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Asian frontier markets leave the rest behind - AFC Asia Frontier Fund 2021 Review and Outlook for 2022

AFC Asia Frontier Fund: 2021 Review and Outlook for 2022


Dear Investors and Newsletter Readers,

2021 has been an emphatic year for Asian frontier markets with many of them being among the top 10 performing markets globally this year. Furthermore, Asian frontier markets have also outperformed global and regional peers by a large margin which only emphasizes the importance of being invested in Asian frontier markets as a diversification strategy.

The AFC Asia Frontier Fund has returned +16.0% in 2021 with a few more days to go before the trading year ends. As we move into 2022, many Asian frontier countries are fundamentally well placed to adapt as the global economy, as well as monetary policies, transition to a more normal phase. 

Furthermore, valuations for Asian frontier markets and for the AFC Asia Frontier Fund (with a P/E ratio of only 9.9x) are not stretched. Any uneasiness in global markets with respect to policy normalization or new COVID-19 variants presents a good time to invest in Asian frontier markets as many countries in our universe are on a long-term structural growth path. 


Asian Frontier Markets Outperformance

(Source: AFC Research)


2021 Review – Asian frontier markets leave the rest behind

At the end of 2020, we discussed in our review and outlook report that we were very positive on the 2021 outlook for Asian frontier markets on the back of a swift economic recovery, strong earnings growth, multi-year low interest rates, and extremely attractive valuations.

A year on, Asian frontier markets have had an exceedingly strong 2021 and have outperformed global peers significantly. As a result, many Asian frontier markets have been among the top-performing markets globally in 2021, leaving many larger emerging markets behind in terms of performance.

In addition to tailwinds such as a very strong post-pandemic economic recovery backed by a robust rebound in earnings, higher commodity prices have also helped many Asian frontier markets deliver impressive stock market returns.

This significant outperformance by Asian frontier markets is particularly important in the context of many large emerging markets underperforming in 2021 which signifies the diversification benefits of being invested in Asian frontier markets.



Asian Frontier Markets Outperformance

(Source: Bloomberg, as of 17th December 2021)


In addition to the economic momentum supporting Asian frontier markets, key structural trends like the manufacturing and supply chain shift into Asian frontier countries continues to play out very strongly, with key beneficiaries being Bangladesh, Mongolia, Pakistan, and Vietnam.


Supply Chain Diversion

(Source: Bloomberg, Bangladesh Export Promotion Bureau)



Mongolian Coking Coal

(Source: Bloomberg)


The pace of vaccinations has also witnessed a marked improvement across our universe over the past few quarters which has supported a further reopening of economies, especially for tourism-dependent countries like Cambodia, Maldives, and Sri Lanka.


Many Asian frontier countries now have high vaccination rates

Vaccination Rate Image

(Source: Our World in Data)


2021 Portfolio Review

The AFC Asia Frontier Fund returned an estimated +16.0% in 2021. Fund performance this year was broad-based with most of the fund’s larger country weights contributing strongly to performance. Returns were led by Mongolia, Uzbekistan, Vietnam, Kazakhstan, Bangladesh, Sri Lanka, Iraq, and Papua New Guinea. The major negative contributors were Myanmar and Pakistan.



Performance Drivers

(Source: AFC Research)


With a return of +118% this year, Mongolia has been the best performing stock market globally in 2021 on the back of higher commodity prices and very attractive valuations. The top 5 performing stocks for the fund in Mongolia were APU, Mongolia’s largest beer, vodka, and soft drinks manufacturer (+198%), Darkhan Nekhii, a leather producer (+95%), Gobi, the largest cashmere producer in Mongolia (+71%), Talkh Chikher, a bakery and confectionery company (+55%), and Mongolian Mining Corp, a coking coal miner (+52%).

Many investors have asked us in the past year why we have a relatively higher weight in Mongolia. The 2021 performance of the Mongolian stock market has provided the answer to those queries.



Top Mongolian stocks

(Source: Bloomberg, % change in prices between 31st December 2020 – 17th December 2021)


The fund has exposure to Uzbekistan via its investment in the AFC Uzbekistan Fund, which gained an estimated 50% in 2021, as the reform-led growth story in Uzbekistan continues to play out, leading to a re-rating of the stock market.

The Vietnamese stock market had a stellar year despite overblown concerns regarding the long-term economic impact of the strict lockdowns imposed in the wake of the “fourth” wave of COVID-19 cases. With a gain of 35% in 2021, the VN-Index is amongst the top 10 performing markets globally as the investment case for Vietnam remains solid, backed by the manufacturing and supply chain shift into the country.

The key contributors to fund performance in Vietnam were two midcap companies, Fecon Corp. (FCN) and Petrovietnam Transport (PVT), which gained 106% and 71% respectively in 2021. Both companies benefit from the growth of industrial activity in Vietnam, especially Fecon, which specializes in the construction industry that has enjoyed an uplift due to increased government spending on infrastructure projects. We did trim our positions in both of these companies after a strong rally in both names.

The other major contributor to fund performance was Kinh Bac City (KBC), the largest industrial park developer in Vietnam, which is a direct beneficiary of the manufacturing and supply chain shift into the country. Its industrial parks host global names like Foxconn, GoerTek, LG, and Oppo, among others. KBC’s stock price had a solid start to the year, and we used this rally to exit from this investment in the first quarter of 2021.

Gemadept (GMD), Vietnam’s largest private port operator, also added to performance for the fund. The fund only entered this name in July 2021, and the stock has gained 27% since then.


Fecon Corp. (FCN) and Petrovietnam Transport (PVT) outperformed the Vietnam VN-Index by a large margin in 2021


(Source: Bloomberg, % change in price between 31st December 2020 – 17th December 2021)


Kazakhstan’s stock market had a stellar year with a gain of 30% in 2021 as the country’s diverse natural resource base benefitted from the rally in commodity prices this year. The fund owns three names in Kazakhstan, and all three of them contributed positively to performance. Uranium miner Kazatomprom saw its stock price increase by 102% this year as the company is expected to benefit from a higher selling price, a structural deficit of uranium supply, and the accelerating global focus on “green” investments.

Kaspi, the fund’s Kazakh fintech holding, had a phenomenal year with a gain of 80% in its stock price as the management team displays solid execution leading to continuous earnings upgrades. As we have mentioned previously in our manager comments, Kaspi is the only tech company in frontier and emerging markets (excluding China) that is making profits on a large scale and follows through with a dividend. Most frontier and emerging market tech names are still burning cash, let alone paying dividends.

The fund’s third holding in Kazakhstan, Halyk Bank, witnessed a 40% rally in its stock price on the back of robust earnings growth of 36% in the first nine months of this year. Despite this rally, the stock continues to trade at a very attractive P/E ratio of only 4.9x, while also providing a very high dividend yield of 10.2%.



Kaspi Outperformance

(Source: Bloomberg, % change in prices between 31st December 2020 – 17th December 2021)


All three of the fund’s Kazakh holdings did well in 2021

KZ Stocks in 2021

(Source: Bloomberg, % change in price between 31st December 2020 – 17th December 2021)


The Dhaka Stock Exchange Broad Index in Bangladesh was one of the best-performing markets in Asia as the country sees a swift and strong post-pandemic economic recovery. Bangladesh went into the pandemic on firm economic footing with greater than 6% GDP growth in the five years leading up to the pandemic. In addition to this, the country’s debt levels are very low which has given it room to stimulate the economy through infrastructure investments. It is safe to say that Bangladesh has by far the soundest macroeconomic fundamentals in South Asia.



(Source: International Monetary Fund)


Bangladesh has also seen a powerful rebound in exports as the country is one of the key beneficiaries of the supply chain shift, especially in the global garment industry. However, to reduce dependence on the garment industry, the government is making a conscious effort to diversify the country’s manufacturing sector by providing incentives to attract other manufacturing-related industries like automobiles and electronics. These policies are already bearing fruit, with Samsung and Honda beginning local assembly of smartphones and motorcycles respectively in the past few years.

As the government continues to offer incentives to attract foreign manufacturers and invests in improving the country’s infrastructure, it would not be surprising to see Bangladesh emerge as the “Vietnam of South Asia” over the next decade.

From the fund’s holdings in Bangladesh, the leading performance contributors were Bata Shoe Bangladesh, BRAC Bank, and British American Tobacco Bangladesh. Bata Shoe Bangladesh’s stock price re-rated as the economy reopened from the lockdowns that occurred between April and July of this year, while BRAC Bank’s stock price rallied on the back of Softbank’s 20% equity investment in Bkash, the leading fintech player in Bangladesh in which BRAC Bank owns a 41% economic interest.

This investment by Softbank in Bkash is not only a vote of confidence for the company’s growth plans but also reflects the broader confidence that foreign investors have with respect to the Bangladesh story.

In Sri Lanka, the biggest gainer for the fund was consumer and healthcare player Sunshine Holdings (SUN), which rallied by 50% this year on the back of its 76% share price gain in 2020. Despite two years of very strong stock price performance, SUN is still trading at an attractive one year forward P/E ratio of 7.1x as the company delivers on net profit growth.

We believe SUN is one of the best consumption plays in Sri Lanka, backed by a strong management team focused on execution, and we would not be surprised if the stock price appreciates more from here given its very attractive valuation and sound growth prospects.


Sunshine Holdings has been the best performing Sri Lankan stock for the fund


(Source: Bloomberg, % change in price between 31st December 2019 – 17th December 2021)


The AFC Iraq Fund also had a good year as the macro-economic situation in the country improved significantly on the back of higher crude oil prices. This economic improvement had a positive spillover effect on local investor sentiment, leading to a strong rally in many of the fund’s still attractively valued names.

The negative drivers of performance this year were Myanmar and Pakistan. The fund holds two positions in Myanmar that were impacted negatively post the February 2021 military coup. However, the fund’s exposure to Myanmar is very low at around 2%.

In Pakistan, the negative impact on performance has only occurred in the past three months during which time economic indicators like the current account and currency began deteriorating, leading to a sharper than expected increase in benchmark interest rates. Though the current uncertain economic environment in Pakistan will most likely soften domestic investor sentiment, the fund’s exposure to the country is around 8%, which is not substantial.

To conclude the 2021 review, portfolio fundamentals remain attractive and healthy with the AFC Asia Frontier Fund still trading at a P/E ratio of only 9.9x which is well below its peak valuation of 17.5x.



AFC PE ratio

(Source: AFC Research)


AFC Asia Frontier Fund portfolio metrics are solid



P/Cash Flow


Return on Equity

Equity ratio

3 Year Earnings CAGR








(Source: AFC Research)


Key Purchases in 2021

In alphabetical order by country, the fund invested in the following companies in 2021:


In Bangladesh, the fund bought Square Pharmaceuticals towards the year-end as the valuation of the company has become too attractive to ignore, while fundamentals of the company remain solid with a net cash position equal to 28% of market cap and a return on equity of 19.1%. There have been some question marks over the company’s growth rate in the past few years but at an all-time low P/E ratio of 11.0x we are happy to wait as the company could be seeing a reversal in fortunes given that it is the largest pharmaceutical company in Bangladesh by revenue and market share.

The fund also initiated an investment in Linde Bangladesh towards the end of the year by taking advantage of the recent correction in its stock price which came under pressure due to rising raw material costs which are linked to the price of copper. The big picture story for Linde Bangladesh is that it is the largest industrial gas producer in the country and the increasing construction and infrastructure investments being made in Bangladesh should lead to higher demand for industrial gases. Besides being a blue-chip company, Linde Bangladesh is also one of the more reasonably valued companies to get exposure to the growing infrastructure needs of the country.


In Cambodia, the fund invested in Emerald Resources (EMR), a gold miner listed in Australia. The company is already in production and is expected to report net profits of AUD 100 mln in 2021, which should help re-rate the stock further as it has already gained 32% since the fund purchased it in April 2021.


We initiated our first investment in Georgia this year by purchasing TBC Bank Group (TBC) listed in London. TBC is the largest bank in Georgia by market share for loans and though it is seeing strong profit growth in Georgia, the more exciting longer-term story for TBC is its foray into Uzbekistan.

More specifically, TBC is the first entity to launch a digital bank on a large scale in Uzbekistan, and so far, the digital bank (TBC UZ) has seen a high growth in user numbers. This digital venture could add substantially to shareholder value in the long run while valuations for TBC are very undemanding at a P/E ratio of only 5.0x.


As mentioned in multiple manager comments previously, the fund purchased fintech player Kaspi in Kazakhstan in the first quarter of 2021. The stock has returned 92% since its initial purchase as the company continues to deliver on robust earnings growth which has consistently beaten market expectations. Furthermore, since the company is highly profitable and pays a dividend, its stock price has outperformed all other frontier and emerging market tech names in 2021, as discussed above in the portfolio review.


In Mongolia, the fund participated in the IPO of Central Express which was the largest ever IPO on the Mongolian Stock Exchange. Central Express is the Mongolian partner of South Korean convenience store operator “CU”, and the company will aggressively expand CU stores in Ulaanbaatar to capture the under-penetrated modern retail market in Mongolia.


In Pakistan, we also participated in two IPOs, namely Air Link Communication (Airlink) and Pakistan Aluminum Beverage Cans (PABC). Airlink is one of the largest distributors of mobile phones in Pakistan and it has also recently signed an agreement with Xiaomi to assemble smartphones locally in Pakistan.

PABC is the largest can manufacturer in Pakistan and it supplies products to all the major brands like Coca Cola, Nestle and Pepsi. We believe both Airlink and PABC are good long-term plays on rising demand for smartphones and beverages in Pakistan due to the country’s large and young population.

Another consumption-related name the fund bought in Pakistan was Nestle Pakistan. It is not only the largest food and beverage company in Pakistan but also trades at a historic low valuation in terms of its P/E ratio of 21x, which is a big discount for a blue-chip consumer name.

We also took advantage of the recent stock market weakness in Pakistan to buy Abbott Laboratories Pakistan which is one of the largest blue chip pharmaceutical companies in the country trading at a trailing twelve months P/E ratio of only 11.0x.

In addition to these consumption related plays, we also purchased Pakistan Oilfields (POL) to gain exposure to rising crude oil prices and the stock’s healthy 14.4% dividend yield.


In Vietnam, the fund took advantage of the deep correction in the VN-Index in July 2021 and purchased Gemadept (GMD), the country’s largest private seaport operator with ports located in both the North and South of Vietnam. We believe GMD is a very good proxy for Vietnam’s increasing integration into the global trade system as its scale will allow it to leverage the country’s increasing export and import activities.

We also purchased FPT Corp. (FPT), Vietnam’s leading technology outsourcing company which continues to make further inroads into the global software outsourcing industry. Earnings growth for FPT Is expected to be robust over the next 2-3 years at 15-20%.

During the market correction in September 2021, we took the opportunity to buy Phu Nhuan Jewelry (PNJ), the largest and most popular jewellery retailer in Vietnam. Besides consumer tastes shifting to branded jewellery, the company has also increased market share as some of its competitors have been negatively impacted by the pandemic. With increasing vaccinations and an economic reopening taking place in Vietnam, PNJ should be able to deliver much better financial results in 2022.

In line with the economic reopening theme in Vietnam, we also purchased two mid-cap domestic tourism companies as domestic travel could return in a strong way in 2022. Taseco Air Services (AST) operates retail stores at the domestic and international airport terminals in various airports all over Vietnam and also runs an airline catering business, while Tay Ninh Cable Car Tour Company (TCT) operates tourist attractions in Tay Ninh province which is a few hours’ drive from Ho Chi Minh City. We believe both companies are well-positioned for any rebound in domestic/international travel.


In the first quarter of the year, we purchased Frontier Digital Ventures (FDV) listed in Australia. FDV invests in and operates online classified portals in various frontier markets including Asia. Its most valuable investment so far is, which has revolutionized the real estate industry in Pakistan while also being profitable. We believe FDV’s investments including could unlock significant value over the next few years.

During the year, we also purchased Coca Cola Icecek (CCOLA) which is listed in Turkey. Though the company is headquartered in Turkey, it generates a majority of its revenues from Asian frontier countries including Iraq, Jordan, Kazakhstan, and Pakistan. In 2021, the company also acquired majority control in Coca Cola Bottlers Uzbekistan, giving it access to another high growth market. At a P/E ratio of 12x, the company offers exposure to high growth markets at a very attractive valuation.


Key Sales in 2021


During the year, we exited Bata Shoe Company in Bangladesh since the stock price rallied on the back of an economic reopening. We reallocated this capital to Linde Bangladesh and Square Pharmaceuticals in Bangladesh which we believe are valued more attractively relative to their future growth prospects.


In Pakistan, the fund exited Pak Suzuki Motor (PSMC) and Waves Pakistan (WAVES) since rising interest rates and higher inflation will most likely have a negative demand effect on high ticket consumption goods like passenger cars and consumer appliances. We purchased PSMC at the bottom of the economic cycle in Pakistan in October 2019 at PKR 150 per share and sold the stock at PKR 271 per share, representing an 81% gain on our exit.


As mentioned previously in the report, we exited industrial park developer Kinh Bac City (KBC) after a powerful stock price rally at the start of the year on the back of the company gaining approvals for setting up new industrial parks.


Outlook for 2022

Going into the new year, we foresee and elaborate on a few themes that could play out in Asian frontier markets:

Higher interest rates and higher inflation will lead to a shift to quality

2022 will possibly be a year of transition from liquidity-fueled stock market rallies to potentially higher interest rates and higher inflation. We believe these themes will occupy the minds of investors, at least in the first half of 2022.

With stock markets globally having had a rollicking run over the past 20 months and global investors getting nervous about the pace of interest rate increases, we believe fundamentally strong countries and companies will stand out in 2022.

On a top-down basis, the countries which we would favour because of their healthy fundamentals are Bangladesh, Kazakhstan, Uzbekistan, and Vietnam. With low levels of government debt, a high level of foreign exchange reserves and structurally strong GDP growth, these countries should better withstand any major shifts in global macro-economic trends compared to some other weaker countries.

In addition to this, we would also look to favor quality companies with sound fundamentals, strong pricing power and well-established franchises. In other words, we believe large-cap stocks can do better in 2022 as 2021 has been the year of small and mid-cap stocks especially in Bangladesh and Sri Lanka.



Key Macro Indicators

(Source: International Monetary Fund)


Economic Reopening

Unlike the U.S and Western Europe, many countries in our universe have not had the chance to fully reopen their economies for a large part of 2021 due to multiple waves of COVID-19 outbreaks and lower vaccination rates. Vietnam’s economy is only now beginning to reopen gradually after it had put in place strict social distancing requirements during the summer.

As a significantly higher vaccination rate will support a further reopening of the Vietnamese economy, we expect to see a strong earnings recovery for some of the consumer names that were negatively affected by the pandemic in 2021. Hence the stock prices of these companies which lagged the overall market in 2021 may see a turnaround of fortunes in 2022.

More broadly, earnings growth within our universe should remain healthy in 2022 as Asian frontier countries see a full year of reopened economies.


2022 Earnings Growth

(Source: Bloomberg, CT CLSA Securities, SSI Securities, Topline Securities)


Tourism Recovery

Barring any new virulent strain of COVID-19, the higher vaccination rates across our universe will be particularly important for the Maldives and Sri Lanka since both their economies are very dependent on the tourism sector. The Maldives has already reached pre-pandemic levels of tourist arrivals, while 2022 could be a breakout year for Sri Lanka’s tourism sector as its high vaccination rate can lead to a very strong recovery after two years of threadbare tourist arrivals. This rebound in tourism will not only be positive for Sri Lanka’s tourism sector but also for the country since the tourism sector can bring in much needed foreign exchange.

In addition to the Maldives and Sri Lanka, other Asian frontier countries which should see the benefits of higher tourist arrivals are Cambodia, Georgia, Uzbekistan, and Vietnam, and this factor can add to their ongoing economic recovery.

Though there are concerns on the Omicron variant, the fact that vaccination rates have increased significantly across countries with many of them also announcing booster shots, we do not believe this will derail the reopening of more economies. Furthermore, with the world going into the third year of the pandemic, most countries are now better prepared to deal with any potential outbreak which should not lead to all-out lockdowns.



Maldives Monthly Tourist Arrivals

(Source: Maldives Ministry of Tourism)


Besides these potential themes that could play out in 2022, the three long-term and more important themes which investors should pay attention to, and which we believe will continue to play out in Asian frontier markets are:

1.    The manufacturing and supply chain shift to Asian frontier countries
2.    Stronger GDP growth relative to other regions 
3.    Continued growth of the digital economy

The manufacturing and supply chain shift to Asian frontier countries

The pandemic has accelerated secular trends linked to the manufacturing and supply chain shifts to Asian frontier countries. We believe a combination of lower wage costs, improving infrastructure, government incentives and shifting geopolitical trends will support the relocation of manufacturing jobs into our universe. Bangladesh and Vietnam will be the two key beneficiaries of this trend and we believe they will continue to become important manufacturing hubs in region.



Bangladesh and Vietnam Garment Market Shares

(Source: World Trade Organization)



Bangladesh and Vietnam Exports

(Source: BGMEA, Vietnam GSO)


Stronger GDP growth relative to other regions

A robust post-pandemic economic recovery will be seen in Asian frontier markets led by Bangladesh, Uzbekistan, and Vietnam, with all three countries expected to post greater than 6% GDP growth over the next five years. More broadly, as a universe, Asian frontier markets are expected to post higher GDP growth rates relative to other regions due to their attractive demographics, economic reforms, and the growth of the manufacturing sector.



Future AFC Economic Growth

(Source: International Monetary Fund)


Continued growth of the digital economy

The structural shift toward a digital economy will play out strongly in Asian frontier markets. High levels of cash usage, increasing smartphone and internet penetration, as well as a change in post-pandemic consumer behaviour will drive the growth of the digital economy in our universe.

Though a high interest rate environment globally in 2022 may not augur well for some unprofitable frontier and emerging market tech company valuations, there are still not too many tech listings in Asian frontier markets at present, and most of the publicly listed tech names in our universe are profitable.

With the tech sector in our universe evolving and growing from a very low base, there is a high possibility we will see more tech listings in Asian frontier stock markets over the next few years which will give us the opportunity to participate more in this growth story.



Bangladesh Cashless Transactions

(Source: Bangladesh Bank)


Our top country picks are Bangladesh, Kazakhstan, Uzbekistan, and Vietnam

Asian frontier markets are not only here to stay but also grow and deliver returns, as has been aptly displayed in a post-pandemic environment with countries in our universe delivering on both stock market returns and economic growth.

With valuations of Asian frontier markets still cheap, any hiccups in global investor sentiment linked to a path towards monetary policy normalization should be viewed as a buying opportunity since many Asian frontier countries are in the midst of a structural and long-term growth phase, as discussed above.

Our top country picks with a 3-5 year view are Bangladesh, Kazakhstan, Uzbekistan, and Vietnam as they all have a combination of a strong macro-economic platform, structural reforms, attractive demographics and are benefiting from a growing manufacturing sector.



AFC Valuations

(Source: AFC Research, Bloomberg)


For the marketing documents of our AFC Asia Frontier Fund, please find below the links to the latest factsheets and investor presentation.

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