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Asia Frontier Capital (AFC) - 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


AFC Asia Frontier Fund USD A1,019.72−14.2%−19.9%+2.0%
AFC Frontier Asia Adjusted Index2 26.2%31.8%25.8%
AFC Iraq Fund USD D523.07−7.1%−16.6%−47.7%
Rabee RSISX Index (in USD) 7.1%−14.8%−59.5%
AFC Uzbekistan Fund989.55−7.4%−9.5%−1.0%
AFC Vietnam Fund USD C1,382.27−18.4%−22.7%+38.2%
Ho Chi Minh City VN Index (in USD) 26.1%32.4%+16.4%
  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.

These are unprecedented times for the global economy, comparable in recent memory only to 2008/09, but structurally different whereby the events of 2008/2009 were credit related, while the current crisis is virus-induced, with Central Banks and governments seemingly doing everything in their power to prevent a credit crisis.

Furthermore, the world is facing a pandemic probably only last seen on a similar scale 100 years ago during the influenza pandemic of 1918-1920 "Spanish flu" and this has not only led to significant volatility in stock markets but has also impacted our daily lives and activities irrespective of which part of the world we may be in. 

Though there are concerns on healthcare infrastructure in developing countries like Asian frontier markets, these countries have taken very swift actions to prevent the virus from spreading. Sri Lanka and Vietnam have managed to maintain the daily new case count to single digit growth rates. In addition to this almost every Asian frontier market closed its borders to international travellers within days and not weeks and have announced nationwide lockdowns which gives them room to manage the current situation. 


Sri Lanka and Vietnam have managed the infection curve relatively better than some peers

(Source: Bloomberg)


Despite the uncertainty and large market downswings, our funds have been able to show resilience with declines which have outperformed most indices and markets globally. This reflects the attention paid to investing in undervalued stocks and following a benchmark agnostic approach. Low correlations of Asian frontier markets are playing out in practice, not only in theory.

The recent stock market correction, though painful, is now providing an excellent entry point to investors as valuations across our universe are at 10-year lows – stock picking has never been easier. Though we believe global markets could remain volatile in the near term as the number of infections rise and poor economic numbers come through, a sustained rally could be seen once there is an indication of infections peaking especially in Europe and the U.S.

Asian frontier markets have bounced back very strongly after previous episodes of market dislocation such as in 2008-09 with markets like Pakistan and Vietnam generating much higher returns than major indices. Though it is very easy to get distracted with the negative consequences of the pandemic, Asian frontier markets are at present and will over the next few months provide an opportunity to invest in these markets last seen a decade ago.


Valuations for frontier markets are back to levels last seen in 2009 –
stock picking has never been easier in a decade

(Source: Bloomberg)


Asian frontier markets have bounced back very strongly

after previous episodes of market dislocation

Index 2008 2009 2010
Vietnam VN Index -68.8% 48.3% -7.2%
Pakistan KSE100 Index -67.6% 50.0% 26.1%
Kazakhstan Stock Index -62.8% 46.6% -2.2%
MSCI Frontier Markets Index -55.4% 7.0% 19.0%
Mongolia MSE Top 20 Index -49.9% -1.5% 173.7%
Sri Lanka CSEALL Index -43.1% 122.6% 102.0%
MSCI World Index -42.1% 27.0% 9.6%

(Source: Bloomberg, all returns in USD)

Below you will find the manager comments for each of our funds as well as a Market Update from the AFC Asia Frontier Fund  which tries to answer the most likely questions from our investors and newsletter readers. 

On an operational level, we at Asia Frontier Capital continue to operate both onsite as well as remotely (currently from 6 different countries). From the onset of the COVID-19 crisis we have had continuous and uninterrupted access to our systems from all of our offsite locations and we have been able to continue managing all of our funds smoothly and communicate with our counterparties to receive and give timely information and updates. This newsletter was compiled partially onsite as well as remotely, while our February 2020 newsletter was produced entirely remotely.

We hope you find this update useful and as the saying goes: “Life is a marathon, not a sprint”. 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 −7.1% in March with a NAV of USD 523.07, the same return as its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index). Year to date the RSISUSD was down 14.8% while the fund lost 16.6%.

The crash in oil prices, brought on by the oil price war between Russia and Saudi Arabia and the collapse in consumption due to COVID-19, seems like the perfect storm to hit Iraq given its vulnerabilities to such external shocks. This is not the first perfect storm to hit it, however. The last one which was arguably more perfect than the current one took place in the summer of 2014 when ISIS took over a third of the country, threatening Iraq's imminent break-up, and for good measure oil prices crashed. 

As in 2014, the fall in oil prices poses serious threats to Iraq’s oil-dependent economy, but the current storm hits a very different Iraq from that of 2014 – especially changed this time is Iraq's equity market. Then, the equity market was at the end of a multi-year bull market that, as the Rabee Securities RSISX USD Index (RSISUSD), had almost doubled by early 2014 from the levels of 2010. Comparatively, now the Iraq equity market is at the end of a multi-year bear market that saw it decline 71% from the 2014 peak. Fuelling the 2014 bull market were foreign investor inflows and the government’s multi-year investment spending program which boosted the economy and domestic liquidity. The opposite is true in the current bear market with most foreigners having withdrawn from the market and the government’s investment spending having been practically non-existent for a number of years.


RSISUSD Index: Bull market 2010–2014 – Bear Market 2014–2020

(Source: Bloomberg)


The significant drop in oil revenues will force the government to sharply curtail expenditures in the same way that it did in 2014–2016, with negative consequences for the economy, yet unlike then the cuts will not be magnified by the need to shift resources to the sharply increasing cost of the ISIS conflict. The combination of the different profiles of investment spending and expenditures have vastly different implications for both the economy and equity market.

In 2014–2016 the dramatic cuts to investment spending and diversion of resources towards the war effort led to year-over-year contractions in non-oil GDP of 3.9% and 14.4% in 2014 and 2015 respectively. The severity of the drop was such that the small bounce of 1.3% in 2016 was followed by a 0.6% drop in 2017. The multiplier effect of these contractions negatively impacted corporate earnings and ultimately led to the equity market’s multi-year decline.

Today’s different circumstances mean that the non-oil economy will not face the same severe double whammy as then, and as such the contractions will be of a different magnitude. It will nevertheless be negatively impacted by the effects from the COVID-19 lockdown far more than any cuts to the government’s investment spending. While every sector of the economy will feel the effects of the lockdown, the informal sector which is dominated by retail and hospitality and which accounts for the bulk of private sector economic activity will be particularly hard hit. In comparison, these effects on the equity market will be through a few sectors that dominate the market, consisting of banking, telecoms and consumer staples.

The banking sector was hurt the most between 2014–2016 as the cuts to the government’s investment spending were disastrous for private sector businesses at the receiving end of the cuts, whose finances deteriorated. This in turn affected the quality of bank loans as these businesses accounted for the bulk of bank lending. Consequently, the banks’ earnings suffered from the increasing non-performing loans (NPL’s) coupled with negative loan growth, as well as losing funding sources due to negative deposit growth. The scale of the effects on private sector businesses from any future cuts by the government should be smaller this time around and should not lead to the same negative effects for the banking sector. However, it would be reasonable to assume that the sector’s tentative recovery will be on hold, while any reversal would be limited given the nascent recovery prior to the COVID-19 shock and the sector’s limited exposure to the informal economy. With the sector contributing the most to the market’s 71% decline from the 2014 peak, it’s difficult to see how bank stock prices can decline much further in response to these developments. 

Other reasonable assumptions that can be made are that telecom stocks could benefit from the increased need for broadband induced by the lockdown, while any moderation in consumption for soft drinks – whose local bottler accounts for the bulk of the consumer staples sector market capitalization in the equity market – should be limited. These are very early thoughts, and much more data on the economy and specific companies are needed before any meaningful analysis can be made. However, such data and analysis in the short term will play second fiddle to shifting expectations on the future direction of oil prices. 

Forecasting the direction of oil prices, especially at critical junctures, is fraught with uncertainty, as subsequent prices have made a mockery of all predictions throughout recent history: from those calling for ever higher prices when “peak oil” was the consensus thinking, to those calling for ever lower prices when “lower for longer” became the consensus. However, analysing the supply-demand for oil, while equally fraught with uncertainty, it is possible to analyse a few broad trends to help frame expectations for the general direction of prices. 

The effects of the lockdowns related to COVID-19 have been profound on the global demand for oil given that about 60% of consumption comes from transportation. The first contraction in demand was seen when China went into lockdown in January and expanded as the rest of the world followed suit in March. Current expectations call for a decline in April of up to 20 mln barrels per day (mbbl/d) from initial world oil demand estimates of 101 mbbl/d, according to the short term energy outlook of the U.S. Energy Information Administration. 

The known nature of the virus precludes a return to full normalcy when global lockdowns are expected to ease from mid-summer onwards. Combined with the unknown nature of the new normal as the world learns to deal with and ultimately contain the virus, the return to a pre-virus oil demand picture is unlikely within the next 12 months. But in 6 to 9 months, demand for oil should recover from the extreme lows of April and trend upwards to a small drop from base-line demand by year end, as suggested by the chart below.


Global Oil Demand Impact from COVID-19

(Source: CNBC 26/03/2020 citing Goldman Sachs Investment Research,
International Energy Agency (IEA), Bloomberg, Reuters, New York Times)


The supply-side of the equation is much harder to predict given the multitude of possibilities of producer reactions to low, yet extremely volatile oil prices in which a great deal of oil production becomes uneconomical. The International Energy Agency (IEA) estimates that about 3.8–5.0 mbbl/d of global production is uneconomical at USD 25–30/bbl prices for Brent crude. The industry has responded to the severe price drop by cutting expenses and in particular capital spending plans, with the IEA reporting a range of 20–30% in cuts to initial plans for 2020. It would be reasonable to conclude that these and other actions would lead to the removal of about 2–5 mbbl/d from an initial supply estimate of 102 mbbl/d for 2020. But these will take a few months to alter the supply-demand imbalance and as such all the excess supply will end up in storage.

Global crude storage capacity will likely be maxed out in the next few weeks, currently estimated at 63% capacity with an effective full capacity at 80%, which will force additional significant production cuts above and beyond the above mentioned 2–5 mbbl/d, this time by economically viable crude producers. This will likely accelerate, or pre-empt, the currently discussed plans for a new round of coordinated production cuts by OPEC+, or OPEC++ if other countries such as the U.S. join.

All of the above will likely mean that oil prices will remain under pressure for the next 9 to 12 months, probably in a price range of USD 30–40/bbl for Brent crude. However, with a return to some sort of post-lockdown normalcy in early 2021, low oil prices should stimulate demand, and coupled with the massive worldwide fiscal stimuli to the global economy should begin to recover. Following a time-lag, as demand absorbs the stored supply, the supply-demand picture should be tilted in supply’s favour, and oil prices will trend higher – likely to a price range of USD 45–55/bbl for Brent crude. 

The outlook for Iraq, within this scenario, i.e. an average of USD 30–40/bbl for Brent crude over the next 12 months, is far from benign, but hardly bleak. As noted in this newsletter in the past, the economic consequences from the continued political paralysis would be that no new budget will be passed, and thus the government will continue to implement the current spending parts of the 2019 budget. However, it will embark on dramatic cuts to investment spending plans and expenditures on goods and services, though it will maintain expenditures on salaries, pensions and social security. These measures imply annual expenditures of USD 69 bln leading to a cumulative 12-month budget deficit of USD 25–38 bln. This can be comfortably funded by indirect monetary financing by the Central Bank of Iraq (CBI), with its foreign currency reserves of USD 67 bln as of the end of 2019.

Beyond the next 12 months, Brent crude prices in a range of USD 45–55/bbl will remove much of the pressure on government finances, but the exact timing of the post-lockdown return to normal with the new level of oil prices means that Iraq cannot avoid embarking on an accelerated and significant set of economic reforms, previously agreed to with the IMF in the 2016 Stand-By Agreement (SBA) but abandoned when oil prices recovered in 2018. However, with an increasingly alienated population these reforms would not come about without meaningful political reforms. 

As a measure to contain the outbreak of COVID-19, the government announced a one-week nationwide curfew, starting on 16th March that was extended twice to 11th April. Trading on the Iraq Stock Exchange (ISX) was suspended in response to these instructions and the Rabee Securities RSIX USD Index (RSISUSD) ended the month down 7.1%, while the fund was down by the same percentage.

The concentrated selling in the few foreign favoured stocks that began in January continued into March. However, as in February, the list narrowed further in March and was the main driver behind the decline. Given the uncertain global economic outlook, this selling could continue when the market resumes trading. Nevertheless, as Iraq’s equity market was discounting neither an economic nor a corporate earnings recovery, it’s difficult to see why it should decline as other markets have elsewhere. Most global markets have had multi-year bull markets and would need to discount vastly different economic assumptions than those that led to their multi-year rises. This explains the better action by the ISX compared to other markets during the recent sell-off – the decline, at least until 16th March, was less than other markets as can be seen from the chart below and arguably makes the risk-reward profile more attractive for the ISX versus these markets as portfolio allocations are rebalanced in the light of the changed global environment.


Trailing 12-months normalized returns for the RSISUSD Index vs MSCI World Index, MSCI Emerging Markets Index and MSCI Frontier Markets Index.

(Source: Bloomberg)


As of the end of March 2020, the AFC Iraq Fund was invested in 14 names and held 0.9% 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 (98.1%), Norway (0.6%), and the UK (0.4%). The sectors with the largest allocation of assets were financials (56.3%) and communications (18.2%). The fund's estimated weighted harmonic average trailing 12 months P/ E ratio (only companies with profit) was 13.27x, the estimated weighted harmonic average P/B ratio was 0.55x and the estimated weighted average portfolio dividend yield was 5.79%.

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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund Class F shares returned −7.4% in March with a NAV of USD 989.55, bringing the return since inception (29th March 2019) to −1.0%, while the 2019 return was +9.3%.

March marks the one-year anniversary of the launch of the AFC Uzbekistan Fund on 29th March 2019. The fund launched with assets under management of USD 2.0 mln and ends its first year at USD 4.0 mln.

Much happened in Uzbekistan in March including the Agency for State Asset Management establishing a plan for the privatization of 81% of the government’s 2,965 state-owned enterprises, the elimination of cotton quotas for farmers and the unfortunate arrival of COVID-19. Nonetheless, some of the global developments related to COVID-19 significantly enhance our conviction for investing in Uzbekistan as the country is increasingly recognised as a regional exporter with the largest manufacturing and agro-industrial base in the region. Its guaranteed supply of USD foreign exchange through monetizing its robust gold and commodities reserves should ensure a strong fiscal buffer. Amid these positives, the final few days of March saw increased sellers in the market leading to the fund’s loss for the month.

AFC Uzbekistan Fund valuations as of 31st March 2020

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.87x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 4.93%


The negative performance for the month occurred in the final days of March. We attribute this to two events:

The first is our largest holding in the portfolio, Qizilqum Cement (QZSM), which announced it would not pay a dividend for 2019 in order to self-fund a 1.1 mln ton per year capacity expansion, estimated to cost USD 110 mln. By suspending its dividend, QZSM is planning to use the USD 57 mln of cash on its balance sheet (the current market capitalization is USD 69 mln) to self-fund. We, like other shareholders would have preferred to have seen a dividend cut rather than a suspension and QZSM to finance a portion of this project with debt, since the company is debt free (Uzbek companies keep very strong balance sheets with very few holding debt, a net positive as the rest of the world faces unsustainable increases in debt). QZSM historically payed a dividend resulting in a low teens dividend yield, thus being the main attraction to local investors as opposed to the immense growth and earnings potential of the company. This led some large sellers to come into the market during the final days of the month, suppressing the share price.

The second contributor to the negative performance for the month was likely the government’s actions to suppress the spread of COVID-19 (discussed in further depth below). On 29th March the government announced private vehicle usage would be banned from 30th March onwards unless owners obtained special permits. This short notice is likely to be what caused a spike in selling across a number of our holdings as investors (mainly employees of these companies) sought to increase liquidity in order to cover daily living costs, with the current ban on private vehicles to remain through 20th April when it is planned the lockdown will be lifted. 

Of course we are displeased with our performance for the month, though the effect of QZSM being sold down only shows to further highlight the deep value on offer in Uzbekistan, with the catalyst being a transformation of the capital markets and rising demand for cement combined with the government seeking to privatize a portion of QZSM, likely to a foreign operator. QZSM ended March with a P/E of 2.41x, P/B of 0.41x and an EV/ton of installed capacity of USD 3.51 (replacement cost for a new cement plant in Uzbekistan is estimated at between USD 100 to USD 125 per ton).

Uzbekistan one year since fund launch:

The past year has seen Uzbekistan experience growth and transformation across many areas of the economy and society. While still facing very obvious challenges, including capacity constraints in government and execution of the dozens of backlogged presidential decrees signed as part of the country’s liberalization, things are certainly moving in the right direction. Some of the notable changes include the elimination of all capital controls, the liberalization of restrictions on foreign ownership of bank shares, the Uzbek Som being freely floated, legislation passed permitting the privatization of all non-agricultural land (previously all land was government owned and secured on long term lease) and a privatization strategy to sell down 81% of the government’s 2,965 state-owned enterprises through either auctions or the Tashkent Stock Exchange as the state currently represents an estimated 55% of GDP. 

These reforms over a short 12 months are impressive. The coming 12 months should see Uzbekistan’s strengths become clearer to investors with the onset of the virus crisis. These include Uzbekistan’s regional manufacturing dominance, domestic sources of foreign exchange (namely gold and other commodities) and low debt levels which will help to buffer it against a dramatic slowdown in globalization and surge in demand for USD. 

Is regionalization the new globalization?

Today’s globalization has its roots in the post-World War II world where manufacturers in western countries benefitted from the labour arbitrage captured in outsourcing manufacturing to countries with significantly lower labour costs—mainly Asia—a deflationary exercise. Globalization led to enhanced efficiency in global supply chains, seeing many industries transition to just-in-time inventory management which helped to keep working capital and inventory requirements low. The system worked beautifully until a black swan event such as COVID-19 came along to freeze the system. 

With supply chains impaired, an increasingly nationalist focus is appearing across the world as we are seeing little to no coordination among EU countries regarding closing of their borders, many countries shuttering their borders and airports to all foreign travel and trade (the Crisis Staff head, Roman Prymula of the Czech Republic told Czech Television recently that border controls may have to be kept in place for an extended period of time and possibly up to two years), while Vietnam, the world’s third largest rice exporter, temporarily banned rice exports to ensure domestic demand is met and Kazakhstan banned exports of “socially significant food products”. It is worth pondering if this is indeed a watershed moment for globalization and its future is to be reshaped as the concept of regionalization becomes increasingly prevalent, where clusters of countries leverage their strengths to supply regional partners (i.e. manufacturing in Mexico for the USA; an accelerating trend in recent years). 

For example, taking a look at Vietnam, it hosts a large manufacturing and agro-industrial complex making it the “factory” of ASEAN and certainly to the Indo-Chinese region with its economies of scale and integrated supply chains. As Vietnam should be to ASEAN, Uzbekistan should be to the Commonwealth of Independent States (CIS) countries (Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan) as well as Afghanistan and Turkmenistan, helping it to develop a gravity for foreign direct investments.  

In preparation for an expected German invasion prior to World War II, Joseph Stalin ordered strategic industrial assets to be moved from Eastern Europe to Uzbekistan. This turned Uzbekistan into the most industrialized Soviet Republic. With its vast industrial base, after Uzbekistan gained independence in 1991, President Karimov decided not to follow the Washington Consensus of free-markets, but instead focused on protectionism through high import duties, turning the country into a fortress of sorts through import substitution – Uzbekistan became one of the first CIS countries to have its own auto manufacturer and national airline while it pursued self-sufficiency in wheat, oil and meat. This created significant hardship for its citizens as protectionism is inherently inflationary (bucking the trend of the deflationary effects of globalization), but over these 30 years Uzbekistan was successful in bolstering its industrial capacity with the production of valued-added construction materials (steel bars and pipes, glass bottles and widows, cement, etc.), food products (packaged juices, wine, beer, dried fruits, processed meat products, poultry, biscuits, cooking oil, rice, fresh fruits, vegetables and etc.). These sacrifices under the previous regime have given Uzbekistan the gift of being to the region as Vietnam is increasingly being to the rest of the world (often regarded as a second, but mini China).  

Uzbekistan, with its large labour force (hosting the largest population in Central Asia at 34 mln) and manufacturing base, has the potential to create a gravity for manufacturing firms and investors in the value-added commodities sphere. This is already occurring with the most recent example being the development of a textile cluster in Bekabad City in South-Central Uzbekistan where a foreign company, SPUNMELT, plans to build a factory for the production of 7,000 tons of raw material used in the production of surgical masks. Uzbekistan already has domestic mask production, but the raw material (which is polypropylene based) is currently being sourced from China, Turkey and Russia. Uzbekistan being a major producer of polypropylene courtesy of its sizable natural gas and chemical industry, aims to become self-sufficient in this raw material and become a net exporter to the rest of Central Asia.   

Uzbekistan’s FX ace in the hole:

As the gears of global trade cease up over the short-term and countries go into lockdown due to COVID-19, countries with short USD exposure (those that have borrowed USD at the sovereign or corporate level) are likely to begin experiencing increasing and varying degrees of strain on their debt service. With global trade and tourism not bringing USD into these countries, FX reserves will have to be spent to service debts which will in turn weaken their currencies versus the USD. This will be compounded by many countries now initiating stimulus which will consume yet more of the FX reserves. The longer the global economy is in lockdown the more severe the situation will become. Major exporting nations such as Mexico now face this issue as orders for manufactured goods have collapsed with western countries battling the virus.  

While Uzbekistan’s external debt/GDP (sovereign and corporate debt) stands at 46% of GDP and it likely seeks long-term modest depreciation in the Uzbek Som to support exports, the country would benefit from making sure this happens in an orderly fashion, especially as the country maintains a current account deficit of USD 3.2 bln in 2019 (a decrease from USD 3.5 bln in 2018) due to the reindustrialization of the country which is leading to strong imports of machinery for textiles, steel, cement, and food processing sectors. Uzbekistan should be able to manage this situation well as in the current time of a global economic crisis it’s proverbial ace in the hole is gold—a commodity in extraordinarily high demand due to worries about the global economy and whose price we expect to rise substantially over the coming years as countries continue to debase their currencies, with over USD 10 trln in global stimulus enacted year to date and certainly with more to come. 

Already having a free-floating currency, Uzbekistan has the opportunity to temporarily bolster the exchange rate during the current instability through exercising its gold production. As discussed in last month’s communication, Uzbekistan is ranked 9th in global gold production and hosts two of the largest gold producing companies in the world: Navoi Metallurgical & Mining Combinat and Almalyk Mining & Metallurgical Combinat. By monetizing a portion of production, being that FX reserves topped USD 30 bln in February (USD 17.25 bln of which is gold, equal to 33% of GDP) it has a guaranteed source of foreign exchange to support the economy and currency. 

We believe these factors make Uzbekistan an increasingly safe haven of sorts over the coming years.

Impressive response to COVID-19 & Economic Impact:

Uzbekistan received its first case of COVID-19 on 15th March. The country’s response has been exceptionally proactive, equal to the responses seen in Singapore, South Korea, Taiwan and Hong Kong in combating this challenge as it takes the route of not “turning off” the economy but rather being aggressive in isolating cases and increasing restrictions as cases have risen—at present there are 159 active cases, 2 deaths and 12 recoveries. 

Proactive measures were taken from the first virus case where starting from 16th March the spring holiday was brought forward and schools were closed through 20th till the first week of April, weddings were banned as well as large social gatherings. Then, on 22nd March after the start of the Navruz holiday, celebrating the start of spring, as cases rose all food and beverage establishments were forced to close and only permitted to fulfill carryout and delivery orders. The week of 23rd March saw a ratcheting of government measures including fines, equivalent to USD 70, for people outside without a mask, cities into lockdown whereby one cannot travel to other cities and the banning of groups of more than three people in public. On 30th March all passenger cars were banned from the streets (special permits for those who need to use their car can acquire one) and lockdown was extended to 20th April to ensure the virus is stamped out. 

Meanwhile, construction sites are busy and there is traffic on the roads, of course a decrease from normal levels, but life continues unlike in many other countries with the virus.


Life continues in lockdown

(Source: Asia Frontier Capital)


The government moved fast with first cases on 15th March. 16th March saw the closing of the borders and airports for individual travel (all land borders and the airports remain open for commercial imports and exports), there was a mere one day of “panic” at the grocery stores and bazaars. However, since the 16th March, all markets and bazaars are open, prices have not been inflated (helped by the country’s large domestic manufacturing and agro-processing base) and store shelves have been fully stocked with zero rationing measures, unlike in places such as the U.S. where certain states are rationing purchases of chicken, meat, fish and other products.

The first cases on 15th March stemmed from one returnee from France and one from Istanbul. Everyone on each of the planes was put under government quarantine along with their families. Additionally, all of their direct contacts were required to self-quarantine. Cases have increased in recent days due to Uzbekistan repatriating overseas citizens and as of today the number of people under either government monitoring or self-quarantine is roughly 28,000, with all infections having arisen from people already in quarantine. In certain English news there have been reports that Uzbekistan was building hospitals in the regions of the country during the week of 23rd March, but these are actually quarantine facilities with a medical component of course, ensuring all Uzbeks returning from abroad are isolated accordingly so as not to potentially spread the virus throughout the general population. 

On the economic front, on 19th March the government approved a handful of measures to ensure stability in the economy. This stability package is valued at ~USD 1bln (UZS 10 trln) and is likely being funded by USD 1bln in gold reserves the government sold late last month, luckily before gold prices corrected due to the liquidation in the global financial system.

This stability package includes:

  1. Broad tax breaks and holidays for the economy, with the deepest breaks (estimated at 30%) to be given to the tourism industry;
  2. Companies in the hospitality, catering and education industries are given a holiday on debt service until 1st October 2020, guaranteed by the government;
  3. UZS 500 bln in loans/support will be made available to SME’s;
  4. Fast tracking the implementation of infrastructure projects (which were on the agenda but whose start dates were moved up).

When the stability package was announced the Minister of Finance stated he expects a decrease in GDP growth of 1.8% which means 2020 GDP growth expectations have been revised to +4% for the year. The major contributors to the decrease in GDP growth are an expected impact of ~USD 150 mln on the tourism industry and a decrease in materials exports of ~USD 400 mln (agriculture and fertilizer at USD 100 mln, textiles at USD 80 mln and copper at USD 60mln), in addition to a decrease in natural gas exports, the latter of which the government aims to transition to zero exports by the middle of the decade anyway as they prefer to increase production of value-added petrochemical products for export.

Ironically, the virus is also giving Uzbekistan the impetus to speed up reforms in streamlining bureaucratic procedures, specifically in the import and export arena, which should significantly stimulate exports over the coming years. This includes the elimination of export guarantees and creating new border procedures to streamline import/export permit issuance and simplifying customs clearance.

Unlocking value in our equity portfolio:

Before the AFC Uzbekistan Fund was launched, we conducted a quantitative and qualitative analysis of all the companies listed on the Tashkent Stock Exchange, including site visits and management meetings across the country. One of the companies we invested into was a metal fabrication company producing valves and fixtures for the oil and gas industry. While the company was profitable, what interested us was the significant real estate portfolio the company owned, much of it idle industrial factories in the city centre of one of Uzbekistan’s largest cities. At the time, the market capitalization of the company was less than USD 500,000. As we believed assets in Uzbekistan were, and still are, too cheap (due to Uzbekistan’s economy having minimal leverage), we expected a revaluation in its real estate portfolio to occur in due course.

Fast forward to this past month and this company is now in discussions with a Middle Eastern investor to purchase several of the company’s properties to develop them into textile factories. The transaction is valued at USD 547,000 or 80% in cash of the current market capitalization of the company.

Furthermore, the company had a joint venture with a South Korean group to produce a specific type of pressure valve for the greater Central Asian residential gas market, but the Korean group provided faulty equipment to the JV and in turn our portfolio company filed a lawsuit against the South Korean group in Korea. The Korean group lost and owes the company USD 430,000 in damages, or 63% in cash of the market capitalization of the company.

Once the transaction closes with the Middle Eastern investors and the funds owed from the South Korean group are paid, a member of the Board of Directors whom AFC appointed has advised the CEO to pay out a special dividend equal to 50% of the proceeds from these two deals, keeping the balance on deposit for working capital and future capital expenditures. We estimate a special dividend of 50% of net proceeds to be roughly equal to 1.5% of the NAV of the fund.

Situations like this are only just beginning to emerge in our portfolio companies. As the government accelerates its privatizations and capacity within government ministries increases, in line with a fall in bureaucracy, we anticipate some of our other holdings to provide similar opportunities.

In these interesting times I would like to share a photo taken from the rooftop restaurant of the newly opened Hilton Hotel in the still under construction new business district of Tashkent City on a wonderful spring day during lock down.


View of Tashkent City from Hilton Rooftop

(Source: Asia Frontier Capital)


At the end of March 2020, the fund was invested in 28 names and held 3.8% in cash. The markets with the largest asset allocation were Uzbekistan (93.4%) and Kyrgyzstan (2.8%). The sectors with the largest allocation of assets were materials (55.7%) and industrials (15.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.87x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 4.93%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by 14.2% in March 2020 with a NAV of USD 1,019.72. The fund outperformed the AFC Frontier Asia Adjusted Index (−26.2%), the MSCI Frontier Markets Asia Net Total Return USD Index (−22.3%), and the MSCI Frontier Markets Net Total Return USD Index (−22.0%) but underperformed the MSCI World Net Total Return USD Index (−13.2%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +2.0% versus the AFC Frontier Asia Adjusted Index, which is down by 25.8% during the same time period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.23% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.47, all based on monthly observations since inception.

The best performing indexes in the AAFF universe in March were Kazakhstan (+0.1%) and Iraq (−6.4%). The poorest performing markets were Vietnam (−24.9%) and Pakistan (−23.0%). The top-performing portfolio stocks this month were a Vietnamese telecom equipment company (+15.2%), a Mongolian energy company (+14.5%), a Mongolian iron ore company (+13.6%), a Mongolian construction company (+7.0%), and a Mongolian internet company (+4.9%).

In March, the fund reduced holdings in Mongolia and Vietnam and added to existing holdings in Mongolia and Vietnam. The fund exited an industrial park developer with operations in southern Vietnam.

At the end of March 2020, the portfolio was invested in 75 companies, 2 funds and held 4.6% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (10.5%), and a pharmaceutical company in Bangladesh (8.3%). The countries with the largest asset allocation were Vietnam (21.6%), Mongolia (18.2%), and Bangladesh (14.7%). The sectors with the largest allocation of assets were consumer goods (24.5%) and industrials (17.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.80x, the estimated weighted harmonic average P/B ratio was 0.72x and the estimated weighted average portfolio dividend yield was 3.75%.


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


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AFC Vietnam Fund - Manager Comment



Historic losses and record-breaking volatility around the world in almost every asset class from stocks to commodities, accompanied by hard hit currencies, led to a disastrous performance in global financial markets in March. Vietnam was no exception with the Vietnamese Dong losing 1.% last month (against 2-10% for many other emerging market currencies). The Ho Chi Minh City VN Index lost 26.1% in USD terms. Other indices followed closely with the exception of the index in Hanoi which fared better with a loss of 16.9% in USD terms, mostly because of fundamentally unwarranted speculation in one heavy weighted bank which almost doubled since the end of January. With panic selling across the board our portfolio was hit hard as well. Together with the lower Dong against the USD, our NAV lost 18.4% in March to USD 1,382.27, bringing the return since inception to +38.2%. This represents an annualized return of +5.3% p.a. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.02%, a Sharpe ratio of 0.36, and a low correlation of the fund versus the MSCI World Index USD of 0.49, all based on monthly observations.

Market Developments

To nobody’s surprise, Vietnam joined other markets around the world in the biggest sell-off in recent decades and one of the biggest ever in history. Some of the world leaders are speaking of a “war against an invisible enemy”, and in fact the losses we see even in the biggest financial market, the U.S., are comparable to 1929, 1940 and the more recent global financial crisis of 2008. The biggest question has always been, how will Vietnam and other already beaten down Frontier and Emerging Markets react when the comparably expensive U.S. markets correct, but nobody expected anything like what we have seen in recent weeks.


Vietnam performed as poorly as other markets (in % USD adjusted)

(Source: Bloomberg)


There is 24/7 reporting about the underlying reasons for this flash bear market and all the panic selling, but we think that the majority of the decline has already happened and it is now more of a question of if and how the bottom-building process will be shaped in the coming weeks and months.


Dow Jones already  close to financial crisis retreat

(Source: Yahoo Finance, Verizon Media)


Volatility hit high from financial  crisis and is higher than ever in the past 30 years

(Source: Bloomberg)


Vietnam Index lost almost 50% over the past 2 years 

(Source: Bloomberg)


Extreme stock price swings in both directions are still to be expected for the foreseeable future until uncertainties over the future path of the infection rate of COVID-19 and implemented measures by governments around the world are reduced and more visibility sets in. The deadly risk for millions of lives is now combated in completely unprecedented ways by most countries around the globe. But it is not the virus itself which brought down capital markets and the world economy to an almost standstill, but the measures taken to combat this virus. When China locked down its province of Hubei, with around 60 mln people, and its capital Wuhan with 19 mln, such measures were seen as totally impossible to be copied in the Western world. Against all expectations, travel restrictions in Hubei were mostly lifted in late March, while 2.3 bln people in dozens of countries have to live now with very similar restrictions of movement. This brought tourism and international travel effectively to its knees. Industrial production in China would be now almost back to normal but is instead facing a secular slowdown in demand as the rest of the world is still in shock and uncertainties over the path of recovery prevails - and as we all know, uncertainty is the biggest enemy of financial markets.

With approximately USD 5 trillion worth of bailout packages among the G-20 alone (with currently a lot of uncertainties on how these measurements will be implemented in practice), economists and analysts are left completely in the dark and don’t have the slightest idea how to make a useful forecast about the impacts of this crisis. As an example we are reading that Germany’s GDP will decline 6% this year and in the Eurozone GDP will decline -20% for the first quarter of 2020, while we still have to listen to officials telling us that the economy should recover later this year and a recession would be mild if there is one at all. But similar to the financial crisis, where over time more measures were implemented in the real economy, we will see more clarity over coming weeks and months. As important, this time central banks are going “all in” immediately instead of taking very small steps over several months, as occurred during the global financial crisis 11 years ago. 

The big question is what will happen after the number of infections stabilizes and eventually decreases? Although too early to say, we already see positive developments in many countries in that respect – but it will be very crucial to see how governments will bring businesses and people back to work, and what the time frame will be. Depending on the re-activation of business activity we will have either a test of recent lows - or make another low before we recover later. Nevertheless, when a market like the US has already dropped from 30,000 to 18,000, the risk of another decline to 14-15,000 (that would be the same percentage decline as during the global financial crisis) is bearable for investors without leverage and offers great long term value opportunities for the first time in many years; and of course nobody knows if we really see those lower prices again. A typical recovery from a bear market has two phases, where phase 1 is characterized by panic selling with broad based stock price crashes which we have just experienced. In phase 2, after extreme volatility and sharp rebounds we usually see another selling wave where strong distinctions are usually to be seen between different markets, sectors and individual stocks. Markets, sectors and stocks with better prospects usually clearly outperform in this phase and many investors are missing out on the best entry points for long term gains as many of them do not return to the lows of phase 1. 

Vietnam is ready for recovery

Despite having a land border in the north with China, which is one of the main entrances for interaction between the two countries in terms of trade and traffic, Vietnam was able to shield itself from the high risk of infections during the first phase of the pandemic in China. Although China is Vietnam’s biggest trade partner (which should serve as a big plus now with both countries having very few active cases and functioning businesses!), the government acted fast and even quarantined in mid-February a village in the north of Vietnam with 10,000 people for weeks – something Europe and now the USA had to learn the hard way, many weeks later. A reader’s comment on this measure in February in one of the US media outlets was: “Countries like China and Vietnam can quarantine entire cities. If this takes hold in the Western world, we cannot shut a city down.” 

With these early and tough measures Vietnam’s industry did not shut down yet, although several companies stopped production. Of course Vietnam is also facing a disaster in the tourism sector, which is responsible for 12% of total GDP. As of today (31st March), Vietnam is still able to identify infection clusters as the country has reported only 204 cases of COVID-19 and the majority of its 90+ mln population are still able to follow their daily routine of life, work and leisure - although with some cutbacks and limitations. Entertainment spots are closed, many tourist spots and restaurants are closed and people are asked to avoid big crowds, but so far “personal freedom” in communist Vietnam is currently still higher than in most other countries.

We acknowledge the suspiciousness against numbers published by the Chinese government and therefore also against other countries in the region, but Vietnam was very transparent from the start of the outbreak as you can see at the end of this report which shows an example of one case last week; all other cases are described in a similar way. 

Immediately after the government finds a new case, an investigation is conducted. The authorities will find out whom the patient had met over the past few days and which places he/she had gone to. This information will then be disclosed to all citizens by media or an app which was released to the public 3-4 weeks ago. Just a few hours after a new case is detected, police will visit the homes of the suspected carriers to persuade them to isolate and check in to one of the public centers the government had recently set up all over the country.

Currently there are around 45,000 people in these isolation centers where government authorities will provide them with free food and other essential stuff for 14 days. There is now a general isolation requirement for all recent arrivals by plane into Vietnam. The Vietnamese Government announced today a 15 day period of social distancing nationwide as of 1st April in order to combat the spread of COVID-19.


NCOVI app by Vietnamese government –
Sometimes complete street address and even names are given

(Source: VNPT Group)


So far, we have seen only a few severe business interruptions, except for the mentioned tourist and aviation sector as well as companies in the textile industry which are experiencing a reduced number of orders for export. There were quite a few Vietnamese companies which had issues with their supply chains, mainly from imported goods from China. This situation seems to be less of a problem going forward with the recent production restart in China. Given the decline in stock prices across the board of 30% on average in 2020, the already attractive valuations have just gotten cheaper. Hopefully over the next few quarters the current crisis will be solved in most parts of the world, in one way or the other.

Many of our stocks were sold down heavily over the past few weeks and while we have consistently written about cheap valuations in our portfolio in past communications, one more important component in the investment world has now become very crucial - healthy balance sheets – one of our top investment criteria when choosing a company to invest in. Nobody knows the duration of this crisis, but it will make a huge difference for the survival of many businesses over the next few quarters. We own many companies with net cash able to survive even if their business operations have to close for even several quarters, although the outlook does not look that grim which hopefully will be reflected in the first quarter business results which will be published next month. 

The outlook is probably not that gloomy, because many companies and also consumer behaviour adjusted quite rapidly to the new situation. Container volume, for example, jumped 14% over the first two months of this year, as trade with China was re-routed through ports when the borders were closed (we own several listed port companies). The plunge in oil prices is certainly a burden for many listed oil and gas companies, but luckily, we are not invested in them. But we recently used the opportunity to build a position in a big oil transportation company as the shipment of oil should not change a lot and the cost of fuel – as for many other companies – dropped dramatically which reduces the cost of transport. These lower costs are favourable for many companies we own, and not to forget for consumers as well.

We believe that in the next rebound the hardest hit stocks will probably see the biggest short-term gains, but often these companies also have some of the weakest balance sheets and we will be very selective in choosing our investments in such a short-term rally. Historically, small and mid-caps outperform in the first 1-2 years of a new cyclical bull market and we hope this will also be valid for Vietnam this time. For now, we are evaluating our investments after the massive market turbulence and are taking advantage of switching opportunities into a few attractively valued stocks with a promising long-term outlook.


Cash balance (VND bln)

Bank loan (VND bln)

Total assets (VND bln)

Cash/Total assets (%)

Bank loan/Total asset (%)





























































(Source: Vietstock, companies’ audited reports, AFC Research)

On average (simple arithmetic) the companies in our portfolio have an equity ratio (shareholders equity divided by total assets) of 60%, which is around double the value we find in most markets on average. Even world class companies like Siemens, Unilever or Nestle, for example, have ratios of 32%, 20% and 41%. Almost 30% of our companies even have real net cash (Cash and short-term investments minus all liabilities).

The massive outflow of foreign funds in the past few months also resulted in new opportunities in bigger names. We now see good entry points in some larger companies which lost 40%-70% in recent months and offer cheap valuations (a few of them well below 10x earnings and 30-50% discount to book value!). At current prices there are certainly huge opportunities as long as one is able to look beyond the current crisis and assess the long-term risks – which is admittedly not easy when most people are scared and forced to abruptly change their lifestyles they used to have.

With the heavy selling pressure brought on mainly by foreign investors in recent weeks, management of many companies are astonished at how hard their share prices have been hit and as a result we see many companies and insiders announcing share buybacks, which is always a very positive sign.

Rice exports jump strongly 

The first 2 months of 2020 saw Vietnam’s rice exports jump 30.5% in volume and 38% in value, reaching 929,000 tones and USD 430 mln respectively. This is quite surprising, given that commodity prices in general have declined over the same period.

The Philippines is still the largest rice customer of Vietnam and they bought 357,000 tons, equivalent to USD 154.7 mln. Iraq is the second largest rice customer with 90,000 tons, equivalent to USD 48 mln. Orders from China surged +595% in volume to 66,000 tons, equivalent to USD 37 mln. This increase in demand is mainly due to the COVID-19 crisis, where the “staying at home” movement made people consume more rice. 


Export growth of key products in the first  2 months 2020 (%)

(Source: GSO, Vietnam Custom, AFC Research)


The Vietnam Food Association predicts that rice prices are expected to increase in 2020, mainly due to decreasing production. The current serious drought in the Mekong Delta, the largest rice production area of Vietnam, has a damaging effect on rice production. Vietnam is currently the third largest rice exporter in the world with an annual volume of 6.2 mln tons, behind Thailand (10 mln tons) and India (12 mln tons). Meanwhile Thailand is also facing the worst drought in 40 years which pulls its rice production down dramatically.


Drought Thailand

(Source: Bangkok Post, AFC Research)


Drought in Mekong Delta of Vietnam

(Source:, AFC Research)


Higher demand and expected lower production may create a rice shortage and push prices up sharply. The Vietnamese Government is worried that the nation’s food safety is affected and this is why the Vietnamese Prime Minister decided to suspend rice exports as of 24th March 2020 in order to recalculate the country’s rice reserves. This decision caused rice export revenue in March to drop by 25% to reach USD 68.9 mln. Finally, in the first quarter, rice export revenue increased 7.9% to USD 653 mln. Most likely, Vietnam will soon start its rice export again after checking inventories and we expect that the situation will be back to normal again soon. 

Example of a COVID-19 case publication in one of the local newspapers

25th March 2020

Da Nang has confirmed one new positive case of the novel coronavirus, bringing the total number of infected patients in the city to 6, the municipal Department of Health announced on Wednesday.

The latest case was confirmed in a 27-year-old Vietnamese woman returning from Sweden. She has become the 135th case to be diagnosed with coronavirus in Viet Nam till date. 
The city’s 6th patient worked for a restaurant in Lund City, Sweden.

On 19th March, she travelled to Denmark by train. Then, she left Denmark for Viet Nam and transited via Doha, Qatar and Bangkok, Thailand. She arrived at Da Nang International Airport on flight PG947 (seat number 16A) at 12.40pm on 21st March.

After implementing entry procedures and making health declaration with local health officials at the city’s airport, the woman was sent to the Centre for Training National Defense and Security Knowledge, located at 86 Nguyen Chanh in Lien Chieu District, for 14-day quarantine at 3.00pm on 21st March.

From 21st – 24th March, the woman was placed in isolation in the room No 14 with 19 others.

On 23rd March, the staff of the city's Centre for Disease Control took throat swabs and blood serum samples of the woman to test for the new virus. As a result, her tests came back positive at 9.30pm on 24th March.

Currently, the infected patient is receiving treatment at the Da Nang General Hospital, and her health conditions are stable.

After the woman tested positive for the virus on Tuesday, local health officials have identified a total of 130 passengers who shared the plane with her from Thailand to Da Nang on 21st March. All of the air passengers were Vietnamese citizens and they are quarantined now at the same place with the patient. They then tested negative for the virus on 24th March.

Also, the Da Nang CDC reported the confirmed case to the municipal Department of Health. The department worked with the Centre for Training National Defense and Security Knowledge to isolate the patient for control of infection purposes. Contact tracing were conducted to identify close contacts of the confirmed case. Medical staff also sprayed disinfectant at a room where the patient had stayed, and around her quarantine site.

The municipal Department of Health has traced 41 close contacts of the infected patient. Among the close contacts are 19 women who shared a room with the patient, and 22 people who sat near her on a flight from Thailand to Da Nang. All the close contacts are quarantined at a designated area in the Centre for Training National Defense and Security Knowledge to monitor their health.




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


At the end of March 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (6.0%) – an insurance company, Idico Urban and House Development JSC (3.8%) – an energy, construction, and real estate business, Vietnam Container Shipping JSC (3.7%) – a container port management company, National Seed JSC (3.0%) – an exporter of seeds, and TanCang Logistics and Stevedoring JSC (2.6%) – a logistics company.

The portfolio was invested in 61 names and held 8.9% in cash. The sectors with the largest allocation of assets were industrials (34.0%) and consumer goods (26.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.90x, the estimated weighted harmonic average P/B ratio was 0.75x and the estimated weighted average portfolio dividend yield was 8.97%.

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Stay safe and kind regards,

Thomas Hugger
CEO & Fund Manager

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