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AFC Asia Frontier Fund Market Update - March 2020

“I feel it’s a time when previously cautious investors can reduce their overemphasis on defense and begin to move toward a more

“I feel it’s a time when previously cautious investors can reduce their
overemphasis on defense and begin to move toward a more
neutral position or even toward offense”

− Howard Marks of Oaktree Capital on 6th April 2020



The first quarter of 2020 has been volatile with March seeing extreme market swings and stock market corrections as COVID-19 spread to most parts of the globe. Below we answer some important questions and you can use the quick links to access each of the following questions, or read on sequentially:

What is the impact on performance?

The performance of the AFC Asia Frontier Fund has historically been relatively resilient when the markets go through cycles of panic selling or volatility. Similarly, in March the AFC Asia Frontier Fund outperformed most benchmarks and also declined less than most individual markets. Diversification of the portfolio and the fund’s value approach have certainly helped while lower correlations of Asian frontier markets with global markets is certainly playing out in practice and not only in theory.

Extreme volatility in March 2020 hurt fund performance but the fund has managed to outperform most indices and individual markets 

  Mar-20 YTD 2020
MSCI World Index -13.2% -21.1%
AFC Asia Frontier Fund -14.2% -19.9%
MSCI Emerging Markets Index -15.4% -23.6%
MSCI Frontier Markets Index -22.0% -26.6%
MSCI Frontier Markets Asia Index -22.3% -29.8%
Vietnam VN Index -26.1% -32.4%
AFC Frontier Asia Adjusted Index -26.2% -31.8%
Pakistan KSE100 Index -28.5% -33.1%

(Source: Bloomberg)

Fund returns have seen less downside when global markets witness big corrections*

Month MSCI World Index AFC Asia Frontier Fund
Feb-20 -8.5% -2.8%
May-19 -5.8% -1.6%
Dec-18 -7.6% -0.8%
Oct-18 -7.3% -5.5%
Jan-16 -6.0% -3.5%
Aug-15 -6.6% -1.4%
May-12 -8.6% -7.6%

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



(Source: Bloomberg, based on monthly observations since inception,
correlations with MSCI World Index)



(Source: Bloomberg, based on monthly observations since inception)


What is the outlook during this pandemic-led market correction?

Global markets saw their biggest monthly corrections since the 2008-09 global financial crisis and there were two major reasons for this. First, the number of infections continued to rise in the US, Europe and other parts of Asia which led many countries to implement or extend lockdown measures. This has consequently led to businesses and social activity coming to a standstill almost worldwide and demand has dropped off due to lockdowns and social distancing measures. Furthermore, with a large portion of the globe in self-confined quarantine, global supply chains have also been impacted and as a result we have a demand and a supply shock.


Significant increase in global COVID-19 cases has rattled markets

(Source: Bloomberg, % change in indices)


Given the events over the past six to eight weeks it is quite evident that the world economy will enter a recession or significantly slower economic growth in 2020 and the market correction has been trying to factor this in. The worst of the economic impact will be felt in the second quarter of 2020 with earnings growth being negative for most companies in many countries. The economic outlook beyond the first half of 2020 depends primarily on when the number of infections peak and how soon countries can go back to normal economic activities. Nonetheless, even when countries emerge from lockdown, these restrictions will most likely be eased in a phased manner which will inhibit a return to normalcy over the short term.



(Source: Economist Intelligence Unit)


Looking at China as an example, after COVID-19 hit in large numbers in early January and the resulting lockdown in the third week of January, the country has gradually started returning to normalised economic activities from mid-March after infections peaked at the end of February. The consensus is that a country could regain some semblance of normalcy in economic activities within 6-8 weeks after an aggressive lockdown and as infections peak out. However, these are just calculated guesses and more importantly one must note that though industrial activity is recovering in China, consumer activity still remains very soft given the uncertainties over job security and future disposable incomes, while the country risks a “double dip” as factories receive order cancellations as western consumers are still in various stages of lockdown.


China PMI has recovered in March but consumer spending still remains soft

(Source: Bloomberg)


Therefore, it is realistic to assume that after a tough first half of 2020, economic growth will not recover fully in the second half despite industrial activities seeing some pick up post lockdowns. The consumer will still be impacted probably due to loss of job security, lower incomes and more importantly the psychological impact of the pandemic which will deter consumers from reverting to their previous routines as soon as cases peak. Furthermore, social distancing measures may not be immediately lifted once infections peak to prevent any relapse and this will also play on consumer spending for the better part of 2020. Simply put, you will not have two dinners or two cups of coffee for the one you missed out due to lockdowns or social distancing.


Social distancing is here to stay for 2020

(Source: Bloomberg)


Are we through the worst of the panic selling?

Global markets have at least partially discounted slower GDP growth and negative earnings growth for 2020 but like we have written in our newsletter since COVID-19 first hit China in late January , a peak in the number of new infections will most likely calm markets down and therefore investors would be looking at when the number of new cases will peak globally. When these infections will peak out is still uncertain but the hope is that for the majority of countries in lockdown these peaks will occur sometime in April or May.  We believe that when there is an indication that new infections are peaking there could be a swift rally in equity markets since almost every market has corrected by 20% or more so far this year and especially in Asia where market corrections have been over 25% for the majority of Asian indices. However, until infections reach a peak global markets will remain volatile. 

Hence, we believe that it would be more logical to look at earnings and valuations not based on 2020 estimates but on normalised numbers of 2021 and 2022 (assuming we are back to full normalcy in 2021 and not second half of 2020).


Markets are hopeful that COVID-19 cases peak in April or May

(Source: Bloomberg)


Consumption related stocks have been beaten down in Asia as investors factor in lower consumer spending due to job losses, lower incomes and travel restrictions. Any recovery in stock markets will most likely be led by cyclicals namely in the consumer discretionary sector i.e. automobiles, beverages, modern retail and travel.


COVID-19 is different from SARS in terms of contagion but expect consumer discretionary stocks to lead any recovery rally

(Source: Bloomberg, % change in indices)


What is the impact on Asian frontier markets?

COVID-19 has spared almost no country, including Asian frontier markets. However, the number of infections in Asian frontier markets is nowhere close to those of the U.S. and Europe. This is mainly due to the closing of airports and borders to international travellers and schools very quickly and/or lower testing capabilities. However, though there are concerns on testing capabilities in some developing countries, the authorities have been very proactive in countries such as Bangladesh, Mongolia, Sri Lanka, Uzbekistan and Vietnam, which closed its borders to international travellers within days and not weeks. In addition to this, all of our major markets have announced countrywide lockdowns in very short order upon the virus’ arrival without any political squabbling.


COVID-19 cases are still low in frontier and emerging Asian countries on relative basis – could be due to lower testing but also due to quick and proactive measures to stop international arrivals and social distancing

(Source: Bloomberg)


In terms of the economic impact on our universe, like elsewhere, the effects of lockdowns and lower demand due to the same will lead to a negative economic impact in the second quarter of 2020 as domestic consumption and industrial production slows down. In addition to this, the economic slowdown in the U.S. and Europe will hurt exporters in our universe like Bangladesh, Cambodia, Pakistan and Vietnam. Tourism dependent economies like Cambodia, Myanmar, Sri Lanka and Vietnam will likely see a big drop in tourist arrivals this year. Overall, 2020 will see lower than historical GDP growth in Asian frontier markets which is a phenomenon not restricted to Asian frontier markets but most major developing and developed markets as well.



(Source: World Bank, Asian Development Bank, Economist Intelligence Unit, State Bank of Pakistan, Asia Frontier Capital)



(Source: Asian Development Bank)



(Source: Bangladesh Bank, IMS Securities, CT CLSA Securities, Vietcapital Securities, Asia Frontier Capital)


Frontier and emerging markets have also seen their currencies weaken due to interest rate cuts, capital outflows, current account deficits, concerns on external financing and on worries about lower foreign exchange income in the form of lower exports, tourism receipts and worker remittances. These are valid concerns but there has not been a free fall in currencies as one big positive is the significantly lower oil price which will help balance some of the currency pressures for oil importing countries like Bangladesh, Pakistan and Sri Lanka. During the previous oil price collapse between 2014-2016 as well, the current accounts and general economy of these countries had a net benefit from lower oil prices despite concerns about weaker remittances. 

In addition to this, unlike 2018 when U.S. interest rates were rising leading to currency pressure for developing countries, interest rates are now being cut globally. Contrary to 2018 when we had a scenario of rising interest rates and high oil prices, we now have much lower interest rates and significantly lower oil prices. Therefore, the lower oil price will be a tailwind for most Asian frontier markets as this will help manage inflation and interest rates and can support the recovery of growth in 2021.


South Asian frontier countries dependent on remittances from Middle East will face near term impact – in the longer run remittances have continued to grow depite movements in oil prices

(Source: Bloomberg, remittance growth rebased to 100)


Furthermore, as the chart below shows, some emerging market currencies have depreciated more significantly compared to Asian frontier currencies probably due to more foreign capital being invested into these emerging currencies. Asian frontier markets on the other hand still have low foreign investor participation in capital markets, which is a blessing in times like now. 


Asian frontier currencies have done relatively better than emerging market peers during this volatile period

(Source: Bloomberg)



(Source: IMS Securities, Central Bank of Sri Lanka, General Statistics Office of Vietnam, Bangladesh Bank, Tellimer)


Despite the near term macro impact, some companies are less affected than others such as grocery retailers, pharmaceutical companies and telecom operators. Both groceries and pharmacies are essential services which have been relatively less impacted by lockdowns while data usage for telecom companies will most likely see an increase as most people stay home. The fund holds the third biggest pharmaceutical company by market share in Bangladesh, the largest telecom company by market share in Sri Lanka and a conglomerate in Sri Lanka which operates the second biggest grocery retailer.

What monetary and fiscal measures have Asian frontier countries taken?

Over the past month there have been massive monetary and fiscal policy measures announced across countries. Both the U.S. and countries within the EU have announced huge fiscal support plans while the U.S. Fed cut benchmark interest rates by another 100 basis points to almost 0%. Global central banks followed this cue and all the fund’s major markets have announced interest rate easing as well as fiscal support measures as provided below. 

These policy moves will help cushion some of the negative economic impact but it will also lead to more stretched fiscal balances. As a result, some countries in both frontier and emerging markets could request for funding from multilateral and bilateral creditors with the International Monetary Fund, World Bank and Asian Development Bank having committed financing lines to affected countries. 

Some countries like Pakistan and Sri Lanka which both have large fiscal deficits don’t have better timing to execute much needed reforms once the COVID-19 led issues have passed as this event will be a sound reason to carry out reforms linked to privatisation, taxes, public sector enterprises and exports. 

Major Asian frontier markets have taken emergency monetary and fiscal measures

Country  Key monetary measures Key fiscal measures
Bangladesh 75 basis points emergency cut in benchmark interest rates, 150 basis points cut in cash reserve ratio, relaxation in repayment terms of bank loans. USD 600 million subsidy package to pay wages to workers in the garment industry, USD 3.5 bln subsidized working capital loans to industrial and service sectors, USD 2.4 bln subsidized working captal loans to small & medium enterprises.
Pakistan 150 basis points emergency cut in benchmark interests rates, relaxation in repayment terms of bank loans. Reduction in fuel prices, deferment in payment of utility bills, USD 600 million package for  cash handouts to lower income families, USD 600 millon relief package for exporters, tax relief for the construction industry. 
Sri Lanka 50 basis points emergency cut in benchmark interest rates, statutory reserve requirement reduced by 100 basis points, reduction in capital adequacy ratio requirements for banks, six month debt moratorium for most impacted sectors, lower interest rate working capital loans. Banned import of all non essential goods, cash handout to lower income families and elderly, deferred payment of taxes and utility bills.
Vietnam 100 basis points cut in benchmark interest rates, USD 12 bln credit package of lower interest rate loans to the most affected sectors, delay of interest payments on loans to affected sectors, banks to delay cash dividends. USD 7.7 bln package for delayed tax payments and land use fees, USD 2.6 bln package to support workers in impacted industries, faster execution of infrastructure projects. 

(Source: IMS Securities, Topline Securities, CT CLSA Securities, SSI Securities, Tellimer)

What has not changed?

The big question to be asked is, what will be the impact from the COVID-19 crisis for global markets and more specifically Asian frontier markets? The spread of COVID-19 will surely impact near term growth but will it stop companies from relocating their operations from China? Will global retailers stop sourcing garments from Bangladesh? Will it alter the attractive demographics of our universe? Will the geopolitical importance of countries such as Myanmar, Pakistan and Sri Lanka get diluted? Will earnings growth be negative beyond 2020?

We strongly believe that one of the big lessons learned from the COVID-19 crisis is the overreliance by European and North American countries on products entirely sourced from China and India, like medical equipment and chemicals for pharmaceutical products. We expect that some of this production could go back to Europe and North America but also to other Asian frontier and emerging countries (like textiles and light manufacturing) in order to reduce the dependence on China and India which can be “life threatening” as experienced with the blocked supply of basic goods in Europe and North America.


(Source: Kingmaker Footwear, Yue Yuen, Dream International)



(Source: Bangladesh Garment Manufacturers & Exporters Association)



(Source: John Keells Holdings)


Asian frontier markets will continue to have favourable demographics with a sizeable young population who will want to consume more in the future despite the near term hit to consumption. There have been previous negative impacts to consumption in our markets but over the longer term demand for consumer goods has seen an increasing trend. Asian frontier markets are still urbanising, modern retail is still growing, automobile sales per capita is still low and smartphone penetration has only begun to increase in the past few years. In short, penetration levels of consumer goods is low. Furthermore, once the situation does stabilise and growth recovers, consumers will have a few tailwinds accompanying them in the form of low fuel prices, low interest rates and lower inflation.



(Source: United Nations Population Division)



(Source: World Bank)


Asian frontier consumer companies have displayed earnings growth across economic cycles

        Cumulative Earnings Growth Return on
Company Country Sector P/E 5 Year 10 Year Equity
Dialog Axiata Sri Lanka Telecom 6.4 11.7% 8.4% 15.2%
Indus Motor Pakistan Automobiles 6.5 28.8% 25.8% 23.6%
Beximco Pharmaceuticals Bangladesh Healthcare 8.2 12.7% 16.9% 10.4%
Singer Bangladesh Bangladesh Consumer Appliances 13.8 19.1% 10.0% 47.3%
BAT Bangladesh Bangladesh Tobacco 17.7 15.2% 16.2% 25.8%
Sabeco Vietnam Beverages 18.9 14.6% NA 29.9%
Unilever Pakistan Pakistan Consumer Staples 21.6 15.4% 29.8% 116.9%

(Source: Bloomberg, P/E based on trailing 12 month earnings)

How do valuations look now?

Simply put – there are multiple bargains available and over the past decade it has possibly never been easier to be a stock picker. As mentioned at the start of the newsletter, as infections rise and poor economic numbers and quarterly results come through, market volatility will remain high and therefore it is easy to get swayed by this bearishness. The companies that the AFC Asia Frontier Fund holds and those on our shortlist have been through stressful economic conditions previously and have been in existence for the last decade, and in many cases even longer. 

These companies have strong balance sheets with low leverage and well established brand names and franchises. Every market in our fund universe now trades at a P/E below 12x while the AFC Asia Frontier Fund trades at its lowest ever P/E of 7.8x. All of our markets now have blue chip companies across sectors trading at single digit P/E multiples and well capitalised banks trading at P/B ratios of 0.3-0.5x. 

Consumer names have been beaten down badly due to the expected negative impact on demand but we see a lot of opportunities in these names across our markets but more specifically in Bangladesh, Pakistan, Sri Lanka and Vietnam. 


Multiples have contracted and stock picking has never been easier

(Source: Bloomberg)


Fundamentals of AFC Asia Frontier Fund portfolio companies are sound with low leverage

P/E P/B Dividend
Return on Equity Debt/
Equity ratio
3 Year Earnings CAGR
7.8 0.7 3.8% 15.5% 0.4 14.2%

(Source: Asia Frontier Capital)

Impressions from locked down Asian Frontier Countries

Since our team is off travelling for the next few months or until it is realistically possible to travel again, some images from the lockdowns in several of our markets helps give a feel of the on-the-ground situation. These lockdowns only allow for citizens going out of their home for necessities such as groceries, medicines or banking related work. We hope that these empty streets will fill up soon so we can get back to our on the ground research but on the positive side everyone is now breathing fresher air!


An empty Galle Face in Colombo



Downtown Ho Chi Minh City

(Source: Vietcapital Securities)


Hardly anyone to be seen on a Karachi thoroughfare

(Source: IMS Securities)


A deserted look in Dhaka, Bangladesh