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Asia Frontier Capital (AFC) - October 2020 Update

“Big companies have small moves, small companies have big moves.” ― Peter Lynch, American investor, mutual fund manager, and


“Big companies have small moves, small companies have big moves.”

Peter Lynch, American investor, mutual fund manager, and philanthropist


AFC Asia Frontier Fund USD A 1,191.49−1.4%−6.4%+19.1%
AFC Frontier Asia Adjusted Index2 +3.0%−2.8%+5.8%
AFC Iraq Fund USD D585.06−2.1%−6.7%−41.5%
Rabee RSISX Index (in USD) 1.6%−1.6%−53.3%
AFC Uzbekistan Fund USD F1,175.06+5.7%+7.5%+17.5%
AFC Vietnam Fund USD C1,894.66+0.7%+5.9%+89.5%
Ho Chi Minh City VN Index (in USD) +2.3%−3.7%+65.7%
  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.

A Biden win is positive for Asia

After an extremely close presidential race and multiple days of vote counting, a change of guard at the White House in the form of Joe Biden as the next President of the United States will be a big positive for Asia in our view. In addition, positive developments on COVID-19 vaccines such as the one being developed by Pfizer and BioNTech can further fuel the strong investor sentiment in Asia.

The geopolitical and economic competition between China and the U.S. is not going to go away but what will make a huge difference is the approach. Compared to Donald Trump, the consensus is that the Biden administration will most likely take a less antagonistic and less hostile approach to resolving issues with China. 

Over the past four years, most Asian countries have been caught in between the aggressive China-U.S. political tensions and the constant rhetoric regarding China-U.S. trade has caused uncertainty for most export-dependent Asian countries as these countries share strong trade ties with both China and the U.S.

This looming hostility between China and the U.S. over the past few years has had an impact on investor sentiment in Asia and less aggressive relations between the two countries can have a tremendously positive effect on investor sentiment in the region. The MSCI Emerging Markets Asia Index rallied by close to 7% in November and has now scaled its previous high made in January 2018, just before the full scale of the U.S-China trade war was unleashed.


A Biden win has led to emerging Asian markets scaling their previous high in January 2018 before the start of the trade war

(Source: Bloomberg)


This investor uncertainty is also evident in country-specific markets like Vietnam. Despite rising export growth to the U.S and increasing foreign direct investments from China showing that Vietnam has been a clear beneficiary of trade tensions, the country’s primary benchmark, the VN-Index, is currently still at the same level where it was in December 2017.

Despite being one of the best macroeconomic stories globally, investor sentiment in Vietnam has been hurt on certain occasions as the Trump administration has at times put pressure on Vietnam with respect to its currency management and has signalled that it is not comfortable with a rising trade deficit with Vietnam.

Foreign stock market investors were net sellers in Vietnam every single trading day in October, and other markets like Bangladesh, Pakistan and Sri Lanka also recorded net selling by foreigners in 2020. We believe that this selling wave will change soon.


Vietnam is a big beneficiary of the manufacturing shift into the country, but China-U.S. tensions have hurt investor sentiment in the region

(Source: Bloomberg)


Manufacturing will continue to shift to Asian frontier countries

Samsung was already assembling a majority of its mobile phones in Vietnam and Bangladesh was capturing market share in garment exports well before the trade war began, and this manufacturing shift away from China has been occurring over the past decade, long before the much recent China-U.S. trade tensions.

Some of this manufacturing shift accelerated after increased tariffs on Chinese exports to the U.S. Even if these tariffs are renegotiated under a Biden presidency, we still don’t expect this manufacturing shift to stop, not only because China-U.S. tensions are expected to continue but also because:

  • Companies are increasingly looking for a China + 1 supply chain strategy, especially after the pandemic displayed the vulnerability of supply chains
  • Asian frontier countries are geographically well-positioned into regional supply chains
  • Significantly lower wages in Asian frontier markets relative to China: minimum wages in Vietnam are still 38% lower than that of China and Bangladesh’s minimum wage is 65% lower than China’s minimum wage
  • Asian frontier countries like Bangladesh and Vietnam offer a large, young workforce. Bangladesh and Vietnam have a labour force of 71 mln and 58 mln respectively
  • China focusses on shifting its manufacturing sector up the value chain, especially in the fields of technology


(Source: Bangladesh Garment Manufacturers & Exporters Association, General Statistics Office of Vietnam, rebased to 100. RMG: Ready Made Garments)



(Source: Asia Frontier Capital)




Oil prices could remain low under a Biden presidency which is positive for most Asian frontier markets

Though the Biden administration’s USD 2 trln New Green Deal will face roadblocks in a Republican-controlled Senate, the new administration’s policy shift towards renewable energy will most likely keep a lid on oil prices which will be a big positive for net-oil importing countries like Bangladesh, Pakistan, Sri Lanka and Vietnam. Furthermore, any potential deal with Iran, though still some time away, could also put further downward pressure on oil prices. 


(Source: Asia Frontier Capital, Tellimer)


Interest rates should remain low

Irrespective of who made it to the White House, the U.S. Fed was expected to remain dovish to help support a post-pandemic economic recovery, and a dovish Fed will be a strong cue for global central banks when it comes to maintaining lower interest rates. This will be another positive for Asian frontier markets as we have already seen lower interest rates lead to greater equity market participation from domestic investors leading to very strong stock market rallies in Bangladesh, Pakistan, Sri Lanka and Vietnam since the end of March 2020.


Significantly lower interest rates combined with lower oil prices will be a strong tailwind for Asian frontier markets

(Source: Bloomberg)


Geopolitical competition will benefit Asian frontier markets

China and Pakistan have re-committed to the China Pakistan Economic Corridor with many infrastructure projects picking up speed again. India is keen to invest in the port expansion project in Colombo, Sri Lanka while the U.S and Japan are building up further trade ties with Bangladesh. This competition between China and U.S./India/Japan is playing to the advantage of Asian frontier countries and helping bring in infrastructure investments and closer trade ties which is providing an opportunity for Asian frontier markets to grow their economies further. 

Less confrontational U.S. foreign and trade policy, low oil prices and low interest rates – a big positive for Asian frontier markets

To conclude, investor sentiment in Asia is expected to get a big boost as the three crucial factors above align with each other to provide a strong tailwind for Asian frontier equity markets. More importantly, Asian frontier markets - besides benefiting from these positives – are trading at very attractive valuations and are coming off a low base despite their recent stock market re-rating. 

A post-pandemic economic recovery is now fully in motion in Asian frontier markets with earnings growth seeing a significant recovery in the third quarter of 2020. The very positive macro and political developments mentioned above will be the much-needed trigger for a continuation of their stock market re-ratings.


(Source: Bloomberg, P/E ratios adjusted for positive earnings)


AFC Vietnam Fund ranked #1 in Asia overall and in Asia Equity by Barclayhedge



Barclayhedge ranked AFC Vietnam Fund the number-1 fund in the “Emerging Markets Asia”, and the “Emerging Markets Equity – Asia” categories for its performance during September 2020. Its +6.0% return that month combined with October’s return brought the fund to within a fraction of a percent of its all-time high NAV. Valuations of the companies in the fund are still very attractive with the fund’s average P/E at just 7.18x, and we are expecting a continued strong performance of the fund going forward.

Below please find the manager comments relating to each of our four funds for the month of October 2020.

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

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AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned +5.7% in October with a NAV of USD 1,175.06, bringing the return since inception (29th March 2019) to +17.5%, and the Year-to-Date return to +7.5%.

October saw continued buying interest from local and foreign investors alike amid a strong start to the 3rd quarter earnings season with the fund’s largest holding, Qizilqum Cement, reporting outstanding results. 

AFC Uzbekistan Fund valuations as of 31st October 2020:

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


Estimated weighted harmonic average P/B:


Estimated weighted portfolio dividend yield:



Qizilqum Cement’s 3rd quarter 2020 net profit soars +224%

Third quarter earnings season kicked off in late October with the AFC Uzbekistan Fund’s largest holding, Qizilqum Cement (TSE: QZSM), at 31% of the fund, reporting nothing short of a monster quarter as earnings surged year on year by 224%, while book value per share rose 25%. We have consistently beaten the drum that Uzbekistan’s early stage of development should lead to several years of strong cement demand and this has indeed been the case, leading QZSM and other listed cement companies, which we also own, to outperform. During October, QZSM's share price rose 32%% as sellers withdrew their offers and new buyers clamoured for shares. We expect this robust share price appreciation to moderate for a while as no security moves up in a straight line. However, clearly the new equilibrium for where sellers and buyers will meet will be higher than in prior months, and the trend in the share price remains decidedly higher. On the back of such strong third quarter earnings, even though the share price rallied strongly, the company still offers extremely deep value, ending October with a P/E of 2.04, P/B of 0.60, dividend yield of 18.04% and trading at an enterprise value per ton of installed capacity of USD 29.48. This compares to new cement plants in the country under construction which are bringing on new capacity at up to USD 120 per ton, 307% above QZSM’s current valuation per ton. Thus, we continue to view the share price of Qizilqum Cement as considerably undervalued.


Qizilqum Cement Share Price

(Source: Republican Stock Exchange of Toshkent)


Cement demand remains resilient with the country powering past COVID-19, accepting it as something to live with as life has returned to normal in the country. International air connectivity has resumed with tourists welcomed, schools now have children attending class in person and restaurants are crowded and operating normally, while construction and infrastructure projects appear to be picking up speed. The seeming acceleration in construction activity could be related to falling mortgage rates (a by-product of what we discussed in the September 2020 fund update with falling inflation leading to the Central Bank of Uzbekistan cutting its policy rate, enabling a decrease in borrowing costs). In 2020 alone, mortgage rates have fallen from a range of 26%-32% to 18%-22%, while the term of mortgages now reaches up to 20 years for a state-subsidized mortgage program and 15 years for market-based loans.

An example of the robust demand for cement and real estate can best be provided by my first trip to Uzbekistan in 2018, when I drove past a stretch of road (located 5 kilometres or a 10-minute drive from the city centre) heading to a meeting with a logistics company in the oil and gas industry, which is now part of the fund’s portfolio. The road was bordered by deserted land and walled off land plots, located next to the old Aeroflot factory (an Aeroflot subsidiary used to build cargo planes in Tashkent). The area has since been transformed. Driving through the area last week there are now thousands of new economic apartments, modern supermarkets, shopping malls, office buildings and an extension of the Tashkent metro system. A new Wyndham Hotel is also planned for the area and a hospital funded by investors from the Middle East is already open.

Demand for housing in Uzbekistan is growing rapidly and unlike in various Southeast Asian countries, such as Thailand, Malaysia and Cambodia, Tashkent in particular has a sizable housing deficit, in the tens of thousands of units and growing annually. This means the housing stock coming online will be absorbed and beget further demand, creating a reflexive positive feedback loop of more job creation, more migration to the city and more demand for housing. The cement industry as a whole, and QZSM specifically, is well positioned to supply the years of future demand the country has ahead of itself.


A furniture showroom on the left and the Wyndham Hotel land plot on the right

(Source: AFC Research)


Apartments, offices, a car wash and shopping mall under construction in the vicinity

(Source: AFC Research)


Fund Transactions

During October 2020, the fund purchased a large block of Tashkent Vino Kombinati (TSE: TKVK) the largest consumer goods company in Uzbekistan and a leading producer of vodka, wine, beer, soft drinks, dried fruits and freeze-dried vegetables. We had been negotiating with the seller of the block for several months in order to secure an attractive price and ended up achieving a sizable discount from the initial asking price. With consumer spending at an early stage, we are excited to have acquired the block as TKVK now represents 9.2% of the fund.

Typically, when a country’s GDP per capita approaches USD 2,000, consumption begins to grow aggressively due to the compounding effects of wealth creation and rising incomes/salaries. Uzbekistan’s 2019 GDP per capita was USD 1,588, meaning it is still in the early innings (to use a baseball reference) of its secular consumption boom and we believe TKVK is the most leveraged listed equity through which to gain exposure to this theme.

At the end of October 2020, the fund was invested in 28 names and held 7.9% in cash. The markets with the largest asset allocation were Uzbekistan (90.5%) and Kyrgyzstan (1.6%). The sectors with the largest allocation of assets were materials (54.0%) and consumer (16.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.16x, the estimated weighted harmonic average P/B ratio was 0.76x, and the estimated weighted average portfolio dividend yield was 11.64%.

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AFC Vietnam Fund - Manager Comment


The AFC Vietnam Fund gained 0.7% in October with a NAV of USD 1,894.66, bringing the return since inception to +89.5%. This represents an annualized return of +9.8% p.a. The Ho Chi Minh City VN Index in USD rose 2.3%, while the Hanoi VH Index gained 1.8% (in USD terms) in October 2020. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.85%, a Sharpe ratio of 0.69, and a low correlation of the fund versus the MSCI World Index USD of 0.54, all based on monthly observations.

Fighting against the headwinds of negative sentiment in international markets due to renewed COVID-19 fears, the virus-free Vietnamese market saw another month of gains, making for a three month long winning streak. The gains were mainly contributed by two stocks, whose combined impact was +3% on the index, while the broader market corrected sharply after recent strong gains (the small-cap index was down -6% in October!). 

Market Developments

After strong gains in recent months, the broader market took a breather, but sentiment still continued its general positive trend. While the market breadth was weaker and gains were not as evenly distributed as before, we saw continued strength in many of our investments despite ongoing overall foreign selling. Meanwhile, MSCI announced an upcoming increase of Vietnam in the MSCI Frontier Market Index which was originally announced back in June 2019. The longer-term inclusion of Kuwait into the benchmark MSCI Emerging Markets index still looks set to go ahead, although it may be delayed again beyond November 2020. The stock market in Kuwait continues to meet all the necessary criteria for re-classification into the MSCI Emerging Markets Index which means it would be eliminated from the MSCI Frontier Market Index, leading to an increase in the weight of Vietnam to 28.76% from 12.5% currently. This is hardly real “news” and shouldn’t have a big direct impact in terms of foreign money inflow which would be expected in the range of USD 400-700 mln. As a comparison, when adjusted for a few special deals, the foreign outflow this year is more than USD 1bln, with the market strongly up in the past few months. However, traders always jump on the bandwagon when momentum builds up, like in this case, and this could provide some added tailwinds.

Vietnam 2013, 2020 and the years ahead

We can hardly believe it ourselves, but it has been 7 years since we decided to start our AFC Vietnam Fund. It was during a financial conference in Ho Chi Minh City where two of our initial founders attended because they saw tremendous value in the country’s development and stock market - and the idea of the AFC Vietnam Fund was born. Probably set up in record time for a fund in Vietnam, two months after this conference, on 23rd December 2013, the fund was officially launched.

For all investments it is always important to review if the original investment rationale still holds, such as its stock price appreciation potential, etc. After all, it is the future which counts when investing in the stock market, not the past. Only when an investor is able to look beyond his individual buying history can life-changing gains be possible. We know many people who made tremendous gains in companies like Apple, Google or Amazon by holding them over many years, but it is much more difficult to find people who made similar gains in trading the same companies over a lengthy period.
We have always seen Vietnam as the single best investment idea on a macroeconomic basis in South East Asia – the “ of South East Asia” so to say, as Vietnam continues to take market share from other Asian nations. The growing importance and size of its economy makes it even harder for decision makers at international manufacturing companies to ignore the rising star of South East Asia. With our investment philosophy, where we try to invest in undervalued and less volatile companies, we still see continued potential for Vietnam over the next several years, and hopefully even decades. It is therefore also important to mention that our ownership (AFC staff and management) in the AFC Vietnam Fund continues to grow, as our fund manager adds every quarter to his holding in the fund. In other words, we still strongly believe in the enormous potential of Vietnam over the years to come and continue to have “skin in the game”.  

We always believed and predicted that Vietnam’s low economic base with its huge amount of human capital (almost 100 mln people), many of whom are well educated and hard-working, especially in comparison to competing countries, has a long way to grow, similar to the path of China’s economic development 20 years earlier. After all, the country’s political, economic and social culture is probably best compared to China, even though Vietnamese do not like to hear this. We were all witnesses to the Chinese (economic) success story in recent decades and – while on a smaller scale – we are still in the beginning phase of a similar success story in Vietnam.

Even though the current numbers are impressive, with Vietnam already closing the gap with some of its main competitors within Southeast Asia in terms of GDP – and that relative outperformance should continue - one should not forget that Vietnam did not play any meaningful role in Asia just 20 years ago. Only after the global financial crisis of 2008, a shift of production from other countries into Vietnam accelerated and a very supportive economic policy from the government in Vietnam made sure that large amounts of investments were attracted to the country, while countries like Thailand and the Philippines spent their time and energy on internal politics.



(Source: Vietnam Insider/IMF)


Similarly impressive is the GDP per capita where Vietnam is also getting closer to other countries, but it also shows how much more room it has to grow until it catches up with Malaysia or Thailand.


GDP Per Capita (current USD) and forecasts (1990-2040)

(Source: World Bank, IMF, AFC Research)


Of course, this long-term outlook is based on the assumption that this positive trend will continue in the future, which, while not a precise prediction, the historic evidence and other positive expectations from renowned institutions such as the World Bank, ADB or IMF are supportive of our continued positive stance on Vietnam. As a consequence, despite being “long” on Vietnam for the past 7 years and close to our all-time high in our NAV this month, at current valuations (both absolute portfolio valuations and relative market valuations) we see pretty much the same potential as we did at the launch of AFC Vietnam Fund at the end of 2013 – maybe with the difference being that we are even more convinced today as we see that our investment approach is successful.

Vietnam records highest export growth in Q3/2020

The top three countries in terms of export growth in Q3/2020, namely China, Taiwan and Vietnam, were also among a handful of economies that brought the spread of COVID-19 under control early on, with Vietnam having reported only 1,177 cases of COVID-19 infection and 35 deaths to date. According to the United Nations Conference on Trade and Development, Vietnam’s exports grew by 10.9% in the third quarter of 2020, followed by China with 8.8% and Taiwan with 6.4%. This is in contrast to many other economies which are still suffering from large numbers of new daily infections and facing difficulties in kickstarting their economies, like Japan, the United States or the European Union whose exports shrunk by 11.6%, 11.5% and 9.9% respectively in the third quarter. 


Export Growth Q3/3030 (YoY)

(Source: United Nations Conference on Trade and Development)


Vietnam’s trade recovery has helped revive its economy, following a historic low growth rate of 0.39% in the second quarter. Vietnamese GDP grew by 2.62% year on year in the third quarter and exports remain a fundamental part of the recovery. Economic GDP growth forecasts for 2020 now range between 2% to 3% which makes Vietnam one of the fastest growing countries in the world. 

Vietnam continues to benefit most from the trade war between the US and China

Even before the pandemic, Vietnam was considered one of the key beneficiaries of the ongoing trade war between the US and China and many manufacturers moved their production facilities from China to Vietnam in order to avoid the punitive tariffs on exports to the US. With the successful containment of the second COVID-19 wave, Vietnam’s standing as a manufacturing hub continued to improve. If you take the example of South Korea, it shows how this trend in favor of Vietnam over China as a manufacturing hub has accelerated and Vietnam officially overtook China as South Korea's biggest investment destination.


South Korean FDI (USD bln)

(Source: Export-Import Bank of Korea, Bloomberg)


Samsung Electronics Co. is a good example of a large South Korean company which has increased its presence in Southeast Asia and other regions and at the same time is scaling back its production operations in China. A couple of weeks ago, the Vice Chairman of Samsung Group visited Vietnam to meet the Vietnamese Prime Minister, Nguyen Xuan Phuc, to discuss Samsung’s investment plans in the country. The Vice Chairman mentioned that he is very pleased with their existing presence in Vietnam and that without these factories their global supply chain might have been disrupted during the pandemic.  According to, Samsung is planning to build a giant R&D centre in Vietnam with more than 3,000 skilled engineers by 2022.

Also, exports to the USA are becoming more and more important, reaching USD 62.3 bln in the first 10 months of this year, growth of 23.8% yoy, which equates to 27.1% of total exports. The country’s trade surplus and foreign reserves both reached a new all-time high at USD 18.7 bln and USD 92 bln respectively in the first 10 months of this year.


Exports to USA (accumulated, USD bln)

(Source: GSO, AFC Research)


Some sectors in Vietnam are benefiting substantially from the COVID-19 situation. One of them is the furniture sector as people working from home are ordering new furniture to upgrade and improve their living standards. In the first 9 months of this year, total furniture and other wooden products exports reached USD 8.4 bln, an increase of 11.4 % with the USA as the largest furniture customer with a volume of around USD 4.76 bln, growing by 29.8% yoy, equivalent to 56.8% of total furniture exports. 


Furniture exports (accumulated, USD bln)

(Source: GSO, AFC Research)


Phu Tai (PTB), one of the largest furniture companies in Vietnam, has grown its exports by 51% in the first 9 months and its consolidated revenues reached VND 4,023 bln, + 3% yoy. 


Phu Tai (PTB) (Aug. 2019 – Oct. 2020)

(Source: Bloomberg)


The fund also holds another furniture company in the portfolio, Duc Thanh Wood (GDT), which a few days ago announced strong order growth of +30% as of end of September 2020. GDT is attractively valued and has a market cap of around VND 640 bln, compared to a net cash position of VND 120 bln and a net profit of VND 74 bln. This equates to a PER after net cash of only around 7x and we believe that they will continue to do very well, given their attractive valuation and strong long-term growth they have showed over the years.


Duc Thanh Wood (GDT) (Aug. 2019 – Oct. 2020)

(Source: Bloomberg)


At the end of October 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.8%) – an insurance company, LienViet Post Joint Stock Commercial Bank (4.9%) – a bank, Dinh Vu Port Investment & Development JSC (4.3%) – owner/operator of the Dinh Vu Port, Phu Tai JSC (3.5%) – a home and office furnishings company, and Viettel Post JSC (3.4%) – a transportation and logistics company.

The portfolio was invested in 50 names and held 5.6% in cash. The sectors with the largest allocation of assets were financials (30.5%) and industrials (27.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.18x, the estimated weighted harmonic average P/B ratio was 1.00x, and the estimated weighted average portfolio dividend yield was 6.85%.

 Factsheet AFC Vietnam Fund
 Presentation AFC Vietnam Fund



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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by 1.4% in October 2020 with a NAV of USD 1,191.49. The fund underperformed the AFC Frontier Asia Adjusted Index (+3.0%), the MSCI Frontier Markets Asia Net Total Return USD Index (+5.4%), the MSCI Frontier Markets Net Total Return USD Index (+1.0%) but outperformed the MSCI World Net Total Return USD Index (-3.1%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +19.1% versus the AFC Frontier Asia Adjusted Index, which is up by +5.8% during the same period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.52% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.52, all based on monthly observations since inception.

Asian frontier markets continue to see the positive impact of economic reopenings due to their better handling of the pandemic and their very young populations. Passenger car sales and cement sales in Pakistan continue to grow very strongly which is not just a reflection of pent-up demand but also the effect of very low interest rates and government incentives to promote the construction industry.

Passenger car sales in September grew by 18% YoY backed by new model launches from Toyota and recent entrant Kia Motors. Both companies have stated that their order books are full for the next 3-4 months as the Pakistani consumer has historically had a shortage of choices and they are now also taking advantage of lower interest rates. The larger Pakistani banks have all seen greater than 30% growth in their auto loan books in the past quarter.

With cement sales and passenger car sales seeing momentum, the fund’s cement and auto holdings have both reported stellar results for the September quarter with Lucky Cement increasing its net profits by 242% YoY and 194% QoQ not only due to a recovery in cement sales but also because of higher selling prices, lower coal prices and lower interest rates. Indus Motor, Toyota’s JV partner in Pakistan, reported a net profit growth of 40% YoY with its newly launched Toyota Yaris now selling more units in September than Honda City and Honda Civic combined. 

Besides the auto and cement sectors, earnings growth on average for Pakistani companies under broker research have grown by 35% YoY and 61% QoQ reflecting the very positive impact of the economic reopening. 

On the development of infrastructure, Pakistan launched its first modern metro in its second largest city of Lahore. The metro is part of the China Pakistan Economic Corridor (CPEC) with the first line consisting of 26 stations spanning 27 kilometres and it is expected to handle 250,000 passengers daily.



(Source: Bloomberg)



(Source: Topline Securities)


Newly launched Toyota Yaris from Indus Motor seeing lot of interest from Pakistani consumers



The newly inaugurated Lahore Metro in Pakistan – infrastructure investments continue despite pandemic

(Source: BBC)


Quarterly results from Vietnam also reflect the positive impact of economic reopenings especially for consumption-related companies with the fund’s Vietnamese holdings in the modern retail, auto and beverage industries growing their net profits sequentially by 67%, 62% and 20% respectively. The overall macro environment in Vietnam trends in a positive direction with the PMI (Purchasing Managers Index) for October coming in at 51.8, another month of expansion.

Exports too continue to post very strong growth with October exports growing by 9.9% YoY on the back of 18% YoY growth in September. However, fund performance was impacted negatively by 80 bps as its largest holding, a pump manufacturer, saw a correction in its stock price due to weak sentiment in mid and small cap stocks in Vietnam this month.



(Source: Bloomberg. VRE: Vincom Retail, VEA: Vietnam Engine & Agri Machinery, SAB: Sabeco)



(Source: Bloomberg)


The macroeconomic situation in Bangladesh has also shown a huge improvement from the initial impact of the pandemic. The current account has reported a significant surplus of USD 3.5 bln for the September quarter compared to a deficit of USD 715 mln for the same period last year. Lower oil prices and a recovery in exports and remittances has led to this current account surplus which has also led foreign exchange reserves increasing to USD 41 bln which covers 10 months of imports giving Bangladesh one of the strongest import coverage ratios in the frontier market universe.

Bangladesh was already on a much stronger economic footing when the pandemic struck as its total debt/GDP is significantly lower compared to its peers in the region and this allows the government the fiscal space to push for a post pandemic economic recovery.



(Source: City Brokerage)



(Source: City Brokerage)



(Source: International Monetary Fund)


Stock market sentiment in Sri Lanka took a hit as it saw a resurgence in COVID-19 cases after almost six months of no community transmission. The cases began in a textile factory in the heavily populated Western Province which also hosts the capital Colombo. However, Sri Lanka still has amongst the lowest cases per million and deaths per million relative to global peers and investor sentiment should get a boost from the upcoming quarterly results which should reflect a full quarter of economic reopening.

Despite the correction in the Sri Lankan market though, the fund’s overall returns from Sri Lanka remained flat this month as Dipped Products, the latex glove manufacturer which the fund holds, rallied by another 40% as it declared standout results on the back of increasing global demand for its medical gloves with COVID-19 cases continuing to rise in its key export markets of Europe and the U.S. 

Net profits for the September quarter for Dipped Products grew by 5x YoY and 2x OoQ and its order book remains full till the middle of 2021. Compared to its more expensively priced Malaysian peers, this stock is still valued attractively at 6x its first half annualised earnings. This stock has returned +195% since the fund purchased it in July 2020.


Dipped Products stock price has outperformed significantly as demand for medical gloves remain high on back of rising global COVID-19 cases

(Source: Bloomberg, %change in prices between 30th June 2020 – 9th November 2020)



(Source: Bloomberg, Worldometer)


The best performing indexes in the AAFF universe in October were Vietnam (+2.2%) and Kazakhstan (+1.3%). The poorest performing markets were Sri Lanka (−4.3%) and Bangladesh (−2.4%). The top-performing portfolio stocks this month were a Mongolian concrete producer (+58.3%), a Sri Lankan latex glove manufacturer (+40.2%), a Mongolian bakery company (+32.0%), a Mongolian junior copper explorer (+28.6%), and a Pakistani automotive battery company (+19.2%).

In October, the fund added to existing positions in Mongolia and partially exited positions in Mongolia as well.

At the end of October 2020, the portfolio was invested in 74 companies, 2 funds and held 2.7% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (9.0%), and an investment company in Myanmar (4.6%). The countries with the largest asset allocation were Mongolia (20.2%), Vietnam (17.3%), and Uzbekistan (12.1%). The sectors with the largest allocation of assets were consumer goods (26.9%) and industrials (16.1%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.49x, the estimated weighted harmonic average P/B ratio was 0.81x, and the estimated weighted average portfolio dividend yield was 4.08%.

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The AFC Iraq Fund Class D shares returned −2.1% in October with a NAV of USD 585.06 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned −1.6% for the month. Since inception, the RSISUSD was down 53.3% while the fund lost 41.5%.

The Rabee Securities RSISX USD negative return in October signalled a pause in the five-month recovery from the multi-year lows reached in April. However, in local currency terms the RSISX USD Index was flat for the month, suggesting the current pause is likely to develop into a consolidation of recent gains. The 32.2% five-month recovery from the April lows merely takes the index to just short of where it started the year – at the tail end of a brutal five-year bear market. 

While the equity market’s overly subdued tone in October was similar to that of the prior two months, adjusting for the disruptions to economic activity in the wake of the 40-day Arbaeen pilgrimage, the overall picture suggests a resumption of the multi-month gradual recovery in daily turnover from the lows seen during the big lockdown. Encouragingly, the overall level of turnover was higher than seen during most of 2019 (chart below).



(Source: Iraq Stock Exchange, Asia Frontier Capital, data as of 31st October)


Foreigners were active participants in the equity market and continued mostly as net buyers, with the overall buying pattern in line with that of turnover as discussed in the prior paragraph.



(Source: Iraq Stock Exchange (ISX), Asia Frontier Capital, data as of 31st October 2020)


Another encouraging development is that the positive pattern of net foreign buying was matched by a similarly positive pattern in foreign buying, as a percentage of total buying, which was consistently higher than the levels seen during most of 2019. On the other hand, foreign selling, as a percentage of total selling, is yet to show a similar positive pattern, although it recovered from the increased levels seen earlier in the year.



(Source: Iraq Stock Exchange (ISX), Asia Frontier Capital, data as of 31th October 2020)


This consistency in foreign buying is especially positive considering the overwhelmingly negative narrative surrounding Iraq, its economy following the decline in oil prices from the disruptions brought on by the COVID-19 pandemic, and the expectations of further weakness in the wake of the recent rolling lockdowns in much of Europe. While a few months do not make a trend, this foreign buying fits in with the thesis that Iraq’s market has discounted pretty much all conceivable negatives, and thus, from a risk-reward perspective is attractive unlike other markets worldwide, most of which have had multi-year bull markets and would need to discount vastly different economic assumptions than those that led to their multi-year rises.


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

(Source: Bloomberg, data as of 7th November 2020)


While too early to derive solid conclusions from the increased foreign activity, it coincides with the strong acceptance and support from Iraq’s international partners for the government’s economic reform program unveiled on 13th October 2020, as the “White Paper”. The support was announced during the PM’s tour to France, Germany and the UK in late October, in which the UK and the World Bank took the lead in launching the Iraqi Economic Contact Group (ICGE), made up of the G7, the World Bank and the IMF to mobilise international support for the White Paper. The promising aspect of this programme is that it would require the country to embark on a real, home-grown economic programme as discussed in the White Paper which the international community would support and sustain.

Domestically the White Paper faces challenges, that range from execution challenges given the country’s capacity constraints and the damage to its institutional infrastructure sustained over the last four decades of conflict, to the protracted local political dynamics which were explored in June in “Revisiting the Iraq Thesis, Five Years Later” – in particular:-

“The dilemma for the government is that on the one hand, the basic governing equations of Iraq's political system - which largely allowed the political elite to maintain their oversized influence on economic policies - are still in force, and as such the elite will likely derail real reforms that threaten their interests; while on the other hand, the rolling economic crisis means that alternative proposed stop-gap measures will not work for long and so reforms are unavoidable in the end.”

Promisingly, local political dynamics are tilting towards an acceptance of the White Paper’s reforms as Iraq’s Finance Minister said in an interview, following the paper’s release that: “There is less denial; before it was all denial.” 

As of the end of October 2020, the AFC Iraq Fund was invested in 14 names and held 3.5% 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 (95.3%), Norway (0.8%), and the UK (0.4%). The sectors with the largest allocation of assets were financials (51.3%) and consumer staples (20.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 12.26x, the estimated weighted harmonic average P/B ratio was 0.61x, and the estimated weighted average portfolio dividend yield was 4.31%.

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With kind regards,
Thomas Hugger
CEO & Fund Manager

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