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Asia Frontier Capital (AFC) - September 2020 Update

“The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as


“The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale.”

Benjamin Graham, British-born American economist, professor and value investor


AFC Asia Frontier Fund USD A 1,207.84−1.2%−5.2%+20.8%
AFC Frontier Asia Adjusted Index2 0.3%−5.6%+2.7%
AFC Iraq Fund USD D597.63−1.6%−4.7%−40.2%
Rabee RSISX Index (in USD) +2.9%−0.1%−52.5%
AFC Uzbekistan Fund USD F1,111.71+0.3%+1.7%+11.2%
AFC Vietnam Fund USD C1,880.97+6.0%+5.1%+88.1%
Ho Chi Minh City VN Index (in USD) +2.6%−5.9%+62.9%
  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.

AFC Vietnam Fund now with a positive 2020 performance

Our AFC Vietnam Fund continued to outperform the VN-Index in September: The fund was up 6.0% compared with the VN-Index, which was up 2.6% in USD terms over the same period. Year to date, the AFC Vietnam Fund is up 5.1% in positive territory and outperforming the VN-Index nicely which is still down 5.9% for the year. Additionally, the AFC Vietnam Fund is now only 1.2% away from the all-time high NAV of USD 1,904.24 recorded at the end of July 2017.

AFC Uzbekistan Fund with new all-time high NAV

The AFC Uzbekistan Fund continued its rise from its low at the end of April 2020 with another positive monthly performance of +0.3% and a 2020 year to date performance of +1.7% which is another new NAV high. Scott Osheroff, the CIO of the AFC Uzbekistan Fund was interviewed in September by Ladislas Maurice of “The Wandering Investor”. We would recommend readers who are interested in investing early in a still undiscovered and underinvested frontier stock market to listen to this highly informative 51-minute interview by clicking the picture below:



Sri Lanka was the best performing market globally in September

With a USD return of 12.9% in September, Sri Lanka was the best performing market globally this month. A majority for the new government in the recently held parliamentary elections, lower interest rates and a safe economic reopening leading to improving macroeconomic indicators have all led to very positive investor sentiment in Sri Lanka. Also, on the external front, a recovery in exports and remittances have helped to reduce pressure on the current account, leading to a stable currency.



(Source: Bloomberg)




Bangladesh, Pakistan and Sri Lanka top performing markets globally in 3Q2020

It was also an excellent quarter for Asian frontier markets in general during the third quarter of 2020. Bangladesh, Pakistan, and Sri Lanka were the top three performing markets globally in the quarter with returns of +24.4%. +19.4%, and +17.0% respectively. This led to another consecutive quarter of positive returns for the AFC Asia Frontier Fund which returned +8.1% in the third quarter of 2020 following on from its +9.6% return in the second quarter of 2020. Very attractive valuations, lower interest rates, economic reopenings, and a big improvement in exports and remittances have contributed to this rally. More importantly, the rally has been led by domestic investors which reflects the positive investor sentiment on the ground despite continued foreign selling.



(Source: Bloomberg, returns in USD)


AFC Asia Frontier Fund co-manager Ruchir Desai presents at CFA Society of Hong Kong

On 6th October 2020, Ruchir Desai, co-manager of the AFC Asia Frontier Fund held a webinar, organised by the CFA Society of Hong Kong, titled – The Future of Asian Frontier Markets. They key points of discussion during the webinar were:

•    The economic impact of the pandemic on Asian frontier markets.
•    The economic outlook for Asian frontier markets.
•    Deficit concerns in Asian frontier markets.
•    Potential long term beneficiaries from trade/pandemic tensions.
•    Why Asian frontier markets?

To view the presentation made at the webinar, click here.

Below please find the manager comments relating to each of our four funds for the month of September 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 Vietnam Fund - Manager Comment


The AFC Vietnam Fund gained 6.0% in September with a NAV of USD 1,880.97, bringing the return since inception to +88.1%. This represents an annualised return of +9.1% p.a. The Ho Chi Minh City VN Index in USD rose 2.6%, while the Hanoi VH Index gained 6.4% (in USD terms) in September 2020. The broad diversification of the fund’s portfolio resulted in an annualised volatility of 12.93%, 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.

The September 2020 NAV is just 1.2% below the all-time high, while the HSX-index is still 25% below its high from early 2018. Despite recent gains, Vietnam shows attractive valuations when compared to other markets in Asia and around the globe, while the valuation of our portfolio is trading at an incredible discount to the market of roughly 45%. This might explain why we see increased general interest in Vietnam and our fund again.

Market Developments

The market continued its upward trend in September, which started on 27th July 2020. Maybe more important than the start of the latest rally is the fact that despite foreign selling over the past few months, the upward price pressure continued with little volatility across sectors. But from our perspective, the most important development was the change in leadership which is now broad-based and not like in some developed markets where very few leading stocks are catching all of the interest.

Vietnam’s stock market recently celebrated its 20th anniversary. While there are always phases where different sectors or market cap segments perform better or worse, we have now witnessed several years where blue chips clearly outperformed the small and mid-cap segment. How much things have changed since the market low six months ago can be easily seen by the relative performance of the mid-cap index compared to the benchmark index in Ho Chi Minh City. Of course, we hope that this is now just the start of a larger trend which would help the performance of the portfolio tremendously.


Mid-cap index relative to HSX-index over the past six years

(Source: Bloomberg)


With value stocks worldwide now historically cheap compared to some of the tech-frenzy driven markets, we see the portfolio as being well-positioned within an already inexpensive market in Vietnam. With most of our top 10 positions trading around 6-7x earnings, we, like many other investors, are scratching our heads when seeing large companies in the US trading at 60x, 100x earnings and above - pushed up mostly by day traders and first-time investors. We noticed a similar trend during the tech bubble of 1999 and we all know that this usually ends badly. At first sight, this might sound scary for global markets in general. Still, the good news is that in 2000/01, following the sell-off after the NASDAQ peaked in March 2000 (the index lost two-thirds of its value within one year!), non-tech companies and the real economy weren’t much affected. Only 9/11 in 2001 and the recession in the following year brought down the broader market.


Dow Jones Industrial Average and NASDAQ performed very differently in 2000

(Source: Bloomberg)


This observation is very important for us, as the whole frontier market universe nowadays is similarly as cheap and under-owned as the Dow Jones blue chips were back in 2000 when tech-stocks were under-represented in the widely followed Dow Jones Industrial Average Index. Even though the risk of a massive correction in the tech sector has risen, attractive markets like Vietnam might perform solidly – or, as we hope – with only a slight shift from investors in developed markets into frontier and emerging markets, it would mean an explosive revaluation of this market.

Meanwhile, the Advance/Decline-Ratio (market breadth) also shows how the picture has changed this year, as this turnaround in market breadth underlines the healthy advance in prices for the first time in years.


Market Breadth

(Source: Bloomberg, HSX, HNX, AFC Research)


The favourable market situation is undoubtedly supported by the relatively better economic outlook for Vietnam compared to almost every other nation in the world, as well as by the successful containment of COVID-19, where Vietnam has seen no local infections for around one month. But unlike other countries, such as Thailand, Philippines or Singapore, Vietnam is now slowly and very carefully re-starting international flights, albeit there will be no positive impact from the international tourism sector for now. The country has recently decided to reopen international flights to and from six Asian destinations – Japan, South Korea, China, Taiwan, Laos and Cambodia. According to the aviation authority, there will be a total of nine inbound flights a week landing in Hanoi and HCM City. Currently, permitted entries to Vietnam are limited to foreign investors, business executives, experts, highly skilled workers, diplomats and international students – international tourists are still not allowed in yet. Passengers must produce documents proving they have been allowed to quarantine in facilities such as diplomatic representative’s buildings, factories, business headquarters, hotels or other similar accommodations, or centralised quarantine facilities managed by the military.

Despite being a tourist destination and having experienced the total collapse of international arrivals, Vietnam should show positive GDP growth of around 2-3% in 2020.





Vietnam stock market’s 20-year milestones 

The Vietnamese stock market officially opened on 28th July 2000 with its first two stocks, Refrigeration Electrical Engineering Corporation (REE) and Saigon Cable and Telecommunication Material JSC (SACOM). Over the past 20 years, Vietnam’s stock market has achieved several significant milestones:

  • The total market capitalization of Ho Chi Minh City Stock Exchange (HSX) surged nearly 3,000 times to around USD 141 bln. Including the Hanoi Stock Exchange and UPCOM, total market capitalization reached around USD 188.4 bln. 

Market capitalisation – HSX (USD bln)

(Source: Bloomberg, AFC Research)

  • The total number of listed companies reached 1,651 (including HSX, HNX and UPCOM).

Number of listed stocks including HSX, HNX and UPCOM

(Source: HSX, HNX, Vietstock and AFC Research)

  • The total number of trading accounts reached 2.54 mln, up from around 3,000 accounts in 2000.
  • Average daily trading volume increased 5,000 times to USD 168 mln per day. Liquidity increased sharply which has helped attract more and more international investors to the Vietnamese stock market. 

Average daily trading volume - HSX (USD mln)

(Source: Bloomberg, AFC Research)



(Source: VN Express)


Furthermore, short selling of equities may soon be allowed in Vietnam under a new proposal which is currently being discussed by the Ministry of Finance. This could potentially help Vietnam’s aspiration of being reclassified from a frontier market to an emerging market by MSCI.

Foreign reserves reached another record high 

The Vietnamese government recently reported that its foreign exchange reserves surged to a new record high of USD 92 bln and they are expecting foreign reserves to reach USD 100 bln by the end of this year.


Foreign reserves of Vietnam (USD bln)

(Source: State Bank of Vietnam, AFC Research)


Unfortunately, foreign remittances to Vietnam are expected to take a big hit in 2020 due to COVID-19, but this negative effect will probably be compensated by the impressive trade surplus in 2020. We therefore expect the Vietnamese Dong to continue to be one of the most stable currencies versus the USD.

According to the General Statistic Office of Vietnam, the total trade surplus in the first nine months of 2020 reached USD 17 bln, mainly due to the strong recovery of exports in the third quarter.


Accumulated trade surplus (USD bln)

(Source: Custom of Vietnam, GSO, AFC Research)


There are several reasons for the positive development in export growth, one of them is the successful implementation of EVFTA (EU-Vietnam Free Trade Agreement), which has started having a positive impact on the record numbers of exports from Vietnam to Europe in coffee, seafood, etc. But Vietnam has also become a promising alternative to China for US businesses in Asia as both a trading partner and a manufacturing hub. All this has also led to optimistic Vietnam GDP growth forecasts for 2020 and 2021 by leading institutions such as the World Bank, ADB, IMF and Goldman Sachs. 


GDP growth estimates (%)

(Source: Goldman Sachs, World Bank, ADB, IMF, AFC Research)


At the end of September 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.3%) – an insurance company, Vietnam Container Shipping JSC (5.5%) – a container port management company, LienViet Post Joint Stock Commercial Bank (4.4%) – a bank, Phu Tai JSC (3.6%) – a home and office furnishings company, and Dinh Vu Port Investment & Development JSC (3.4%) – owner/operator of the Dinh Vu Port.

The portfolio was invested in 49 names and held 7.9% in cash. The sectors with the largest allocation of assets were industrials (32.6%) and consumer goods (26.2%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.75x, the estimated weighted harmonic average P/B ratio was 1.02x, and the estimated weighted average portfolio dividend yield was 6.30%.

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AFC Uzbekistan Fund - Manager Comment



The AFC Uzbekistan Fund Class F shares returned +0.3% in September with a NAV of USD 1,111.71, bringing the return since inception (29th March 2019) to +11.2%, and the Year to Date return to +1.7%.

September saw more double-digit dividend yield announcements among the fund’s holdings. Some of these yields are now markedly higher than the average one-year Uzbek Som term deposit rate offered by local banks and may indicate the tipping point for local investors to start taking a more serious interest in listed equities as an alternative investment strategy.

AFC Uzbekistan Fund valuations as of 30th September 2020:

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


Estimated weighted harmonic average P/B:


Estimated weighted portfolio dividend yield:



Uzbekistan’s “Golden Cross”

A “golden cross” is a chart technical analysis term in the investment industry referring to when the short-term moving average of a security crosses over a major long-term moving average, to the upside. Commonly, this is the 50-day moving average crossing above the 100 or 200 day-moving average, indicating bullish momentum and the start of an uptrend from a conservative standpoint as the uptrend would likely already be weeks old at this point.

In reference to Uzbekistan, since Thomas’ and Scott's first trip to Uzbekistan in May 2018 (these were two separate trips with Scott tacking Uzbekistan onto the end of an investment tour to Kazakhstan in early May and Thomas making a trip a few weeks later, allocating some of his time to a side trip to Tashkent) we have held the view that slowing inflation and an injection of foreign capital into the domestic banking sector would in time enable the Central Bank of Uzbekistan (“CBU”) to lower its policy rate, leading to falling lending and deposit rates by banks, thus increasing the attractiveness of listed equities on the Tashkent Stock Exchange for local investors. To be honest, we were early, but we also knew that the odds of Uzbekistan continuing to open and liberalize were in our favour and that we would benefit from being early in order to build healthy position sizes and a strategically well-positioned fund before other foreigners arrived.

Scott had the opportunity to live in 6 (5 of them frontier) Asian countries over the past decade, and has experienced first-hand just how (positively) violent economic re-ratings can be, specifically in the equity and real estate markets. For example, real estate (rice paddy at the time) on the outskirts of Phnom Penh, Cambodia in 2014 which was selling for USD 5/sqm, is today valued at over USD 200. While in every country a re-rating will vary by both the catalysts which drive it and its intensity, we long believed falling term deposit rates, below dividend yields on listed equities, would be one key spark to light a proverbial fire in the multi-year re-rating process of the equities market. This “golden crossover” if you will has now happened and the spread between deposit rates and dividend yields is expected to continue to widen until more foreigners (who are increasingly taking notice and entering the market through brokerage account openings) and local investors wake up to the realization that one of the best investments to make in Uzbekistan today is in listed equities.



(Source: Bloomberg)


Courtesy of COVID-19, Uzbekistan’s GDP growth in 2020 is expected to slow to 1.5% from the previous World Bank estimate of 5.5%. The expected slowdown in GDP growth has seen demand for credit slow and inflation fall (save for a short-term spike in various food-related commodities during the initial quarantine in March 2020 due to the closure of international borders).

Disinflation has enabled the CBU to lower its policy rate by 100 basis points on two separate occasions this year, falling from 16% to 14%. These cuts have led the average one-year term deposit rate for individuals at banks to fall from 20.3% in March to 16.4% in August. Businesses meanwhile are offered different (lower) deposit rates which fell from 17.2% to 15.1% during the same period. As inflation continues to slow down and new banks enter Uzbekistan, while existing ones can increase their available capital for lending (for example publicly listed bank, Ipak Yuli (TSE: IPKY) issued USD 25 mln in new shares to German investment corporation DEG and Triodos Investment Management in August, while Gazprom Bank, Russia’s third-largest bank received approval to open a representative office this month) competition for clientele should begin to drive down lending rates and in due course provide the CBU the means with which to cut its policy rate further.



(Source: Bloomberg)


Likely in a bid to both slow credit growth (which in previous years was as high as 50%) and inflation further, the CBU put a cap on bank lending rates of 21% and 24% from 1st July 2020 through year-end for business and individual borrowers respectively. As such socialist policies are usually ineffective, lending has fallen precipitously and is likely to remain subdued until this cap is removed. While certainly not a free-market principle, it will be effective in moderating credit growth and subduing inflation, allowing the CBU to potentially cut the policy rate yet further, a situation which would only make investing into the equities market that much more attractive.

In conclusion, what does all of this mean for the AFC Uzbekistan Fund and the broader Uzbek capital market? From an opportunity cost perspective, local individuals and corporations who currently prefer to invest their risk capital into term deposits can now receive significantly higher double-digit dividend yields from a multitude of listed equities. Previously, the excuse locals would make when discussing the benefits of investing into exceptionally cheap listed equities with double-digit dividends was that the dividends were not high enough to justify the perceived risk of owning them, relative to term deposits, as many investors don’t understand the risk-reward of investing in equities and view them simply as another fixed-income-type product where cash flow is all that matters. Today, however, even a mere assessment of the relative cash flows favours investing into equities, with some of these attractive companies outlined below.

We believe it is only a matter of time until the increasing foreign participation in the stock market and/or locals seeking high yield investment opportunities triggers a more rapid and profound phase of the multi-year re-rating for which the stage is increasingly set.



Asia Frontier Capital in the news

On 16th September 2020 Scott Osheroff sat down with Ladislas Maurice of “The Wandering Investor” to discuss Uzbekistan on a macro level as well as diving into the deep value and growth potential of listed equities on the Tashkent Stock Exchange. To view our discussion on YouTube, click on the image below.



At the end of September 2020, the fund was invested in 28 names and held 13.4% in cash. The markets with the largest asset allocation were Uzbekistan (84.7%) and Kyrgyzstan (1.9%). The sectors with the largest allocation of assets were materials (51.9%) and industrials (12.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.36x, the estimated weighted harmonic average P/B ratio was 0.68x and the estimated weighted average portfolio dividend yield was 13.82%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by 1.2% in September 2020 with a NAV of USD 1,207.84. The fund underperformed the AFC Frontier Asia Adjusted Index (−0.3%), MSCI Frontier Markets Asia Net Total Return USD Index (+1.9%), the MSCI Frontier Markets Net Total Return USD Index (+0.7%) but outperformed the MSCI World Net Total Return USD Index (−3.4%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +20.8% versus the AFC Frontier Asia Adjusted Index, which is up by +2.7% during the same period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.55% 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.

The AFC Asia Frontier Fund posted another quarter of positive performance with returns of +8.1% in the third quarter of 2020 following the +9.6% return in the second quarter of 2020. Asian frontier markets stole the show in the third quarter with Bangladesh, Pakistan and Sri Lanka being the top three performing markets globally in the third quarter with returns of +24.4%, +19.4% and +17.0% respectively in USD terms. For the fund, returns in the third quarter were also led by Bangladesh, Pakistan and Sri Lanka with the fund’s holdings in these three countries returning +33%, +30% and +14% respectively.


Asian frontier markets had a robust quarter – Bangladesh, Pakistan and Sri Lanka top three performing markets globally in 3Q20

(Source: Bloomberg)


Sri Lanka was also the best performing market globally in September with returns of +12.9% in USD terms. A very well managed pandemic response, as well as a super-majority for the Rajapaksa led SLPP (Sri Lanka Podujana Peramuna) in the recent parliamentary elections has led to this buoyant investor sentiment. A safe economic reopening has led economic indicators like PMI’s, industrial production, and business confidence indexes to recover. On the external front as well, besides lower oil prices, exports and remittances have witnessed a recovery which has reduced pressure on the current account.



(Source: Bloomberg)



(Source: Department of Census and Statistics)



(Source: Central Bank of Sri Lanka)


The government is also taking proactive steps by offering foreign exchange hedges to foreign institutional investors looking to invest in domestic government securities which should help in attracting foreign capital. Despite recent concerns on the country’s external debt position, the Sri Lankan Rupee has been stable this year compared to countries which appear to have much larger external financing issues relative to Sri Lanka, which has never defaulted on its external debt and is well positioned to meet its external obligations in the near term.

Performance in Sri Lanka was led by two consumer and healthcare conglomerates which returned +24.5% and +18.7% respectively, while the fund’s Sri Lankan latex glove manufacturer continued its good run returning +25.1% this month. This stock has returned +74% since the fund purchased it in July 2020.


Sri Lankan Rupee has been stable in 2020 – Sri Lanka in a better position relative to countries which have much bigger external financing issues

(Source: Bloomberg, % depreciation against USD since 31st December 2019)


Vietnam’s economic recovery continues after flattening the curve of the second wave of COVID-19 cases. 3Q20 GDP growth came in at +2.6% compared to +0.4% in 2Q20, which reflects the post-pandemic economic recovery. Exports picked up very strongly in September growing by 18% YoY, and foreign direct investment (FDI) regained momentum with FDI disbursements of USD 2.4 bln, an increase of 6.6% YoY and the highest monthly disbursement so far in 2020.



(Source: Bloomberg)



(Source: SSI Securities)


This growth in FDI continues to reflect the strategically advantageous position Vietnam is in with respect to attracting manufacturers looking to relocate or diversify their supply chains. Pegatron, the Taiwanese company which supplies components to Apple, Microsoft and Sony recently announced that it would be investing USD 1 bln over the next few years to set up manufacturing capacity in Hai Phong in northern Vietnam.

Over the past two quarters, two of the fund’s key mid-cap holdings have outperformed the VN-Index by a large margin – a construction contractor and a transportation company. They have both gained +71% since 31st March 2020 compared to the VN-Index’s return of +37%. Both companies are benefiting from the reopening of the economy while the construction contractor has caught the eye of domestic investors as the government focuses on infrastructure spending to support economic growth.

Both Bangladesh and Pakistan have seen a significant benefit from the reduction in oil prices and a recovery in exports and remittances as both countries have reported current account surpluses for July and August. However, despite these positive macro developments, Pakistan had a soft month after a very good run over the past few months. Still, economic momentum continues with domestic cement sales volumes seeing a consistent increase post the lifting of lockdowns in May. In Bangladesh, the fund’s largest holding, Beximco Pharmaceuticals GDR saw its stock price correct by -12.9% this month after having also had a strong rally in July and August – this cost the fund 76 basis points in performance.



(Source: Bangladesh Bank, State Bank of Pakistan)



(Source: Topline Securities)


A big positive for the capital markets in Bangladesh is the approval of the IPO of Robi Axiata, the second largest mobile phone operator by market share after Grameenphone. The listing of this blue-chip company could motivate other large corporations to also list their shares on the stock exchange, which will allow investors to gain access to the robust and massively under-penetrated consumer story of Bangladesh. 

The best performing indexes in the AAFF universe in September were Sri Lanka (+12.3%) and Mongolia (+2.8%). The poorest performing markets were Kazakhstan (−2.0%) and Pakistan (−1.3%). The top-performing portfolio stocks this month were a pharmacy chain from Papua New Guinea (+60.0%), a Pakistani truck manufacturer (+26.3%), a Sri Lankan latex glove manufacturer (+25.1%), a Sri Lankan consumer & healthcare conglomerate (+24.5%), and a Mongolian financial services company (+18.7%).
In September, the fund added to existing positions in Mongolia and Vietnam and partially exited positions in Mongolia.

At the end of September 2020, the portfolio was invested in 74 companies, 2 funds and held 3.8% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (9.5%), and an investment company in Myanmar (4.5%). The countries with the largest asset allocation were Mongolia (19.4%), Vietnam (18.2%), and Uzbekistan (11.1%). The sectors with the largest allocation of assets were consumer goods (27.0%) and industrials (16.7%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.61x, the estimated weighted harmonic average P/B ratio was 0.78x, and the estimated weighted average portfolio dividend yield was 4.50%.

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The AFC Iraq Fund Class D shares returned −1.6% in September 2020 with a NAV of USD 597.63 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned +2.9% for the month. Since inception, the RSISUSD was down 52.5% while the fund lost 40.2%.

AFC Iraq Fund September 2020 Update: “Still the Dog Days of Summer”

Unusually, the more subdued than normal “dog days of summer” witnessed in August were extended into September as economic activity slowed further, especially as the 40-day Arbaeen pilgrimage approached its climax in early October – as can be seen from the Google mobility data in the chart below. 



(Baseline is the median, for the corresponding day of the week, during 3rd January – 6th February, Source: Google, data as of 4th October.)


The Arbaeen similarly affected the USD-Iraqi Dinar (IQD) transaction volumes conducted by the Central Bank of Iraq (CBI), which administers five daily USD auctions every week to facilitate foreign trade transactions (transfers, indicated as green bars in the below chart) and to satisfy the need for physical USD for Iraqis travelling abroad (cash, indicated as red bars in the below chart). Demand for USD in the CBI’s auctions is a reasonable proxy for consumer demand, given the country’s high dependence on imports to satisfy domestic consumption of goods and services, and thus this decline confirms the slowdown implied by the mobility data.



(Source: Central Bank of Iraq (CBI), Asia Frontier Capital, data as of 6th October)


While the Arbaeen had similar effects on economic activity last year, the slowdown this year comes from a lower base than in other years. And so, the moderation of activities might be a reflection of a wider economic slowdown given the fading effects of the rebound from the lockdown-induced plunge. The economy, like other economies worldwide, is probably adjusting to a “new normal” post-COVID – that is at risk of being in a prolonged sub-par state as a second wave of the pandemic emerges worldwide, bringing with it partial lockdowns.

Nevertheless, the slowdown of economic activity in the two weeks leading up to the Arbaeen is at odds with the increase, in the same two weeks, from 2.9% to 4.1% in the premium of the market rate over the official exchange rate of the Iraqi Dinar (IQD) versus the USD (chart below).



(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital, data as of 6th October)


The contradiction of an increasing USD rate, while USD sales volumes are decreasing, might be explained by jitters as rumours circulate of an imminent IQD devaluation as a solution to the government’s struggle to meet its most pressing expenditures that are much higher than its current oil revenues. Such rumours are routine in a country in which the dissemination of economic updates is poor, and trust in the government is very low, driving perceptions and subsequently fears. These fears notwithstanding, the 4.1% premium, while high compared to the lows that prevailed for most of 2018-2019, is lower than levels reached during the height of the lockdown when similar fears were making the rounds. More importantly, the current premium levels are substantially lower than the levels reached at the worst of the last economic crisis in late 2016 as can be seen above.

The rumours of an IQD devaluation are fuelled by the ruling political class’ pursuit of a “silver bullet” solution to the country’s fiscal crisis. A pursuit that is resurrected whenever oil revenues decline substantially below expenditures, such as during the current period and in 2014-2016. The appeal of the devaluation silver bullet is that a weaker exchange rate of the IQD versus the USD would enable the state to meet its IQD expenditures from its USD based oil revenues, resolving the state’s fiscal crisis. However, such a respite is fleeting as prices would soon rise in lockstep with the devaluation, given the country’s high dependence on imports to satisfy local consumption, and the inability of local industry to meet this demand. This in turn would raise the cost of living and lower the living standards of a large segment of the population, leading to the very social discontent that the political class is seeking to avoid.

However, a gradual depreciation of the IQD versus the USD is likely as lower future oil revenues weaken the forces supporting the current exchange rate, and the new government’s reform programme gradually unfolds. It was argued in Revisiting the Iraq Thesis, Five Years Later that:

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

A way out is in pursuing reforms that will yield real economic dividends, yet at the same will not threaten the elite's interests. The first of these are the low hanging fruit, ignored during the years of oil aplenty, of measures that will allow the private sector to grow, supported by an unconstrained commercial banking sector and unhindered by government bureaucracy”

The private sector’s growth, supported by the reform programme, will take time, measured in years not months, to grow sufficiently enough to satisfy local demand for goods and services. A more competitive exchange rate, in particular versus the country’s largest trading partners, would support and accelerate this development.

The equity market (Rabee Securities RSISX USD Index), meanwhile, rose 2.9% in September but the fund significantly underperformed its benchmark, down 1.5% for the month. The Index’s rise was strongly influenced by the stellar performance of its largest index component, Baghdad Soft Drinks (IBSD), with an index weight of 33.5% and which was up 14.9% for the month, benefitting from the re-investment of its dividends. On the other hand, the two leading banks that drove the market higher until September corrected, with the Bank of Baghdad (BBOB) down 17.8%, and the National Bank of Iraq (BNOI) down 2.9%. Other market leaders were either flat or corrected by a few percentage points.

In spite of the market’s lopsided rise for the month, this performance builds on the multi-month recovery following the multi-year lows reached in April 2020, for a total increase of 34.3% since then. However, notwithstanding this strong performance, the market is almost back to where it started the year – at the tail end of a brutal five-year bear market. Iraq’s Rabee Securities RSISX USD Index (RSISUSD) is still down 66% from the 2014 heights, which 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 8th October)


As of the end of September 2020, the AFC Iraq Fund was invested in 14 names and held 5.9% 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 (92.7%), Norway (0.9%), and the UK (0.5%). The sectors with the largest allocation of assets were financials (49.8%) and consumer staples (20.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.90x, the estimated weighted harmonic average P/B ratio was 0.62x and the estimated weighted average portfolio dividend yield was 5.67%.

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With kind regards,
Thomas Hugger
CEO & Fund Manager

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