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Asia Frontier Capital (AFC) - October 2021 Update


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The only source of knowledge is experience.

― Warren Buffett


 (USD)October 2021YTDSince
AFC Asia Frontier Fund USD A1,609.33+0.9%+20.2%+60.9%

AFC Frontier Asia Adjusted Index2

AFC Iraq Fund USD D783.18+6.2%+38.5%−21.7%

Rabee RSISX Index (in USD)

AFC Uzbekistan Fund USD F2,102.50+4.6%+56.7%+110.2%

Tashkent Stock Exchange Index (in USD)

AFC Vietnam Fund USD C3,530.05+4.5%+54.5%+253.0%
Ho Chi Minh City VN Index (in USD) +7.6%+32.8%+163.4%
  1. The NAV given is for the main share series for the relevant master fund. Investors' 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.

The final quarter of 2021 began on a strong footing for AFC funds, with the AFC Iraq Fund gaining 6.2% in October taking its year-to-date return to a robust +38.5% which is an outperformance against its benchmark by 12.8%.

The AFC Vietnam Fund continued its strong run with a gain of 4.5%, taking its year-to-date return to +54.5% which is also ahead of its benchmark by 21.7% while its annualised performance since inception now stands at an impressive 17.4% p.a.

The AFC Uzbekistan Fund gained 4.6% in October and its year-to-date return is now at +56.7% which has taken its annualised performance since inception to a very robust +33.2%. 

The diversified AFC Asia Frontier Fund posted another positive month with a gain of 0.9% taking its one-year return to +35.1% as Asian frontier markets continue to rally and outperform global markets.


AFC Asia Frontier Fund Webinar

On 28th October 2021, Thomas Hugger and Ruchir Desai, co-managers of the AFC Asia Frontier Fund hosted a webinar to discuss the performance, outlook, and structural trends for Asian frontier markets. If you were unable to attend, please click on the link below to view the recording of the webinar or to view the webinar presentation .



BarclayHedge Awards

BarclayHedge Award


BarclayHedge Award


I am glad to report, once again, that we have been recognised by Backstop BarclayHedge for our outstanding fund performance. This time, both the AFC Asia Frontier Fund and the AFC Vietnam Fund won the Top-10 performer award for their September 2021 performance in the sectors “Emerging Markets Equity - Asia” and “Emerging Markets - Asia”. This is another confirmation of the validity of the investment thesis of our funds, and shows that they are well suited as a diversification tool for many equity investors.

Below please find the manager comments relating to each of our four funds for the month of October 2021.

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 Iraq Fund Performance


The AFC Iraq Fund Class D shares returned +6.2% in October with a NAV of USD 783.18, outperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which gained 2.4% during the month. The fund is up 38.5% year to date versus +25.7% for the index, representing an outperformance of +12.8% year to date. Since inception, the fund lost 21.7% while the RSISUSD index is down 43.5%.

The key to the AFC Iraq Fund’s performance lies in its diversified holdings, within the limitations of the Iraq’s Stock Exchange (ISX)’s small pool of investable companies despite there being 105 listed companies on the ISX, mainly from the financial sector. These are holdings of high-quality companies whose earnings power/assets/franchises held up very well and grew during the market’s brutal six-year bear market that, in our view, seems to have ended in 2020. Moreover, the growth in their earnings and asset values is expected to outpace the economic recovery post-COVID 19, which should lead to a sustainable long-term outperformance against the market by these companies. 

In October 2021, the standout performer was shares of the National Bank of Iraq (BNOI), which was up 33.3% for the month to account for a 16.2% weighting in the index – up substantially from its 10.7% weighting when it was added to the index in July 2021. The stock’s strong performance for the year, up 114.3%, after adjusting for a dividend corresponding to a 9.2% dividend yield in March 2021, has been driven by the bank’s strong multi-year performance in growing its deposit base and loan book. This trend continued for the first half of 2021, with its loan book up 79.0%, after having been up 88.0% in 2020. Its customer deposits were up by 58.3% in H1 and 67.3% in 2020, while its pre-tax earnings were up 2.2% versus the same period in 2020, and up 116.0% for the year in 2020.

BNOI’s strong execution over the last few years has been driven by a combination of a new management team in 2017 that reorganized the bank, focused on the ignored retail section of the market, and crucially had an evaluation of the real Iraq risks, as opposed to the much higher perceived risks. The success of BNOI’s retail strategy in attracting sticky consumer deposits, and subsequently growing its retail loan book, demonstrates the potential opportunity from the adoption of banking in Iraq’s cash dominated economy. Building on this opportunity, in late 2020 BNOI strengthened its position in the nascent and high potential banking sector with the takeover of the Iraqi branch network of Lebanon’s Bank Audi. In the process, BNOI increased its assets by 32%, vaulting it into the top three banks on the ISX as ranked by asset size.

In addition to a focused strategy, the bank is benefitting from the strong economic rebound from the extreme lows of last year brought about by the significant recovery of oil prices and the return to semi-normality with the easing of the COVID-19 containment measures. In its latest economic update on 21st October 2021, The World Bank reported that in the first half of 2021 (H1/2021) non-oil GDP expanded by over 21% over H1/2020. This recovery can be seen from Google’s mobility data (below chart), which also suggests a continuation of a recovery in non-oil GDP in the second half of the year. In particular, activity in the crucial sectors of retail and grocery had recovered by the end of October by up to 90-170% above the levels that prevailed prior to the 2020 lockdown. Interestingly, the recent uptick in the workplace and downtick in residential sub-indicators reflect an almost complete return to pre-lockdown activity.


Iraq's COVID-19 Statistics

(Baseline is the median, for the corresponding day of the week, during 3rd January – 6th February 2020. Source: Google, data as of 31st October 2021)


The global economic turnaround and subsequent recovery in oil prices will continue to fuel Iraq’s economic rebound into 2022 and beyond. However, it can be argued that the Rabee Securities RSISX USD Index – with its 25.7% gain year to date by the end of October 2021 notwithstanding – has not discounted the transformation of the economic rebound into an economic recovery in 2022 and beyond. Moreover, the index’s gains for the year have not translated into meaningful foreign fund inflows into the market. However, this will likely change by year end, given that the future direction of oil prices plays a major role in the foreign perception of Iraq and thus foreign fund inflows. The latest data shows that both current forward future prices and analyst median forecasts suggest continued high oil prices into early 2024, albeit at less than the current unsustainably high prices (chart below).



Brent Crude Chart

(Source: Bloomberg, data as of 3rd November 2021)


2021 Parliamentary Elections

The misconceptions regarding the results of the parliamentary elections held on 10th October 2021 could dampen foreign interest in Iraq’s equity market until the government formation a few months later - thus providing an opportunity for long-term investors who can see through the fog of the elections.

These were the sixth such elections held since the 2003 invasion, yet for the first time, they were held under a first-past-the-post system ¬– reluctantly adopted by parliament a year ago in response to the multi-month, country-wide demonstrations led by youths demanding political reform in late 2019. The combination of a low turnout, a new post-2003 low at 36% of eligible voters, and a new electoral system produced some real surprises and some seeming surprises. The major real surprise was the gains for the first time by the youth-led, pro-reform movement, which while small in total number of seats, are promising for the future and will likely encourage more participation by the youth in future elections. However, far more relevant is the seeming surprise of the vastly different fortunes in the seat count of the two rival coalitions – the Sadrist Movement best known through its leader Muqtada al-Sadr and the Fateh Alliance that represents the country’s Popular Mobilization Forces (PMF). Despite their fierce rivalry, the two coalitions together defined the political scene and led the two government formations post the ISIS-conflict.

The seat gains by the Sadrist Movement and the seat losses by the Fateh Alliance, from election to election, rather than reflecting a fundamental change in the fortunes of the two rival coalitions, reflect the successes and failures of two different election strategies used in the new first-past-the-post system as the total number of votes won by each coalition were almost the same – with the Fateh Alliance slightly outperforming, in vote count, the Sadrist Movement according to preliminary election results. The resultant parliamentary seat count held by each coalition, the aforementioned reasons notwithstanding, will play a role in the formation of the upcoming government. However, this is only a part of the process of government formation which has been defined by the post-2003 ethno-sectarian power-sharing political order. 

The most likely outcome is that the composition of the new government will closely mirror the last two and will be strongly influenced by both the Sadrist Movement and the Fateh Alliance, but the relative strength of each is influenced by the seat gains and losses in the current elections. Thus, the current drama playing out in Iraqi regular and social media by the rival coalitions is a combination of both posturing and sabre-rattling by each as part of the multi-month political negations leading to government formation. While this means months of political uncertainty, the one certainty is that the 2021 expansionary budget, as discussed here in more detail last month, will continue to be in force for the next 15-18 months with the current high oil prices fuelling this expansionary spending. This in turn will sustain the consumer-led economic rebound into economic growth, which in turn will eventually lead to a continued recovery in corporate profits. Thus, the conditions are in place for the Rabee Securities’ RSISX USD Index to emerge from its multi-month consolidation and resume its rally, and for a continued robust performance for the AFC Iraq Fund in both absolute and relative terms.

At the end of October 2021, the AFC Iraq Fund was invested in 14 names and held 1.0% 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 (96.2%), Norway (2.2%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (63.8%) and consumer staples (13.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.76x, the estimated weighted harmonic average P/B ratio was 0.96x, and the estimated weighted average portfolio dividend yield was 3.90%.

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AFC Uzbekistan Fund - Manager Comment

AFC Uzbekistan Fund Performance


The AFC Uzbekistan Fund Class F shares returned +4.6% in October with a NAV of USD 2,102.50, bringing the return since inception (29th March 2019) to +110.2%, while the year-to-date return stands at +56.7%. On an annualized basis, the fund returned +33.2% p.a. with a Sharpe ratio of 2.22.

October saw the commencement of the third-quarter 2021 earnings season, where many of the fund’s core holdings reported strong growth yet again, benefitting from the accelerating growth in the economy, and whose share prices continued to rally on the back of good reports and more investor activity in the market.

AFC Uzbekistan Fund valuations as of 31st October 2021:

Estimated weighted harmonic average trailing P/E (only companies with profit): 6.89%

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 5.33%


Presidential Election Concluded

Uzbekistan’s presidential election was held on 24th October 2021, where President Shavkat Mirziyoyev competed against four candidates. He won re-election by a landslide with 80.1% of the votes. With elections now behind us, President Mirziyoyev has five more years to continue, and hopefully accelerate, his reformation of the social and economic fabric of Uzbekistan, helping the country to gain what we believe is its rightful place as the largest and most influential economy in Central Asia. However, there is a lot yet to be done, and some of the more challenging reforms, including the government’s extensive privatisation programme, lay ahead, which we will be watching closely.

Uzbekistan is a semi-protectionist country and there’s nothing wrong with that!

The concept of free-market and open economies is an idea spawned post-WW II by the West and trumpeted by the likes of the IMF and World Bank. However, while highly efficient in theory, in practice such policies can hollow out domestic industrial sectors, as was the case with the USA in the 1990s and 2000s, where manufacturing capacity shifted to Mexico and Asia to take advantage of the labour arbitrage. At the same time, such policies can inhibit younger economies from ever developing their domestic industries as they are flooded by imports from foreign competition, which already have economies of scale.

As we are all learning today, just-in-time supply chains only work when everything runs smoothly, and there are no logistical bottlenecks. This has worked brilliantly since the 1990s when globalisation took the world by storm. Now, however, we have been gradually (and increasingly with government responses to COVID-19) witnessing a world of rising protectionism, whether food exporters banning or slowing export permissions, or more recently, China slowing export approvals for phosphate. This trend is only set to accelerate as we witness resource shortages and rising geopolitical headwinds globally.

Believing we are in the early innings of a rising tide of (i) nationalism/protectionism of domestic resources and industries and (ii) a focus on supply chain redundancies, the disinflation Europe and America benefitted from by outsourcing their supply chains to Asia will likely shift to inflationary as they seek to reconfigure their supply chains closer to home.

This scenario bodes exceptionally well for the region I have termed the “New Fertile Crescent”. This includes China, Russia, Central Asia, Iran and Turkey. The original Fertile Crescent is regarded as the cradle of modern civilisation and existed at the confluence of the Euphrates and Tigris rivers in modern-day Iraq. The “New Fertile Crescent”, however, encompasses countries with good demographics on average, large domestic resource bases, low debt to GDP, and more importantly, control over their supply chains accompanied by strong domestic manufacturing sectors. Thus, we believe this region is set to undergo a period of secular growth as it is less impacted by commodity-price inflation and rising protectionism, since it is already relatively protectionist and has focused on building strong domestic industries. Case in point: Uzbekistan.

In an increasingly fragmented and protectionist world, we look at the New Fertile Crescent region as being full of opportunities and where Uzbekistan is likely to play a big part, especially due to its domestic policies which have helped to bolster domestic industry with a focus on import substitution. During the month, I had the opportunity to visit one such beneficiary of these policies, the largest steel plant in Uzbekistan, Uzmetkombinat (TSE: UZMK).

Uzmetkombinat—one of Uzbekistan’s blue-chip companies

Uzbekistan’s business environment is evolving in the direction toward a free market but is certainly not an entirely free market, nor should it be. Having the largest industrial base of any “Soviet Satellite” during the USSR, Uzbekistan’s former and current president have been wise to focus on protecting and nurturing its domestic manufacturing sector. This certainly applies to Uzmetkombinat, currently the AFC Uzbekistan Fund’s second-largest position.


A site visit to Uzmetkombinat- Uzbekistan’s largest steel plant

A site visit to Uzmetkombinat- Uzbekistan’s largest steel plant

(Source: AFC Research)


UZMK has an annual production capacity of 1 mln tons of steel, produced using electric arc furnaces to melt scrap steel collected in Uzbekistan, as well as imported crude steel from Russia and Kazakhstan. The company benefits from its monopoly position in the collection of scrap steel in Uzbekistan, while the country officially bans exports of any scrap. This gives UZMK a competitive advantage in purchasing scrap at a price it sets well below international scrap steel rates. As the government of Uzbekistan imposes import duties on steel products, steel prices in the country are higher than abroad, thus allowing UZMK to benefit from significant margin when selling its steel locally—a core focus of the company as Uzbekistan remains a net importer of steel, mainly from China, Russia, Iran and Kazakhstan.

With steel demand continuing to rise in Uzbekistan, UZMK is currently undergoing a EUR 600 mln capacity expansion which will see steel production increase from 1mln tons per year to 2.5 mln tons per year by 2026, subsequently cutting steel imports and further cementing UZMK’s grasp on the local steel market.


Touring Uzmetkombinat’s factory

Touring Uzmetkombinat’s factory

(Source: AFC Research)


The formation of steel billets

The formation of steel billets

(Source: AFC Research)


UZMK’s expansion consists of modernising its current German production lines, which will increase capacity by 300k tons per year, the construction of a 1mln ton per year hot rolled coil line (this is already underway), and the purchase of a small steel factory in a nearby city with annual production capacity of 200k tons per year. This expansion will use mostly Italian equipment, contrary to the common stereotype that companies in frontier countries would default to Russian or Chinese equipment. The capital for this project will come from various sources—a locally syndicated loan for USD 100 mln and several other loans from international banks at favourable rates, while a portion of the project will be financed from cash on hand.


Hot-rolled coil prices were on a roll in 2021

The formation of steel billets

(Source: Bloomberg)


One of the risks with such a project is the large debt UZMK will be taking on. However, while the company may cut its dividend for a year or two, the medium-term outlook is very bright. For example, a downstream steel plant, the Tashkent Metallurgical Plant, located on the outskirts of Uzbekistan’s capital, Tashkent, is currently importing roughly one mln tons per year of hot-rolled coil. Once UZMK has completed its new production line, expected in 2023, it has a guaranteed buyer as UZMK will be able to undercut imported hot-rolled coil courtesy of Uzbekistan’s import duties, thereby rendering Russian steel uncompetitive.

UZMK has returned over 1,100% from our initial investment in the company, before dividends, and we remain upbeat due to its monopolistic position and benefitting from Uzbekistan’s focus on import substitution. This has led trailing-twelve months earnings to soar 547% YoY, while book value per share has surged 62% YoY. Compared to most similar companies recycling scrap steel abroad, UZMK has a strong moat as it controls its raw materials costs, while foreign companies are subject to paying market price for scrap steel. The company ended October trading at a P/E of 4.01x, P/B of 1.79x and hosts a dividend yield of 3.34%.

Going forward, while steel prices will surely not rise the way they have over the past year, we believe a transition is occurring where China, the world’s largest steel producer, is struggling with energy shortages and pollution curbs, thereby eliminating many tax rebates on exported steel to engineer an end to overproduction. This should bolster international steel prices over the coming years and put UZMK in an enviable position as it moves yet closer to bringing its new capacity additions online.
Lastly, as UZMK puts the finishing touches on its capacity expansion and accelerates its debt repayments, this should coincide with an international dual listing, likely on the London Stock Exchange, in 2024 or 2025 which will provide foreign investors exposure to one of the most attractive blue-chips in Uzbekistan today.

At the end of October 2021, the fund was invested in 27 names and held 16.6% in cash. The portfolio is allocated to Uzbekistan (83.37%) and Kyrgyzstan (0.03%). The sectors with the largest allocation of assets were materials (49.6%) and financials (16.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.89x, the estimated weighted harmonic average P/B ratio was 1.56x, and the estimated weighted average portfolio dividend yield was 5.33%. 

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AFC Vietnam Fund - Manager Comment


AFC Vietnam Fund Performance



The AFC Vietnam Fund rose by 4.5% in October with a NAV of USD 3,530.05, bringing the year-to-date return to +54.5% and the return since inception to +253.0%. This represents an annualized return of +17.4% p.a. since inception. The Ho Chi Minh City VN Index gained 7.6% in October 2021 in USD terms. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 13.94%, a Sharpe ratio of 1.19, and a low correlation of the fund versus the MSCI World Index USD of 0.53, all based on monthly observations since inception.

The VN-index jumped to a new record high thanks to commodity-related stocks like Petrovietnam Gas (GAS), which jumped 30% over the month. With nearly 100% of eligible adults now having received a first vaccine shot in Hanoi and HCMC and more than 85% fully vaccinated, optimism returned over an imminent recovery of the economy. The market advance was broad-based, with all market sectors experiencing solid gains.

Market Developments

Computer chip shortage, car production delays, port congestions, a lack of truck drivers – whatever you can think of – inflationary pressures. After (too) many months of denial, officials finally acknowledged that inflation is real and not temporary, as they wanted us to believe for quite a long time. Their argument, that current inflation is just the result of the temporary supply chain nightmare we are currently experiencing is not wrong, but wasn’t every inflationary period in the past (40’s war period or 70’s oil shock for example) always a result of too little supply (reduced level of certain production) chased by too much demand (loose money policy, wage growth)?

Tapering is undoubtedly on the mind of Western central banks. Still, we can also see first interest rate trend reversals in some countries worldwide, such as New Zealand, Norway, Poland or South Korea.


FED Funds rate 1954-2021

FED Funds Rate

(Source: Macrotrends LLC)


The recent recession might be the only one where rates were not lowered throughout the recessionary period, but the chart makes it obvious why. Unlike Japan or Europe, the US did not enter negative interest rate territory. With all current discussions from financial commentators about slight differences in interest rates between countries, it looks like a lot of hot air when we compare current rate levels both to historical standards, as well as with real interest rates. Meanwhile, even US high-yield bonds are not making any money for their investors on an inflation-adjusted basis.



US HY Market

(Source: Bloomberg Finance LP, Deutsche Bank)


With very high risk needed to achieve any positive real return in the bond market, it is not surprising at all that bond funds see outflows and investors are looking instead for stocks and alternative investments. An end to free money policies and a return to more normal interest rate levels, for instance to ~3% in the US and Europe, would certainly be a disaster for bond investors, but not necessarily for stock investors. We likely would see a setback for the high flying, highly valued and highly weighted tech sector, but sectors like banks would finally see an end to their long-lasting lending margin misery. If commodities continue their inflation-induced bull market run, other lower-weighted sectors would also flourish. Because of sector weightings, this would mean a correction for the main indices and the widely favoured index ETFs could take a hit, while actively managed funds can take advantage of the sector rotation. 

Similarly, in Vietnam, the bottom in interest rates seems to have been reached, although with an inflation rate of less than 3%, Vietnam is one of a few countries still offering positive real interest rates.


IMF Vietnam Central Bank Policy Interest Rate 2012-2020

IMF Vietnam Central Bank Policy Interest Rate 2012-2020

(Source: Bloomberg)


Sector rotation is also ongoing in Vietnam, and the financial sector, especially the insurance sector, should benefit from this new interest rate cycle. Meanwhile, investors are closely watching the current announcements around third-quarter results. With lockdown-related production reductions receding, investors are not concerned about the already expected and priced in weak results of the last quarter and are instead trying to figure out how strong the recovery will be in the coming quarters. For that reason, it might be a surprise that many companies in the export sector, e.g., textiles, have rallied 30-50% from their latest correction, but the answer lies simply in the still intact positive long-term outlook for the sector. The same can be said for one of our investments, a producer of wooden kitchenware, children´s toys, and home furniture with substantial exports, a very healthy balance sheet and a strong management team. Despite production halts in the third quarter and a 70% (!) loss in revenues, the company still managed to stay profitable with only a slightly reduced net profit margin of an impressive 17%. Once again, it has paid off that we focus on companies with solid balance sheets and sound business models.

The best deal is buying at the bottom!

In January 2020, when the first COVID-19 outbreak happened in Vietnam, the government launched a significant economic stimulus package, with low interest rates being one of the key policies. At that time, we forecasted that low interest rates would strongly support and benefit the banking sector, and hence we increased our investment in this sector and made handsome profits to date. Many bank stocks surged 200-300% within 12 months, including LPB and VPB, the largest bank holdings in our portfolio at the end of 2020. The low interest rate policy benefited the banking sector, but on the opposite end of the spectrum, it damaged the profitability of the insurance sector. Most insurance companies generate their profits from bank deposits and bond investments.


Bank deposits contribute 80% of total insurance companies’ investment

IMF Vietnam Central Bank Policy Interest Rate 2012-2020

(Source: BSC, insurance companies, AFC Research)


With tumbling interest rates, profits of insurance companies were negatively affected, and this is also the reason why Saigon Securities Corporation (SSI), the largest broker in Vietnam, wrote a report last year about the insurance sector, advising its clients to avoid insurance stocks because of the negative impact of the low interest rate environment. Insurance stocks indeed showed poor performance in the last 12 months, particularly in the first half of 2021. For example, Bao Viet Holding (BVH), the largest insurance company in Vietnam, declined by around 12% compared to the VN-Index which performed +27.6% over the same period.


Bao Viet Holding from January 2021 – October 2021

Bao Viet Holding from January 2021 – October 2021

(Source: Viet Capital Securities)


During the last two years, 12-month deposit interest rates at commercial banks plunged massively from around 7-8% to 4-5% p.a.



12 month deposit rate

(Source: BVSC, FiinPro)


Deposit rates started to drop dramatically from the beginning of 2020 to the end of March 2021 before stabilising over the last six months. In our view, current interest rates in Vietnam have already reached their bottom and have little room to fall further.

The lowest bank deposit growth in history

The Vietnamese government wants to lower deposit interest rates to drag down the lending rate consequently which is expected to boost credit growth to stimulate the economy. However, banks find it very difficult to attract new deposits in a low interest environment. Hence the bank deposit growth reached a new record low in 2021 of only 4%. Low interest rates encourage banking clients to withdraw their money and to buy real estate or stocks instead. In August 2021, the total bank deposit balance in Vietnam dropped by around VND1,000 bln (USD 44 mln), which is not a big amount, but it is seen as a serious warning signal for banks, not to lower their deposit rates any further. 


Bank deposit growth in Vietnam (%)

Bank deposit growth in Vietnam (

(Source: SBV, AFC Research)


In October 2021, the vice Governor of the State Bank, Mr. Dao Minh Tu, also said that there is not much room for lowering interest rates any longer when deposit growth is declining. When deposit growth continues to fall, it will hurt credit growth and economic recovery. In fact, in the last two months, many small banks have increased their deposit rates slightly. For example, Sacombank (STB), one of the largest private banks in Vietnam, announced mid-October an increase of its 2-month deposit rate from 2.8% to 3.4%.

Inflationary pressures

Another reason which hinders banks from decreasing their rates further is inflationary pressure. In October 2021, CPI increased to 1.8%, which is still at a level that is not concerning, but “the inflation pressure is escalating”, according to a recent statement of the Prime Minister, Mr. Pham Minh Chinh. In September, the producer price index (PPI) in China surged over 10%, the highest level in 26 years. In Vietnam, the lockdown in Q3 tempered inflation, but that might change in the current quarter.


PPI in China

Factory Inflation

(Source: Bloomberg, National Bureau of Statistics)


China is the largest trading partner of Vietnam, with a total volume worth over USD 130 bln per year. Every year, Vietnam imports around USD 85-90 bln of goods and materials from China. Therefore, when the producer price index in China jumps, it will also affect Vietnam indirectly. According to Mr. Pham Duc Thanh, Director of Vietnam Strategy and Economic Research Center, the producer price index (PPI) in Vietnam had increased substantially to 23% in the first nine months of 2021. He expects that price increases will be transferred to consumers sooner or later. Therefore, if inflation goes up further, the State Bank of Vietnam has to intervene and try to ease inflation. Tightening monetary policy may be applied and hiking interest rates is one of the first options which may be considered. 

For the above reasons, there is not much room for deposit interest rates to go down further and when deposit rates eventually start to rise again it will have a very positive effect on profits of insurance companies. We therefore believe that the timing to overweight the insurance sector in our portfolio is optimal. Furthermore, the overall revenues in the insurance sector grew by around 13% in the third quarter, regardless of the impact of COVID-19. Many insurance companies also announced very positive results, such as Agricultural Bank Insurance, which reported a record high profit before tax in 3Q-2021 of VND151 bln, an increase of 70.8%! PVI Corporation, the largest non-life insurance company, also reported a huge net profit growth of 103.7% for the third quarter. Although the short-term growth and long-term outlook of the insurance sector is very optimistic, insurance stocks still underperformed so far against the index this year, but we believe they will start outperforming soon.


Net profit growth of insurance companies in Q3/2021

Net Profit Growth

(Source, insurance companies, AFC Research)


Insurance sector underperformed versus VN-Index in 2021

Insurance Sector

(Source: HSX, AFC Research)


New rules increasing pressure to implement ESG in the investment process

Environmental, Social and Governance (“ESG”) factors have become increasingly prominent throughout the business world. Indeed, the AFC Vietnam Fund has taken steps on our own accord to recognise ESG as important in recent years. The coherent framework surrounding ESG provides clear guidelines for us to act ethically, morally, and responsibly in a way that investors expect.




(Source: AFC Research)


The focus on climate – regulatory convergence

Understandably, regulatory bodies worldwide are emphasising the ‘E’ in ESG. Regulations issued in August of this year by the Securities and Futures Commission “SFC” in Hong Kong, where our fund is registered, have mandated all funds must take climate-related risks into consideration in their investment and risk management processes, and make appropriate disclosures thereof by August 2022. However, the lack of reliable emissions data on the part of many investee companies poses a challenge, at least for now. 

There has been a gradual recognition that Vietnam cannot continue to sacrifice the environment for economic benefit. Central Vietnam suffered from devastating floods in 2020, while air pollution around Hanoi has been particularly acute for years. These events lay bare Vietnam’s vulnerability to storms and floods, but they have combined with higher quality-of-life expectations from the middle class to make it imperative for the government to act on climate change. Fortunately, they have done so with the new Law on Environmental Protection, which was introduced in line with international standards and is set to take effect on the first day of 2022. Naturally, our task assessing the ‘E’ in ESG will become easier with the convergence of regulations in both investor and investees’ jurisdictions, as investee disclosures on their environmental impact will become more commonplace.

The focus on climate – regulatory convergence

Notwithstanding current problems, the green energy transition in Vietnam is well underway. Coal contributed more than 50% to the national power-generation capacity in 2020, but this proportion is set against the backdrop of the enormous growth potential of the renewables sector. Vietnam is already the leader in Southeast Asia for renewables, wielding the highest installed solar power capacity.

Assuming Vietnam follows through on its ambitious Power Development Plan VIII (“PDP 8”) to reduce reliance on fossil fuels and cut carbon emissions in the long term, the AFC Vietnam Fund will continue to look for opportunities in this field. 

At the end of October 2021, the fund’s largest positions were: Agriculture Bank Insurance JSC (8.7%) – an insurance company, PVI Holdings (5.2%) – also an insurance company, Power Engineering Consulting JSC No. 2 (4.7%) – a consulting firm, Tuong An Vegetable Oil JSC (4.4%) – an edible oil producer, and Transimex-Saigon JSC (3.8%) – a logistics services company.

The portfolio was invested in 46 names and held 7.3% in cash. The sectors with the largest allocation of assets were consumer (33.8%) and financials (27.4%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.92x, the estimated weighted harmonic average P/B ratio was 1.81x, and the estimated weighted average portfolio dividend yield was 3.39%.

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AFC Asia Frontier Fund - Manager Comment


AFC Asia Frontier Fund Performance


The AFC Asia Frontier Fund (AAFF) USD A-shares returned +0.9% in October 2021 with a NAV of USD 1,609.33. The fund underperformed the AFC Frontier Asia Adjusted Index (+3.2%), the MSCI Frontier Markets Asia Net Total Return USD Index (+4.5%), the MSCI Frontier Markets Net Total Return USD Index (+4.0%) and the MSCI World Net Total Return USD Index (+5.7%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +60.9% versus the AFC Frontier Asia Adjusted Index, which is up by 26.5% during the same period. The fund’s annualized performance since inception is +5.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.5% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.53, all based on monthly observations since inception.

Returns for the month were led by Kazakhstan, Vietnam, Iraq, Uzbekistan, Sri Lanka, and Georgia while Mongolia witnessed a correction after a very strong run so far in 2021. This month’s performance takes the fund’s one year return to a strong +35.1% with performance being broad based across markets over the past year.

Very attractive valuations and higher commodity prices continued to propel Kazakh focused names higher which translated into Kazakhstan becoming the second-best performing market globally in October with a gain of +10.9%. So far in 2021, Kazakhstan is the seventh best performing market globally with a return of +38.2% in USD terms as of 31st October 2021.




(Source: Bloomberg)


Kaspi, the fund’s Kazakh fintech holding was the best performing stock for the fund this month with a gain of +36.5% as it posted outstanding 3Q21 results which showed revenue and net profit growth of +55% and +90% respectively. These results came in ahead of market expectations which resulted in the company raising their 2021 net profit guidance for the third time this year.

The company is well on track to achieve greater than USD 1 bln in net profit in 2021 making Kaspi the most profitable tech play in frontier and emerging markets (excluding China). The Kaspi Super App not only continues to grow users but has also gained significant traction in user transactions which reflects how the Kaspi Super App is transforming the digital and fintech landscape in Kazakhstan.



Kaspi outperformed

(Source: Bloomberg, % change in prices between 31st December 2020 – 29th October 2021)


The fund’s Kazakh uranium mining holding, Kazatomprom, witnessed another rally in its stock price as the company is expected to benefit from the positive long term uranium demand-supply dynamics. Kazatomprom’s stock price is up +141% this year and +221.5% since the fund’s initial purchase in June 2020.


Kazatomprom stock price has done well this year for the fund on the back of higher uranium prices


(Source: Bloomberg)


Coming back to tech, Air Link Communication (Air Link), the fund’s Pakistani mobile phone distributor and assembler, announced that it will be the exclusive manufacturing partner for Xiaomi mobile phones in Pakistan. This is a very positive development for the company as Air Link will assemble 2.5-3.0 mln handsets annually from January 2022 onwards which will add significantly to Air Link’s profitability. This development reflects the massive smartphone opportunity in Pakistan where smartphone penetration levels are still below 20% and we believe Air Link is very well positioned to capture this growing opportunity.

The fund’s diversified ecommerce holding, Frontier Digital Ventures (FDV) also declared good 3Q21 results with the company posting a positive EBITDA for the quarter which was led by, FDV’s Pakistani property portal which has revolutionised the real estate market in Pakistan and whose revenues grew by 68% while reporting its fifth consecutive quarter of positive EBITDA.



Frontier Digital

(Source: Frontier Digital Ventures)


The VN-Index in Vietnam made a strong comeback this month with a gain of +7.6% as the economy gradually reopens from the COVID-19 induced lockdowns. The fund’s Vietnamese holdings witnessed a broad-based rally on the back of this positive sentiment. The fund initiated a position in two domestic tourism focussed companies which could see a strong recovery in earnings due to pent up demand as consumers look to get back to traveling after being confined to their homes for the past few months.



Vietnam Manufacturing

(Source: Bloomberg)


Bangladesh’s exports grew significantly by 60% in October topping USD 4 bln for the month which is a large outperformance compared to other Asian frontier exporters. In addition to investing in infrastructure, Bangladesh is also putting the right policies in place to attract manufacturing jobs in the auto, pharmaceutical and mobile phone sectors which in the long term can make Bangladesh a leading manufacturing hub in South Asia and help it diversify away from the garment sector.




(Source: Bangladesh Export Promotion Bureau)


The best performing indexes in the AAFF universe in October were Kazakhstan (+10.9%) and Vietnam (+7.6%). The poorest performing markets were Mongolia (-7.2%) and Bangladesh (-4.5%). The top-performing portfolio stocks this month were a Kazakh fintech company (+36.5%), a Kazakh uranium mining company (+22.4%), a Vietnamese construction contractor (+21.6%), a Mongolian copper explorer (+15.4%) and a diversified frontier markets e-commerce company (+13.9%).

In October, the fund bought two domestic tourism related companies in Vietnam, added to existing positions in Mongolia and Vietnam and reduced existing positions in Mongolia and Papua New Guinea.

At the end of October 2021, the portfolio was invested in 79 companies, 2 funds and held 2.2% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (8.6%) and a pharmaceutical company in Bangladesh (4.1%) . The countries with the largest asset allocation were Mongolia (18.1%), Vietnam (16.2%), and Iraq (11.4%). The sectors with the largest allocation of assets were consumer goods (27.3%) and industrials (14.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.66x, the estimated weighted harmonic average P/B ratio was 1.21x, and the estimated weighted average portfolio dividend yield was 3.32%.

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I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues at This email address is being protected from spambots. You need JavaScript enabled to view it. .

With kind regards,

Thomas Hugger
CEO & Fund Manager

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