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Asia Frontier Capital (AFC) - June 2020 


“What you pay for an investment is the single biggest determinant for how successful that investment will be. When equity prices are


“What you pay for an investment is the single biggest determinant for how successful that investment will be.

When equity prices are high, your returns will be lower.

When they are cheap, your returns will be higher.

Barry Ritholtz - American equities analyst


AFC Asia Frontier Fund USD A1,117.30+1.0%−12.3%+11.7%
AFC Frontier Asia Adjusted Index2 2.1%18.7%11.6%
AFC Iraq Fund USD D531.68+4.0%−15.2%−46.8%
Rabee RSISX Index (in USD) +5.0%−13.5%−58.9%
AFC Uzbekistan Fund USD F1,005.90+1.5%−8.0%+0.6%
AFC Vietnam Fund USD C1,620.26−0.3%−9.4%+62.0%
Ho Chi Minh City VN Index (in USD) 4.2%14.3%+47.5%
  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.


Asian frontier markets trade at historically low valuations

Though the S&P 500 has outperformed both frontier and emerging markets over the last decade, the underperformance of emerging and frontier market value stocks is even starker as investors have paid greater attention to higher valued growth stocks. However, looking at the decade between 2000-2010 (after the burst of the "dot-com bubble"), emerging market value stocks outperformed developed markets by a very large margin.

While the last decade has only been about the S&P500, investors looking for assets which have underperformed the S&P500 significantly over the past decade and are trading at a big discount to developed markets should definitely look to Asian frontier markets. These markets are not only in the “value” category but the fundamentals of companies in this universe are stable, with low leverage and consistent long-term earnings growth.

Additionally, many Asian frontier markets are one of the bigger beneficiaries of the shift in global supply chains as well as the shift in global geopolitics. Their demographics are also very favourable and their young populations will boost future consumption and help them recover from the pandemic sooner than older and more leveraged societies.

The AFC Asia Frontier Fund now trades at its lowest ever P/E multiple since inception of the fund  and the charts below hopefully help explain why Asian frontier markets should be part of any diversified investment portfolio with a 3-5 year investment horizon.

Our presentation update "AFC Asia Frontier Fund - The Time is Now" shows why investors should invest now in Asian frontier markets. 

Time for a reversal? Frontier markets have underperformed developed markets over the last decade

(Source: Bloomberg, % change in prices from 31st December 2009 – 30th June 2020)


Time for a reversal?  Frontier market valuations trade at the biggest valuation discount to developed markets in a decade

(Source: Bloomberg)


Low interest rates and low oil prices will be a tailwind for Asian frontier markets

(Source: Bloomberg)



(Source: GMO LLC, as of 31st May 2020)



(Source: United Nations Population Division)


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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The AFC Iraq Fund Class D shares returned +4.0% in June with a NAV of USD 531.68 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned +5.0% for the month. Year to date the RSISUSD is down 13.5% while the fund has lost 15.2%.

26th June 2020 marked the five-year anniversary of the AFC Iraq Fund – conceived a year earlier amidst the perfect storm of ISIS’s take-over of the city of Mosul and threatening to break-up Iraq and the crash in oil prices. The thesis behind the launch was that the common threat of ISIS, and its ideology, would lead to a realignment of interests of regional and international players who would ultimately work together to confront it and end or contain the proxy wars that contributed to the spread of extremism. The end of conflict, and the expected oil price recovery, would ultimately lead to an economic revival whose sustainability would be anchored by a multi-year reconstruction spending to repair the damage of over four decades of conflict that is orders of magnitude worse than that faced by any country in conflict in recent memory.

The five-year anniversary mark sees Iraq grappling with ingredients of yet another perfect storm: the disruptions to its economy in COVID-19’s wake; a potential second wave of the pandemic that the weak healthcare infrastructure is ill-equipped to handle; and topped off by potential political instability as the new government pursues an economic reform program that simultaneously threatens the interests of the political elite and delivers austerity to an alienated population. 

Iraq’s equity market has arguably discounted these negatives and several others as it has been shredded by a brutal multi-year bear market in which the YTD decline of 14.6% comes on the back of 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. The extent of this discounting makes its risk-reward profile very attractive versus almost all other equity markets that are still mostly discounting the same economic scenarios pre-COVID-19, even though the world has fundamentally changed since then. In-spite of the varying extents of recoveries from the March lows, the gap between other equity markets and Iraq’s equity market is still huge, supporting Iraq’s relative attractiveness (chart below).


Normalized five-returns for the RSISUSD Index vs MSCI World Index, MSCI Emerging Markets Index and MSCI Frontier Markets Index

(Source: Bloomberg, data as of 6th July 2020)


Events that unfolded over the years confirmed the basic tenets of the investment thesis, and even though the severity of the economic downturn was much worse than expected, the equity market showed signs of bottoming following the multi-year bear market as 2019 came to end. 2019 saw both the market broadening its breadth, and a tentative economic recovery at both the macro and company levels. It can be argued that these encouraging developments were put on hold by the dramatic events of early 2020, i.e. the US assassination of Iran’s top general in Baghdad and the subsequent Iranian rocket attacks on Iraqi military bases, as well as the onset of COVID-19. However, the real risks to the investment thesis were, paradoxically, the effects of increasing oil revenues on the last Iraqi government’s myopic spending patterns.

This government, formed following the 2018 general elections and encouraged by increasing oil revenues in 2018 and 2019, reversed the first structural reforms that came with the Stand-By Arrangement (SBA) reached with the IMF in 2016, and reverted to the same failed policies of prior administrations. The explanation lies in the rentier structure of the Iraqi state, in which the public sector dominates the economy through the state’s direct and indirect control of the largest economic activities, and its role as the largest formal employer. Higher oil prices, in the past, incentivized successive governments to buy loyalty through immediate distribution of oil rents through expanding the public sector payroll at the expense of much more rewarding, but long-term, returns from investments in infrastructure (chart below).



(Source: IMF Iraq Country Reports 2004-2019, Ministry of Finance,
Asia Frontier Capital. Lines in lighter colour are trend lines)


This playbook was evidenced in the 2019 expansionary budget, in which spending on salaries and pensions increased by 13% year-over-year and accounted for 47% of total expenditures, while non-oil investment spending increased a seemingly impressive 64% year-over-year, yet it accounted for 5% of total expenditures. The initial budgeted non-oil investment amount would have been equivalent to an 8.5% stimulus to the non-oil economy, which would have provided sustainability to the consumer spending-led economic expansion underway (the “AFC Iraq Travel” report , in August, reviewed the revival of commercial life in Baghdad). However, as 2019 wore on it was clear that the government was not executing on most of its investment spending program, and was planning to use the growing budget surplus instead to embark on a significant increase in the public sector payroll. The economic upshot would have been an acceleration of consumer spending, which while positive for equity returns, would have been short-lived, peaking in 2022 or so as the inevitable bust would have set in by then.

The known nature of COVID-19 and the emerging, slow and un-synchronized recovery from the global lockdown, in addition to oil prices averaging in the range of USD 30-40 per barrel for Brent crude for 2020 and USD 45-55 per barrel for 2021 means that Iraq cannot avoid embarking on real economic reforms. This is exactly what the new government, formed in May 2020, is pursuing and as articulated by the Minister of Finance, these reforms include a fundamental retooling of the budget's structural imbalances.

The dilemma for the government is that on the one hand, the basic governing equations of Iraq's political system – which largely allowed the political elite to maintain their oversized influence on economic policies – are still in force, and as such the elite will likely derail real reforms that threaten their interests; while on the other hand the rolling economic crisis means that alternative proposed stop-gap measures will not work for long and so reforms are unavoidable in the end. A way out is in pursuing reforms that will yield real economic dividends, yet at the same time will not threaten the elite’s interests. The first of these are the low hanging fruit, ignored during the years of oil aplenty, of measures that will allow the private sector to grow, supported by an unconstrained commercial banking sector and unhindered by government bureaucracy.

One of the first measures of the reform initiative supports this line of thinking in that the Central Bank of Iraq (CBI) introduced regulations that would allow commercial banks to provide letters of credit for government entities – a step that could lead to the erosion of the monopoly of the state banks, that in 2018 accounted for 81% and 86% of banking loans and deposits respectively, and which are mostly with the government. In the short term, these measures would provide qualified banks with fee income to boost their earnings, eventually grow their deposit base as they develop their government businesses, and in the process attract more private sector deposits, which ultimately would support their lending activities. Similar low key yet implementable measures are likely to be introduced over the next few months. Coupled with these would likely be measures that would remove some of the stifling regulations that hinder the private sector.

While such measures will not attract many headlines, and each on its own might not seem to be significant, their cumulative effects would be extremely positive for the banking sector. The first to feel these effects would be the earnings and book values of the ISX’s listed banking sector, which given that the sector was one of the worst effected in the multi-year brutal bear market, these in turn would have outsized effects on the sector’s equity returns. Consequently, these would in turn impact the whole market positively given the sector’s major weighting in the market’s trading activity.

June was a low-key month as the re-imposed two-week curfew on 31st May to contain the latest increase in COVID-19 cases meant that the Iraq Stock Exchange (ISX) resumed trading on 14th June, following its last trading day on 21st May - which preceded the Eid-break. The ISX returned to its five-day-a-week trading schedule, but 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. Nevertheless, that still means a 33% increase in trading activity.

As of the end of June 2020, the AFC Iraq Fund was invested in 14 names and held 3.9% in cash. The fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (94.4%), Norway (1.2%), and the UK (0.5%). The sectors with the largest allocation of assets were financials (50.4%) and communications (20.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.58x, the estimated weighted harmonic average P/B ratio was 0.57x and the estimated weighted average portfolio dividend yield was 5.88%.

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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund Class F shares returned +1.5% in June with a NAV of USD 1,005.90, bringing the return since inception (29th March 2019) to +0.6%, while the year to date return stands at −8.0%.

June saw daily life and economic activity in Uzbekistan continue to rebound with restaurants now permitted to re-open and European-style summertime outdoor café culture in full swing. Meanwhile, continued privatizations of majority stakes in listed state-owned enterprises led to increased turnover at the Tashkent Stock Exchange.

AFC Uzbekistan Fund valuations as of 30th June 2020

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.37x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 6.44%


Annual General Meeting SeasonWhile most Annual General Meetings “AGMs” were postponed due to COVID-19, they are now beginning to be held, either physically or online. On 26th June I attended the AGM of the largest winery in Uzbekistan, which is one of the fund’s key holdings providing direct exposure to rising domestic consumption trends. The company is a consumer goods behemoth, producing 156 types of vodka, 27 types of wine, 9 types of cognac and 3 types of whiskey, and that is just its alcohol division. They also produce fruit juice, soft drinks, bottled water and a line of dried and frozen fruits and vegetables. For fiscal year 2019, the company reported a 131% increase in revenue (of which 9% or USD 4.6 mln came from exports) and 79% profit growth. At the end of June, the company traded at a P/E of 4.92x and a P/B of 1.66x. The dividend payout for 2019 was 85% of net income (UZS 35,196 per share), which equates to a dividend yield of 16.91%.


Uzbekistan-made cognac

(Source: Tashkentvino)


Another of the fund’s top holdings held its AGM on 26th June as well, digitally in this case. The company is a leading producer of white spirits for the alcohol and pharmaceutical industries. Reporting 70% annual profit growth for 2019, the company also declared a dividend of UZS 4,454. At the end of June, the company traded at a P/E of 7.92x, P/B of 2.76x and had a dividend yield of 10.6%.

First Quarter Statistics

The Central Bank of Uzbekistan published a statistical report for the first quarter of 2020, whereby the current account deficit continued its trajectory towards surplus with a deficit of USD 810 mln compared to USD 1.05 bln in 2019. The closing of the deficit can be largely attributed to growth in remittances, which may face some headwinds in the second quarter of 2020 when COVID-19 impacted the Russian economy, where the majority of remittances to Uzbekistan come from. While Uzbekistan was impacted by the effects of slowing global trade due to COVID-19, non-gold exports decreased by a mere 5.8% in the first quarter, inclusive of a 30% decrease in gas as China reduced its purchases, indicating that other export-oriented sectors such as agriculture and textiles remained resilient. Meanwhile, gold reserves increased by 100,000 ounces to 10.9 mln ounces and exports of physical gold fell by 18.4% to 635,000 ounces (USD 1.05 bln) from 944,000 ounces (USD 1.2 bln) in first quarter 2020. Comparatively, the average selling price of gold in first quarter 2020 was USD 1,582, a 21% increase over 2019. As the price of gold continues to climb in USD terms, Uzbekistan is likely to see its foreign exchange reserves swell as it is able to export fewer physical ounces to support the country’s current account deficit.

As discussed in prior notes, Uzbekistan is continuing to diversify its exports and while gold contributed 31.9% of exports in the first 5 months of 2020, agriculture is a rising star. In the first four months of 2020, Uzbekistan exported 23,500 tons, or USD 48 mln worth of sweet cherries, a 200% increase from 2019. Over the long-term, as investments in agricultural technology accelerate, we are confident in Uzbekistan’s ability to become the breadbasket to the CIS region, similar to California which supplies the USA with high-value horticulture products.

Open Skies Policy & Tourism

For those who have visited Uzbekistan from Europe or USA, it is abundantly clear that the country is not as cheap to fly to compared to other travel destinations such as Vietnam or Thailand. This is because until last year the Uzbekistan Airports Corporation was part of a monopoly which included Uzbekistan Airways (the national carrier) and all of the country’s airports and related service activities. Thus the likes of Turkish Airways, Fly Dubai and Korean Air, among others, paid a higher price for terminal slots and jet fuel, helping to support Uzbekistan Airways. This monopoly has since been dissolved by the government and on 12th June it was announced that from 1st August 2020 Uzbekistan is introducing an “Open Skies” policy at all of its regional airports which will pave the way for new airlines to enter Uzbekistan. They will be able to determine flight frequency, capacity and importantly pricing on their own accord. The Open Skies policy will not include Karimov International Airport in Tashkent for the time being, presumably because it is the most lucrative airport in the country. However, Bukhara and Samarkand are included in the list which will provide ample opportunity for new airline entrants to shuttle between airports abroad and these two cities which host significant tourism potential.

While very few of us are travelling at present due to the global governmental response to COVID-19, this arguably gives Uzbekistan time to develop its much neglected and outdated tourism infrastructure. Uzbekistan also opened its economy late in the global economic expansion, which started in 2009, and this may be a blessing in disguise with COVID-19 having arrived this year. Tourism represents a rather minuscule 3% of GDP, much smaller than what it will be in 5 or 10 years and it therefore should suffer minimally due to the lack of tourists, relative to countries such as Thailand and Cambodia where tourism represents 11% and 12% of GDP respectively.

Further on the topic of tourism and connectivity, during June, Ukrainian low-cost airline, SkyUp, requested permission from the State Aviation Administration of Ukraine to conduct twice-weekly flights between Kyiv, Ukraine and Tashkent. If approved, this route offers to add connectivity between Uzbekistan and the Eastern European tourism market.

At the end of June 2020, the fund was invested in 28 names and held 4.0% in cash. The markets with the largest asset allocation were Uzbekistan (93.7%) and Kyrgyzstan (2.3%). The sectors with the largest allocation of assets were materials (55.7%) and industrials (16.5%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.37x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 6.44%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares increased by 1.0% in June 2020 with a NAV of USD 1,117.30. The fund outperformed the AFC Frontier Asia Adjusted Index (−2.1%) and the MSCI Frontier Markets Asia Net Total Return USD Index (−2.9%) but underperformed the MSCI Frontier Markets Net Total Return USD Index (+1.7%) and the MSCI World Net Total Return USD Index (+1.5%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +11.7% versus the AFC Frontier Asia Adjusted Index, which is down by −11.6% during the same time period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.49%, 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.

A positive month of performance led to the second best quarterly performance for the AFC Asia Frontier Fund since inception with second quarter 2020 performance coming in at 9.6%. Though a rebound in market sentiment has helped, a large part of the positive return this quarter has come from non-benchmark names which reflects the benchmark agnostic strategy of the fund with a focus on stock selection.

Mongolia was the largest positive contributor to performance led by the fund’s junior mining companies and a bakery company, as a landslide victory for the ruling party in the parliamentary elections held on 25th June led to very positive sentiment for Mongolian stocks. The pandemic response in Mongolia has also been extremely good with only 220 cases.

Sri Lanka was the best performing global frontier market this month within the MSCI Frontier Markets Index with a gain of +6.2% taking its returns to +17.7% since the market reopened on 11th May 2020. Historically attractive valuations and a well-managed pandemic response compared to other South Asian countries led to much improved investor sentiment.


Attractive valuations and successful pandemic response - Sri Lanka outperformed the MSCI Frontier Markets Index since the market reopened for trading

(Source: Bloomberg, % change in prices from 11th May 2020 - 30th June 2020)


The flattening of the COVID-19 infection curve in Sri Lanka bodes well for the country’s future to transform into a tourism and trade hub for the greater South Asian region, while the pandemic response should be a positive for the present government as it goes into parliamentary elections scheduled for 5th August 2020.

The fund’s Sri Lankan holdings had a good month due to the market rally with gains being led by a telecom company and the two banks the fund holds. During the month the fund increased its exposure to a diversified conglomerate and once again initiated a position in a consumer and healthcare conglomerate after exiting this position in May 2018 at a good profit. The price of this stock corrected by 52% since we sold it and we have re-entered since we believe that the profitability in its key consumer business has bottomed.


Sri Lanka is the only major South Asian country to flatten the COVID-19 infection curve – this is positive for Sri Lankan tourism and trade policy

(Source: Bloomberg)


Normalcy returns to Sri Lanka – Galle Face Green in Colombo welcomes back visitors



The fund’s bank holding in Kazakhstan, Halyk Bank, had another month of strong performance with a gain of +17.5% on the back of a +17.2% gain in May as the bank declared better than expected first quarter results. Yoma Strategic, the fund’s Myanmar focused holding also had another good month with a stock price performance of +23.5% as it announced its intention to buyout Telenor’s stake in Wave Money, the mobile financial services joint venture in which Ant Financial will be taking a 33% stake.


Halyk Bank has outperformed the Kazakhstan Stock Exchange Index

(Source: Bloomberg, % change in prices between 31st March 2020 -30th June 2020)


Yoma Strategic Holdings has outperformed the MSCI Frontier Index since the March 2020 bottom – a good example of our benchmark agnostic approach

(Source: Bloomberg, % change in prices between 31st March 2020 -30th June 2020)


After two very strong months of performance, the Vietnamese market took a breather with the Ho Chi Minh VN Index correcting by -4.6%. Second quarter GDP growth managed to remain in positive territory with a minor expansion of +0.4% YoY, however economic numbers for June reflect the ongoing improvement in the economy as the domestic market recovers from the impact of the pandemic. Industrial production in June grew by +7.0% YoY which is significantly better than -10.6% and -3.1% reported for April and May. This recovery in industrial production was led by the important manufacturing sector which grew by 10.3% YoY, levels last seen before the pandemic struck in January 2020. Foreign direct investment (FDI) picked up too, with FDI disbursements for June growing by 8.3% YoY to USD 1.9 bln, the first YoY growth since February 2020 which is also a reflection of Vietnam benefiting from the shift of manufacturing activities from China.



(Source: Bloomberg)


Bangladesh also continues to make strides in further developing its manufacturing sector with this month’s annual budget further extending tax benefits to manufacturers and assemblers of smartphones. These policies are already having a positive impact with Samsung assembling smartphones in Bangladesh since June 2018. Pharmaceuticals, automobiles and smartphones are some of the manufacturing industries witnessing new investments as Bangladesh diversifies away from relying solely on the garment sector.

The State Bank of Pakistan cut benchmark interest rates in June by a further 100 basis points taking this year’s easing to 625 basis points. This easing is generally positive for the stock market sentiment and specifically for cyclical plays like cement and auto stocks. The fund’s cement and auto holdings performed well relative to the KSE100 Index so far in 2020. 


Interest rate easing in Pakistan has been positive for the fund’s cyclical stocks

(Source: Bloomberg, % change in price between 31st March 2020 – 30th June 2020)


The best performing indexes in the AAFF universe in June were Sri Lanka (+6.2%) and Iraq (+5.0%). The poorest performing markets were Cambodia (−15.1%) and Vietnam (−4.6%). The top-performing portfolio stocks in June were a Mongolian junior gold miner (+53.1%), a Sri Lankan bank (+28.0%), a Mongolian coking coal miner (+27.5%), another Mongolian junior gold miner (+25.0%), and a Myanmar-focused conglomerate (+23.5%).

In June, the fund bought a consumer healthcare company in Pakistan, a consumer conglomerate in Sri Lanka and a uranium miner in Kazakhstan and sold a construction company in Vietnam. During the month the fund also added to existing positions in Bangladesh, Sri Lanka, Mongolia and Vietnam and partially exited positions in Bangladesh and Mongolia.

At the end of June 2020, the portfolio was invested in 72 companies, 2 funds and held 3.4% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (11.2%), and a pharmaceutical company in Bangladesh (5.0%). The countries with the largest asset allocation were Vietnam (21.1%), Mongolia (20.5%), and Bangladesh (11.3%). The sectors with the largest allocation of assets were consumer goods (25.2%) and industrials (16.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.44x, the estimated weighted harmonic average P/B ratio was 0.72x and the estimated weighted average portfolio dividend yield was 3.52%.

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AFC Vietnam Fund - Manager Comment



After being up nearly 5% earlier in June, profit taking set in and markets experienced a broad correction. Despite Vietnam eking out small GDP growth for the first half of the year, both foreign and local investors reduced their risk ahead of second quarter earnings. The index in Ho Chi Minh City lost 4.2% and the Hanoi Index gained 0.3% in USD terms (with the two highest-weighted banks pushing the index up 12% at one point), while small and mid-cap stocks showed small losses. The continued defensive positioning helped the fund to avoid bigger losses last month and the NAV lost 0.3% with a NAV of USD 1,620.26 bringing the return since inception to +62.0%. This represents an annualized return of +7.7% p.a. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.70%, a Sharpe ratio of 0.53, 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

The volume on the Vietnamese stock market was relatively high during the month due to increased interest from local investors. Foreigners continued to be net sellers for most of the month, which was easily absorbed by the always more dominant local investor base. In 2020, foreigners sold more than USD 200 mln, but to keep that in context – this is less than the current average daily turnover on the two stock exchanges and just a little more than 0.1 per-mille of total market cap. We should also not forget that during the market collapse between 2008 and 2012 foreigners were buyers most of the time, so any directions to be interpreted from foreign flows are questionable. This confirms our theory that while international money flows are important for Vietnam, as is the case for any other market, it is more important to see growing domestic investor participation in order to create a sustainable stock market.


Foreign market participation rate over the years

(Source: HOSE, AFC Research)


Monthly price trend and market turnover 2012-2020

(Source: Bloomberg)


Internationally, stock markets recovered strongly on the back of record stimulus programs from governments around the globe with their size and scope easily surpassing the stimulus programs during the global financial crisis back in 2008. Increased liquidity from central banks brought back not only investor confidence, but also many stock indices, which rebounded to within 10% of pre-crisis levels, or in the case of the American technology index, NASDAQ, to a new record high. Given lower earnings for 2020, little earnings visibility for 2021 and stretched valuations in many developed markets, we should finally see a relative outperformance of Frontier- and Emerging markets which have underperformed for several years and which offer much better value on prospects of a reflated economy. The US investment house Stifel showed in a recent study how close to a turning point we are for value investing. With Frontier Funds having lost almost 90% of their assets under management, the turning point should be upon us. 



(Source: Stifel, Nicolaus & Company, Incorporated)


We do not believe that local investors in Vietnam, who are currently driving the market, have a close eye on those things, but cheaper money certainly helps very speculative-oriented retail investors, clearly seen in the sudden increase in liquidity since May.

After the strong recovery from April to early June we saw the first signs of a necessary and long-awaited correction. With the world turning from overly pessimistic to outright optimistic based on mostly positive news flow of an imminent recovery in the global economy, we would like to highlight the importance of looking beyond the strong headline numbers we see on financial and mainstream news nowadays. Instead of focusing too much on US/European- or Vietnamese numbers, it is worth looking into the recovery of China which was the first country to enter and recover from the COVID-19 crisis. Auto sales, for example, have jumped back strongly to pre-crisis levels, while sales in Europe are still 57% below last year’s level. But does this mean that China’s car industry has successfully recovered from the crisis already? Honestly, we do not know – and we doubt anybody else is able to tell with only a small amount of certainty. The recent May numbers are certainly encouraging, but could also be merely pent-up demand after the numbers crashed by -80%.



(Source: CEIC, Matthews International Capital Management, LLC)


Those previous disastrous numbers are now also the basis for the sometimes euphoric “recovery numbers” we currently read all across countries and industries. After all, a month-on-month improvement of 100% from -80% means nothing more than the number is still 60% below last year! Keeping this – and the risk of a second wave - in mind, we will only get an idea about the quality of the economic recovery in the months ahead. Current expectations for automobile sales in China have now been increased from -20% to -10% for the full year of 2020. For next year, estimates are for a recovery of +13%, which seems extremely uncertain. In other words, if the numbers turn out to be correct, there would be no growth at all for 2 years.



The same can be said for the very important retail sales number which probably reflects the domestic sector best as well as the confidence and power of the individual consumer. That is why we will closely watch this number in Vietnam over the coming months.


Monthly Growth Rate of Total Retail Sales of Consumer Goods in Vietnam



Can Vietnam do better?

With Vietnam soon to reach 3 months without any community infections, daily life has become pretty normal and for many people COVID-19 is already history, at least for the time being. ASEAN countries, with a population of more than 600 mln, have reported far fewer total cases and deaths than compared to just Germany for example, which is not doing bad themselves. 



(Source: ASEAN Post, WHO)


The normalization of life might also be the main driver of a regional and worldwide outperformance in economic activity. With the slight economic growth of 0.37% experienced in the first 6 months of 2020, Vietnam will certainly be one of the few larger countries to show any growth at all. Like many other countries, Vietnam is also actively trying to revitalize its grounded tourism industry with domestic price incentives. While skeptical at first, we have to admit that these programs worked out in a combined effort between the government, tour operators and hotels. Vietnam’s famous street life has also come back within just a few weeks! While in the beach city of Danang, for example, there were next to zero tour buses to be seen at the beginning of June, now the streets are again crowded with many buses carrying Vietnamese tourists, mostly from Hanoi and Ho Chi Minh City, instead of Chinese and Koreans. To a higher extent, these better numbers are only valid for the weekends. With the majority of hotels now open again, occupancy rates at seaside destinations are back to around 80%, but this has only been achieved by heavy discounting for local tourists. Therefore, we are not convinced that hotel operators are really able to make any profits at the moment, but at least local restaurants, taxis and other service providers are back in business, employing people without government subsidies or guaranteed income for local workers. The situation is still gloomy though for all businesses catering to foreign tourists as long as borders remain closed with no relaxations of COVID-related immigration regulations in sight.


Tourism services revenue growth (%; yoy)

(Source: General Statistic Office Vietnam, AFC Research)


Vietnam-EU Trade: EVFTA Ratified by Vietnam’s National Assembly

Vietnam’s National Assembly on 8th June ratified the European Union Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement (EVIPA) paving the way for it to take effect sometime in July or August this year. The agreement was unanimously approved with 94.6% of lawmakers in favor of the EVFTA and 95.6% percent in favor of the EVIPA. It will eliminate 99% of tariffs, although some will be cut over a 10-year period, while other goods, notably agricultural products, will be limited by quotas.



The EVFTA is an ambitious pact providing almost 99% of the elimination of custom duties between the EU and Vietnam. As per the Ministry of Planning and Investment, the FTA is expected to help to increase Vietnam’s GDP by 4.6% and its exports to the EU by 42.7% by 2025. The European Commission has forecast the EU’s GDP to increase by USD 29.5 bln by 2035.

In 2019, Vietnam exported USD 41.5 bln worth of goods and services to the EU, while the value of imports from the region reached USD 14.9 bln, generating a trade surplus of USD 26.6 bln.

In 2019, mobile phones stood at “1st position” among exports to the EU with USD 12.2bln, followed by shoes (USD 5bln), computers (USD 4.7bln) and garments (USD 4.3bln). 


Top export products to the EU in 2019 (USD bln)

(Source: GSO, AFC Research)


These top export sectors to the EU generate thousands of jobs in Vietnam, especially in shoes, garment, seafood and other agricultural products such as coffee. It will help the country to increase workers’ income and therefore consumption is expected to grow strongly. According to the Chairman of the Vietnam Association of Garments, the industry will benefit a lot when import taxes are reduced from 12% to 0% over the next 3 to 7 years. The association estimates that export revenues of garments will increase by 50% over the next 10 years. Seafood is also another beneficiary of this agreement, especially pangasius. Last week, the CEO of Vinh Hoan Corp, the largest pangasius exporter in Vietnam, said to Cafef, “pangasius export revenues to the EU is expected to double from currently USD 250 mln to USD 500 mln over the next 3 years after import taxes will be reduced from 5.5% to 0%”. Also, the Vietnamese Coffee and Cocoa Association is confident that export revenues to the EU will jump sharply after import taxes drop to 0% in July/August of this year. 

At the end of June 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (6.7%) – an insurance company, Vietnam Container Shipping JSC (4.5%) – a container port management company, TanCang Logistics and Stevedoring JSC (3.8%) – a logistics company, LienViet Post Joint Stock Commercial Bank (3.2%) – a bank, and Phu Tai JSC (3.1%) – a home and office furnishings company
The portfolio was invested in 48 names and held 23.0% in cash. The sectors with the largest allocation of assets were industrials (28.6%) and consumer goods (22.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.54x, the estimated weighted harmonic average P/B ratio was 1.02x and the estimated weighted average portfolio dividend yield was 7.63%.

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Stay safe and kind regards,

Thomas Hugger
CEO & Fund Manager

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