AFC Uzbekistan Fund Class F shares returned +3.3% in May with a NAV of USD 991.09, bringing the return since inception (29th March 2019) to −0.9%, and the Year to Date return to −9.4%.
With quarantine measures being significantly relaxed across most of the country, with only 960 active COVID-19 cases, economic activity has experienced a sharp rebound. This subsequently led to a sizable uptick in volume on the Tashkent Stock Exchange, leading to some notable price appreciation, accompanied by some large dividend announcements among the fund’s holdings.
AFC Uzbekistan Fund valuations as of 31st May 2020:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Easing of quarantine measures
In early May the government established three categories of quarantine—red yellow and green—ranking each region according to the number of cases. Regions ranked “red” are in full lockdown with residents only able to go out for a walk or to the market or pharmacy. Regions in “yellow” can see nearly a full return to economic activity with the exception of schools being open and restaurants only allowed to deliver, while private vehicles can only be on the road from 07:00 to 10:00 and from 17:00 to 20:00. Regions classified as “green” experience all the same benefits of regions classified as “yellow” but with no restrictions on private vehicle usage during the daytime. Thus, Tashkent, ranked yellow, but effectively rated “green” as private vehicle usage is uninhibited during the day, has largely returned to business as usual. While the country’s international borders will remain closed for personal travel through at least 30th June, on 13th May the government announced it would recommence some domestic flights and train service to multiple regions as part of the continued easing of confinement measures.
Banking sector reforms
On 12th May, President Mirziyoyev signed a presidential decree, “On the Strategy for Reforming the Banking System of the Republic of Uzbekistan for 2020-2025,” which is a roadmap for the continued liberalization and privatization within the sector. The main aspects of the decree include:
• Increasing the share of private bank’s assets in the sector from 15% to 60%;
• Increasing the total share of bank debt to private clients from 28% to 70%;
• Attracting foreign strategic investors for at least three state-owned banks;
• Increasing the share of non-bank lending from 0.35% to 4% of total loans.
Six state-owned banks are slated for privatization including Ipoteka Bank (IPTB) with 90% state ownership, SQBN (SQBN) with 90% state ownership, Asaka Bank (ASBU) with 100% state ownership, Aloka Bank (ALKB) with 100% state ownership, Qizhlok Qurilish Bank (KKBN) with 80% state ownership and Turon Bank (TNBN) with 97% state ownership. Meanwhile, the National Bank of Uzbekistan, Microcredit Bank (MCBA), and Agro Bank (AGBA) will not be privatized.
Another important piece of the legislation is an increase in the minimum paid-up capital of banks from UZS 100 bln (USD 9.9 mln) to UZS 500 bln (USD 49.5 mln) by 2025, to further strengthen the already strong sector.
Portfolio companies showing continued strength
On 22nd May 2020 the Uzbek Commodities Exchange (URTS) held its annual general meeting where the company announced among other things that it would be paying a dividend of UZS 2,490 per share. This equates to a dividend yield of 17%. Performance for the company has remained robust in the first quarter of 2020 and we expect it to be another strong year for the exchange. Local investors are only just beginning to realize the benefit of owning a company generating a 17% dividend yield, while also benefitting from exposure to appreciation in the underlying equity, rather than keeping their savings in bank deposits earning a flat 20% per year. Such high dividend yields are not here to stay, but that will likely be due to local and foreign investors increasingly allocating capital to the stock market, leading to share price appreciation and hence lower yields. This remains part of our longer-term thesis as the capital markets develop and investors realize Uzbekistan is a safe haven of sorts amid the current global-macroeconomic volatility.