported throughout the city in coaches, and who are now just returning back home to their provinces, with thousands currently tested and/or isolated. 

The next few days will probably show to what extent the virus has been spread. We expect that with the strict measures the government has already implemented, infection rates should stay low and manageable in the future. In fact, “low rates” could prove to be even better than “no rates” as the zero-infection rate almost forced the government to keep the borders completely closed, as happened after the successful containment in April. Under a scenario of “low rates”, Vietnam would be able to restart its very important international tourism industry easier with other “low rate” countries.

With ample cash on hand and increased volatility, the timing of the announcements of second quarter 2020 earnings, which have started to be published over the past 14 days, is perfect for us. Remember, second quarter 2020 earnings were impacted by the lockdown in April, so we are able to analyse which companies were able to manage this situation better than others, in case we experience a repeat of another nationwide lockdown. Government announcements during the past few weeks to accelerate economic activity will now be that much more important to implement, so our visibility for sector and company outlooks has actually improved over the past few weeks. Further domestic economic recovery will be interrupted or delayed at worst (as it had been in April), but for now we see no change for export-oriented companies.

We therefore focus our attention on the companies in our portfolio and their recent business developments. In fact, many of our top holdings showed good results in this difficult economic environment. Since we attribute great importance to a sound balance sheet and unlike most other funds avoid large weights in our portfolio, we are closely watching the current situation in a relaxed manner. To give an example, the fund’s top three positions, which represent 17% of our total assets under management, showed stable to positive results in the first half of 2020. Net profit for the three companies were +24%/+36%/-4% compared to 2019, and while these holdings are not benefitting from the crisis, they are showing resilience to the economic disruptions most companies around the globe currently feel. All three companies are trading at very inexpensive levels, near their book value, and between just 4-7x earnings and additionally have high dividend yields ranging from 6-10%. Maybe even more important during these uncertain times is that none of these three companies has any net leverage and they continue to have good long-term growth prospects. Also, the other 7 companies in the top ten positions do not look much different, with no imminent risk to their business models. All we need now is some luck in timing to catch good companies at even more attractive prices with our healthy cash balance.


Index corrected around 25% of recent gains - VN Index from Oct 2014 to Aug 2020

(Source: Bloomberg)


The Manufacturing shift to Vietnam continues

Through the end of July, FDI (foreign direct investments) stood at USD 10.1 bln, which is only 0.5 bln lower than in the period of 2019, despite COVID-19. This ongoing manufacturing shift to Vietnam, mostly from China, is helping to keep Vietnam’s export growth positive.1



(Source: GSO, AFC Research)


Exports tumbled by 14.4% and 15.5% in April and May, but recovered strongly in June to −1.9% YoY and grew to +0.3% in July 2020. In the first seven months of 2020, Vietnam reported a trade surplus of USD 6.5 bln. 

Apple will produce millions of its popular AirPods wireless earphones in Vietnam for the first time in the third quarter of 2020, according to Nikkei Asian Review, which is a sign that Apple is accelerating its diversification of production out of China amid the coronavirus pandemic.



(Source: Nikkei Asian Review)


Vietnam showed a strong recovery of the its Purchasing Managers’ Index (PMI) from 32.7 in April to 47.6 in July. New orders increased for the first time in five months at a solid pace. Respondents indicated that the COVID-19 pandemic has been brought under control in Vietnam and had contributed to rising new business. Both the consumer and intermediate goods sectors posted expansions in new business. 


Purchasing Managers’ Index (%)

(Source: Bloomberg)


Also, the tourism sector started to grow again, mainly thanks to a huge marketing campaign from the Vietnamese government in order to stimulate domestic tourism. According to the Aviation Department of Vietnam, the number of flights and passengers increased sharply by 21% in June and 27% in July. Domestic passenger growth in the aviation sector fell by only 8.6% year on year in July which can be considered as good performance compared to other countries. To which extent the latest COVID-19 outbreak in Vietnam will have a bigger impact again on the aviation and tourism sector remains to be seen.


Passenger growth in the aviation sector (% yoy)

(Source: GSO, AFC Research)


Governments around the world have announced unprecedented fiscal stimulus packages in response to the COVID-19 pandemic which vary significantly across countries. Developed economies have announced more aggressive packages than developing economies which have been more cautious; for example, Japan is spending 42% of GDP, the US 14%, while ASEAN-5 on average only 5.9%, despite starting with a lower public debt/GDP ratio. Vietnam has announced a rather moderate fiscal package of around USD 12 bln, equivalent to 4.6% of 2019 nominal GDP, including tax and land rent deferrals (USD 8 bln), assistance for people affected by COVID-19 (USD 2 bln) and exemption and reduction of taxes and fees (USD 2 bln). With this plan, the total fiscal deficit could reach around USD 14 bln or 5% of 2020 estimated nominal GDP, which is around 1.5% higher than the original target and far off from any concerning levels in the face of this global crisis. 

At the end of July 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.0%) – an insurance company, Vietnam Container Shipping JSC (5.3%) – a container port management company, TanCang Logistics and Stevedoring JSC (3.9%) – a logistics company, Pharmedic Pharmaceutical Medicinal JSC (3.4) – a pharmaceutical company, and LienViet Post Joint Stock Commercial Bank (3.2%) – a bank.

The portfolio was invested in 47 names and held 24.1% in cash. The sectors with the largest allocation of assets were industrials (28.3%) and consumer goods (21.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.69x, the estimated weighted harmonic average P/B ratio was 1.06x and the estimated weighted average portfolio dividend yield was 7.84%.

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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.

Stay safe and kind regards,

Thomas Hugger
CEO & Fund Manager

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