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Asia Frontier Capital (AFC) - September 2021 Update



Asia Frontier Capital - Newletter


A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be”.

Wayne Gretzky – “the Great One” – born in Canada and a former professional NHL ice hockey player (Edmonton Oilers, Los Angeles Kings, St. Louis Blues and NY Rangers) and four times winner of the Stanley Cup (all with the Edmonton Oilers).


AFC Asia Frontier Fund USD A 1,594.26+3.1%+19.1%+59.4%
AFC Frontier Asia Adjusted Index2 -4.2%+4.3%+22.6%
AFC Iraq Fund USD D737.42-3.1%+30.4%-26.3%
Rabee RSISX Index (in USD) -3.3%+22.7%-44.9%
AFC Uzbekistan Fund USD F2,010.89+0.8%+49.9%+101.1%
Tashkent Stock Exchange Index (in USD) +0.7%+20.2%+0.5%
AFC Vietnam Fund USD C3,379.06+3.8%+47.9%+237.9%
Ho Chi Minh City VN Index (in USD) +1.0%+23.4%+144.7%
  1. The NAV given is for the main share series for the relevant master fund. Investor’s holdings may be in a different share class or series or  currency and have a different NAV. See the factsheets and/or your statement for full details.
  2. The index was adjusted on 1st June 2017. Prior to that it consisted 100% of the MSCI Frontier Markets Asia Net Total Return USD Index, and after 1st June 2017 it consists of 37% of that index and 63% of the Karachi Stock Exchange 100 Index in USD.
  3. NAV and performance figures are all net of fees.



New milestone for AFC

AFC achieved a new milestone in its growth journey with our assets under management crossing above the USD 100 million mark for the first time this month. 


AFC assets under management cross the USD 100 million mark

AFC assets under management cross the USD 100 million mark



To keep pace with this growth, we moved to a new office in Hong Kong at the end of September. The new address is:

Asia Frontier Investments Limited
1805, 18/F, Hing Yip Commercial Centre
272-284 Des Voeux Road Central
Sheung Wan
Hong Kong

Sheung Wan MTR-Station, exits A1 or B

Link to location on Google Map 


Strong end to the 3rd quarter of 2021 for Asian frontier markets

Despite the volatility witnessed in global equity markets due to the unfolding crisis at Chinese real estate developer Evergrande, Asian frontier markets held up very well. The AFC Vietnam Fund returned +3.8% this month, taking its year-to-date return to +47.9% and its annualised return since inception to +17.0%.

The AFC Asia Frontier Fund had a solid month with its diversified holdings helping to overcome the global volatility witnessed during the month. The fund’s gain of +3.1% significantly outperformed its benchmark and the MSCI World Index which both declined by -4.2%. This significant outperformance reflects not only the lower correlation between Asian frontier markets and global markets but also the sound stock selection strategy of the fund. The month’s gain makes it 6 quarters in a row of positive performance for the AFC Asia Frontier Fund taking its one-year return to +32.0%.

The AFC Uzbekistan Fund returned +0.8% taking its year-to-date return to +49.9% while its annualised return since inception stands at a robust +32.1% which has also led to a doubling of its NAV since inception at the end of March 2019.

A strong end to the quarter for Asian frontier markets continues to make them amongst the best performing equity markets globally as the chart below shows. A recovery in earnings, attractive valuations, domestic liquidity, and higher commodity prices are some of the key reasons for this significant outperformance of Asian frontier markets.



Asian Frontier Markets have outperformed

(Source: Bloomberg, % change in prices between 31st December 2020 – 8th October 2021)


AFC presents at the CFA Society of Hong Kong

Ruchir Desai, co-manager of the AFC Asia Frontier Fund, held a webinar on 28th September 2021 to a “virtual full house”. The webinar, titled “Asian Frontier Markets – Hidden Value”, was organised by the CFA Society of Hong Kong and discussed key topics such as:

•    How have Asian frontier markets performed since the start of the pandemic?
•    Which Asian frontier countries are coming out stronger or well-positioned post the pandemic?
•    Which Asian frontier countries are benefitting from supply chain and manufacturing shifts?
•    What are the fintech and e-commerce opportunities in Asian frontier markets?
•    Outlook and concerns for Asian frontier markets

To view the presentation made at the webinar click on the link below:

Asian Frontier Markets – Hidden Value

AFC participates once again at the Asia Investment & Banking Conference

AFC continues to support student led initiatives and for the fourth year running, AFC participated in the Asia Investment and Banking Conference organised by the London School of Economics. Ruchir Desai, co-manager of the AFC Asia Frontier Fund, participated in the Asset Management panel held on 6th September. Click on the image below to learn more about the conference.


AFC participates once again at the Asia Investment & Banking Conference


I am glad to report, once again, that we have been recognized by Backstop BarclayHedge for our outstanding fund performance. This time, our AFC Vietnam Fund won the Top-4 performer award for its August 2021 performance in the sector “Emerging Markets Equity - Asia” and also the Top-4 performer award for its August 2021 performance in the sector “Emerging Markets - Asia”. This is another confirmation of the validity of the investment thesis of our AFC Vietnam Fund, and shows that it is well suited as a diversification tool for most equity investors.


AFC wins awards from BarclayHedge

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AFC Vietnam Fund - Manager Comment

AFC Vietnam Fund Performance


The AFC Vietnam Fund rose by 3.8% in September with a NAV of USD 3,379.06, bringing the year-to-date return to +47.9% and the return since inception to +237.9%. This represents an annualized return of +17.0% p.a. since inception. The Ho Chi Minh City VN Index gained 1.0% in September 2021 in USD terms. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 13.97%, a Sharpe ratio of 1.15, and a low correlation of the fund versus the MSCI World Index USD of 0.52, all based on monthly observations since inception.

In comparison to previous months, September turned out to be much quieter than expected, despite higher global volatility caused by the financial difficulties of Evergrande, one of China’s leading real estate developers. As expected, Vietnam showed negative economic growth for the third quarter caused by the hard lockdowns in major provinces, but this is seen as a temporary slowdown, given that the country is now slowly reopening after infection rates have already declined. Smaller stocks continued to outperform the main index by a big margin which also helped the performance of our fund. The outperformance of the fund compared to the index is even more visible when we look at the quarterly performance of Q3 2021, where the fund gained 11.1% compared to an index loss of -4.7%.

Market Developments

After a volatile summer period, the index traded in a narrow range for the first half of the month, before the financial problems of one of China’s leading property developers, Evergrande, rattled world markets. Nevertheless, the market was able to end on a positive note. The small-cap index was even able to make new highs and the market breadth improved significantly. Actually, it had already bottomed back in mid-July and is now approaching its high from earlier in the year. Combined with continued high volume on positive days, this results in a perfectly designed bull market, continuously driven by local investors and missed out by foreign investors.



AFC Vietnam Fund Market Breadth

(Source: Bloomberg)


The most important market impulse this year was certainly a change in local investor behaviour. Although foreign market participation was never over 20%, in previous years local investors were always trying to catch up with foreign investors and therefore intensified the move of stocks which foreigners were either buying or selling. Since a better part of fund flows was from ETFs which pre-announced the reshuffling of their portfolios on certain dates, domestic investors also tried to front-run the rebalancing of foreign ETFs – and that also partly explains why foreign ETFs have performed so badly over the years.

For example, investors who bought the Van Eck’s VNM ETF at its inception in 2009 are still losing money after 12 years! Investors who bought the AFC Vietnam Fund at its inception, less than 8 years ago, more than tripled their money. And still, our assets under management (AUM) are almost 90% lower than the AUM of this ETF! However, the majority prefers sub-optimal, inefficient ETFs over actively managed funds, mostly because of the argument of lower costs?!


Looking for pennies instead of investing for the long term?

Looking for pennies instead of investing for the long term?

(Source: Bloomberg)


For the first time in history yields on 5-year government bonds were lower than in the U.S. – yes, we are talking about Vietnamese government bonds!


5 year Vietnamese Government Bonds

Looking for pennies instead of investing for the long term?



These almost absurdly low interest rates, combined with reduced prospects near term on the real estate market – and probably more lockdown related time to study stock market movements – led to an ever-increasing interest in investing in the stock market. So called “F0-investors” (investors with no previous investment experience) are opening new trading accounts en-masse and are therefore increasing demand for stocks which easily compensates for foreign selling.

For many people, this fact could flag warning signs about a possible overheating in the stock market short-term. While nobody can perfectly predict a correction (which is always possible), Vietnam is still in its infancy in the development of its financial markets, and so is the participation of investors. Compared to Taiwan, a more mature market in Asia, the retail participation rate in Vietnam is still low at only 3.6% of population, compared to more than 90% in Taiwan. In addition, Vietnam offers attractive valuations and a stable currency. With next year’s expected recovery in economic and earnings growth, Vietnam trades at a very undemanding 13x forward earnings, 35% cheaper than the US and many other markets in the region. If Vietnam follows other East and South Asian development stories of the past, the stock market will flourish as the economy grows over the next few decades.


Taiwan and Vietnam brokerage accounts compared to population

Taiwan and Vietnam brokerage accounts compared to population

(Source: Yuanta Securities, AFC Research)


How Vietnam wants to tackle energy inflation in the future

Whenever statistics about surges in inflation are announced (like currently!), officials are usually quick to blame this on increases in energy prices. While this might be true, the underlying reasons are seldom mentioned. Apart from external shocks, free money from central banks around the globe led to all kinds of price inflation, with asset price inflation not the least of which that should be mentioned. In the US, core inflation is running at its highest rate since 1991 and all types of energy prices are exploding – from coal, uranium, and electricity to natural gas – and governments and central bankers continue to explain/hope/pray that all of this is just temporary. If travel on an international scale should resume on further opening for business and leisure purposes, and manufacturing bottlenecks subside, should we really believe that demand for energy and therefore prices will fall again?


U.S. Inflation

U.S. Inflation



Energy prices 2021

Energy prices 2021

(Source: Bloomberg)


Even if the calming words, which don’t offer any help (especially to lower income families who need to pay their bills) would turn out to be true, prices will not come down again. Let’s assume that after consumer prices go up from 100 to 110, if inflation is 2% the following year, then consumers will still have to pay 112.20, while officials will speak of “target inflation” and achieved goals helping consumers. But will consumer’s incomes rise in a similar manner while getting zero interest on their savings?

With strong energy demand growth, the Vietnamese government must find the difficult balance between securing enough energy for the country while simultaneously reducing the burden on the environment, and make sure that low earning Vietnamese whose energy bills are proportionally higher compared to those in the West, are not getting financially stressed by rising energy prices. One of the solutions is obviously the rising importance of renewable energy in their long-term energy plans.

A new draft for the long-term plan of Vietnam’s energy needs, the so-called Power Development Planning VIII (“PDP 8”) reinforces the Vietnamese Government’s current view on prioritizing renewable energy sources to minimize negative impacts caused by electricity production on the environment. Other than a big increase in renewable energy, this includes an increased import of fuels and establishing or increasing transmission and distribution grid links with China, Laos, and Cambodia in order to maximize each country’s energy potential. Unfortunately, Vietnam, like other countries, likes to outsource its environmental responsibility by importing electricity from neighbouring countries which will reduce its environmental impact by limiting domestic pollution output – at least on paper. Of Vietnam’s total electricity generation capacity of about 69 GW, more than 50% came from coal in 2020, with non-hydro renewable sources such as wind and solar making up only 5%.  Under the draft PDP 8, Vietnam plans to increase solar capacity to 18.6 GW and wind capacity to 18 GW by 2030.


Vietnam offers comparable opportunity for solar power to southern Europe

Vietnam offers comparable opportunity for solar power to southern Europe

(Source: Solargis)


Governments play all kinds of tricks to fulfil their own or international targets on emissions reduction, but after all there is a trend internationally which is hardly to be stopped and will affect not only our personal lives, but also how we will invest in the future. ESG has already been adopted by many companies, investment managers and increasingly financial regulators. On a negative note, we should add, a possible side effect of reduced investments in conventional energy sources during a time of still growing demand, could lead to higher prices and further inflationary pressure. With high debt levels in most countries around the world and therefore limited ability to raise interest rates significantly, negative real interests are likely here to stay for the immediate future which equates to “creeping expropriation” of individuals savings, while over time it helps indebted individuals and governments.

At the end of September 2021, the fund’s largest positions were: Agriculture Bank Insurance JSC (9.2%) – an insurance company, PVI Holdings (5.6%) – also an insurance company, Power Engineering Consulting JSC No. 2 (4.3%) – a consulting firm, Phu Tai JSC (3.9%) – a home and office furnishings company, and Idico Urban and House Development JSC (3.9%) – an energy, construction, and real estate business.

The portfolio was invested in 46 names and held 2.6% in cash. The sectors with the largest allocation of assets were consumer (33.2%) and financials (32.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.28x, the estimated weighted harmonic average P/B ratio was 1.78x, and the estimated weighted average portfolio dividend yield was 3.53%.

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AFC Asia Frontier Fund Performance


The AFC Asia Frontier Fund (AAFF) USD A-shares increased by 3.1% in September 2021 with a NAV of USD 1,594.26. The fund outperformed the AFC Frontier Asia Adjusted Index (−4.2%), the MSCI Frontier Markets Asia Net Total Return USD Index (+2.0%), the MSCI Frontier Markets Net Total Return USD Index (+1.2%) and the MSCI World Net Total Return USD Index (−4.2%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +59.4% versus the AFC Frontier Asia Adjusted Index, which is up by 22.6% during the same period. The fund’s annualized performance since inception is +5.0%. 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.

Despite a very volatile month in global equity markets, the fund performed very strongly and outperformed key benchmarks by a wide margin this month. This reflects the lower correlation of Asian frontier markets with global markets in practice (and not only in theory) since concerns about Chinese real estate company Evergrande do not have any direct impact on Asian frontier markets. 

Performance this month was driven by Mongolia, Bangladesh, Vietnam, Papua New Guinea, and Sri Lanka, while Pakistan and Iraq were laggards. Another month of positive performance makes this the sixth consecutive quarter of positive performance for the AFC Asia Frontier Fund.

The fund initiated this month its first investment in Georgia through the purchase of TBC Bank Group PLC (TBC), which is the largest bank by assets in Georgia. Though Georgia is seeing a swift economic recovery due to an increase in remittances and a bounce-back in tourism, the more exciting story for TBC is its foray into Uzbekistan where it has a first mover advantage with its recently launched digital bank TBC UZ.

Besides low smartphone penetration (31%), Uzbekistan also has low banking penetration in general and very low retail banking penetration in particular. Retail loans as a % of GDP are only at 11.1% leaving a lot of room for future growth. With Kaspi (Kazakhstan) and Tinkoff (Russia) becoming very successful digital/fintech stories in the region, we believe TBC UZ could potentially also be a big value generator for TBC shareholders as digital adoption of financial services picks up in Uzbekistan.

The potential for TBC UZ was strengthened by the announcement of an investment by IFC (International Finance Corporation) and EBRD (European Bank for Reconstruction and Development) for a 20% equity stake each in TBC UZ, and this additional capital will help execute the digital bank’s future growth plans. TBC trades at a very attractive valuation with a P/E of 4.8x and P/B of 0.9x of 2021 estimated earnings.



TBC Bank Group

(Source: TBC Bank Group)


Mongolia was the largest performance contributor this month with Mongolia Mining Corporation (MMC) seeing a strong rally on the back of rising coking coal prices. Though a real estate and construction slowdown in China could impact Chinese steel consumption and therefore Mongolian coking coal demand, the bigger issue for MMC at the moment is the continued COVID-19 related border restrictions between China and Mongolia. If the restrictions are lifted, this will be positive for the company’s sales volumes and this resumption of border trade could be the next positive trigger for the stock price.

On the back of rising commodity prices which should benefit commodity exporting countries, we also increased the fund’s weight to Kazakhstan by adding to all three existing Kazakh positions, namely, Halyk Bank, Kaspi and Kazatomprom.


Higher coking coal prices this year has helped Mongolia Mining Corp’s stock price

Coking Coal Prices

(Source: Bloomberg, % change in prices between 31st December 2020 – 30th September 2021)


Bangladesh provided a good all-round performance for the fund as COVID-19 cases from the latest wave have come down significantly, leading to a reopening of economic activity. The fund’s consumer discretionary names did well as an economic reopening will most likely lead to pent up demand for multiple consumption goods which led to a 6.7% rally in benchmark DSE Broad Index.


COVID-19 cases from new wave have tapered off in Bangladesh leading to an economic reopening

COVID-19 Cases Bangladesh

(Source: Bloomberg)


The best performing stock for the fund this month was John Keells Hotels (JKHL) in Sri Lanka which gained +38% as the U.K. removed both the Maldives and Sri Lanka from its red travel list. This is very positive news as the U.K. was one of the largest tourist source markets for both countries before the pandemic struck and more importantly both the Maldives and Sri Lanka are entering the peak tourism season which runs from November to March. This should provide a further boost to travel bookings and foreign exchange reserves for both countries.

Besides tapering COVID-19 case numbers, both the Maldives and Sri Lanka also have a very high vaccination rate relative to some other Asian tourist destinations like Thailand and Vietnam which should also be supportive of future tourist bookings in the upcoming peak season. The Maldives has actually been open to international tourists since July 2020 and has almost gone back to pre-pandemic numbers in terms of monthly tourist arrivals.

The fund bought JKHL in November 2020 as vaccine roll outs would re-open tourism markets and more importantly it generates most of its revenues from the Maldives. With COVID-19 cases in Sri Lanka also coming under control, the outlook for its Sri Lankan operations has improved, especially with the new U.K. ruling.



Sri Lanka Tourism and the UK

(Source: CT CLSA Securities)



Tourist Arrivals in the Maldives

(Source: Maldives Ministry of Tourism)


With a gain of +0.8%, the VN-Index in Vietnam did not react too much to the 3Q21 GDP growth of -6.2%, as such a poor performance was anticipated by us in July 2021 (see article) due to the lockdown-like conditions over the past 3-4 months especially in the South of Vietnam. However, we believe case numbers have peaked and with vaccinations increasing at a fast pace the government would allow more business and social activities from October onwards, leading to a gradual recovery in earnings especially for consumer discretionary companies who have had to temporarily shut down most of their retail stores over the past few months.

With a gradual economic reopening imminent, the fund initiated a position in Phu Nhuan Jewellery (PNJ) which is the biggest jewellery retailer in Vietnam. With more of its stores expected to reopen in the next few months we anticipate an earnings recovery for the company and more importantly, PNJ’s competition in the organised and unorganised jewellery industry has been weakened by the pandemic which should allow PNJ to strengthen its market share and competitive position even further. More broadly, we believe that “re-opening” plays in Vietnam could see a better performance in the coming few quarters as vaccinations and economic reopening’s increase and the fund is well positioned to such themes.



Vietnam Vaccination Rates

(Source: Bloomberg, SSI Securities)


During the month, the fund subscribed to one of Pakistan’s most exciting IPOs in the recent past. Air Link Communication (Airlink) is one of the largest distributors of mobile phones in Pakistan and is an important distribution partner for leading brands like Apple, Samsung, and Xiaomi. Besides distribution, the company has recently set up an assembly plant for mobile phones which is already producing products for some well-known Chinese brands, and it is also expanding its retail store network aggressively to capture growing demand for smartphones not only in key commercial hubs like Karachi and Lahore but also other large Pakistani cities. 

The company’s cumulative annualised net profit growth over the last 5 years is at 19.4% and it would not be surprising to see this trend continue as smartphone penetration in Pakistan is only at 18%, leaving a lot of room for players like Airlink to grow significantly which could make this company one of the most exciting consumer stories coming out of Pakistan.

The State Bank of Pakistan raised interest rates by 25 basis points, its first interest rate increase since July 2019 as economic growth over the past few quarters has come in better than the Central Bank’s estimates, leading to a widening of the current account deficit. We believe the State Bank of Pakistan is being proactive so as to protect the quality of economic growth, but we also think the interest rate cycle has turned in Pakistan. We foresee another hike in November 2021 and January 2022 as well but as long as we don’t see interest rates being raised to the level they were in 2018/2019, Pakistan’s economy should be able to sustain GDP growth of 4-5% over the next few years which is an overall long term positive.



Smartphone Penetration Pakistan

(Source: Air Link Communication)


An Air Link retail store in Lahore

Air Link Retail Store

(Source: Air Link Communication)


The best performing indexes in the AAFF universe in September were Bangladesh (+6.7%) and Kazakhstan (+6.7%). The poorest performing markets were Pakistan (−5.3%) and Cambodia (−3.6%). The top-performing portfolio stocks this month were a Maldivian resort operator listed in Sri Lanka (+38.1%), a Mongolian bakery and confectionery company (+35.0%), a Mongolia leather company (+27.2%), a Mongolia coking coal mining company (+26.5%) and a Kazakh uranium mining company (+25.7%).

In September, the fund exited an automobile assembler and a leasing company in Pakistan and bought a bank in Georgia, a mobile phone distributor and an oil and gas producer in Pakistan, a jewellery retailer in Vietnam and two consumer discretionary companies in Mongolia. The fund also added to existing positions in Kazakhstan, Mongolia, Turkey, and Vietnam and partially exited positions in Mongolia.

At the end of September 2021, the portfolio was invested in 77 companies, 2 funds and held 3.0% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (8.4%) and a pharmaceutical company in Bangladesh (4.1%). The countries with the largest asset allocation were Mongolia (20.1%), Vietnam (15.2%), and Bangladesh (11.2%). The sectors with the largest allocation of assets were consumer goods (28.2%) and industrials (13.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.25x, the estimated weighted harmonic average P/B ratio was 1.17x, and the estimated weighted average portfolio dividend yield was 3.18%.

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AFC Uzbekistan Fund - Manager Comment

AFC Uzbekistan Fund Performance

The AFC Uzbekistan Fund Class F shares returned +0.8% in September with a NAV of USD 2,010.89, bringing the return since inception (29th March 2019) to +101.1%, while the year-to-date return stands at +49.9%. On an annualized basis, the fund returned +32.1% p.a. with a Sharpe ratio of 2.12.

September 2021 saw the AFC Uzbekistan Fund reach a new all-time-high, while having doubled its NAV since inception. This month was one of the most exciting in a long while, with new developments in the economy and capital markets announced. We are still in the early days of Uzbekistan’s transformation from a centrally planned to a free-market economy and are excited for its continued liberalization as the AFC Uzbekistan Fund is well positioned to benefit from the coming step change in the capital markets.

AFC Uzbekistan Fund valuations as of 30th September 2021:

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


Estimated weighted harmonic average P/B:


Estimated weighted portfolio dividend yield:



We are now entering Phase II

Our long-held thesis for the development of the Uzbek capital markets, and the Tashkent Stock Exchange in particular, has been that their transformation to a well-functioning market would occur over a period of three phases. I’ve re-iterated these phases for new readers below:

Phase I began in 2018 and is now concluding. This is the initial re-rating phase where companies and the broader stock market were forgotten and viewed as undesirable by local investors due to a combination of high inflation, term deposit rates in the mid 20% range, and a depreciating Uzbek Som. Foreign investors were notably absent as well due to capital controls specific to the capital markets, though these were finally eliminated on 2nd March 2019 when Asia Frontier Capital was the first foreign investor to successfully test the repatriation mechanism. These challenges made listed equity valuations extremely depressed, in multiple cases trading with dividend yields greater than 30% and accompanied by net profit growth rates of greater than 400%/500% as the Uzbek economy began to be liberalized. The Phase I re-rating has seen listed equities go from “never should have been so cheap” to now value-oriented and buttressed by strong profit growth profiles.

During Phase I, inflation has fallen to 10.8% with the Central Bank targeting sub 10% inflation in 2022, while currency deprecation has greatly moderated. 2021 depreciation expectations versus USD are projected to be in the 3-4% range, compared to 10% in 2020 and 13.9% in 2019. These developments have thus far attracted more local, and increasingly foreign capital, into the stock market, thereby adding needed liquidity.

Phase II we expect to occur between 2022-2025. This phase should see SOE’s (state-owned enterprises), what we call the “crown jewels” of Uzbekistan’s economy, being privatised through domestic IPOs and SPOs and eventual dual listings abroad, likely in London. These companies include the national airline, Uzbekistan Airways, one of the biggest gold mining companies in the world, Navoi Mining, and Metallurgical Kombinat, a leading copper producer, Almalyk Mining and Metallurgical  Kombinat, and one of the largest steel plants in Central Asia, Uzmetkombinat, among others. These listings should attract significant foreign and local capital to the Tashkent Stock Exchange, increasing liquidity and interest in the market.

Phase III we expect will see private sector companies IPO once the stock market is liquid and has enough investor participants, both institutional and retail, to absorb larger share issues. This phase should overlap with Phase II and we are already seeing private sector companies considering eventual IPOs which is highly encouraging.

Big conference news!

During the CBonds conference on 9th September 2021, where Scott had the opportunity to speak on a capital markets development panel, the Deputy Minister of Finance, Mr. Odilbek Isakov headlined the event where he cracked open the proverbial cookie jar on the government’s plans for our “Phase II” expectations. He mentioned that over the next several years we should expect to see fifteen IPOs/SPOs, including five state-owned banks, three insurance companies and two metallurgical plants, among others. Focus will be put on seeing a gold-backed ETF (presumably similar to the    NYSE: GLD ETF in the USA) and equity ETFs launched on the Tashkent Stock Exchange. A secondary market for debt securities will be introduced, while inflation-linked bonds will be issued. Strengthening corporate governance was also mentioned as a key focus, as well as the central securities depository enhancing its technology to allow for the issue of ISIN codes for securities with a medium-term aim of connecting to Euroclear/Clearstream systems, and enabling automated dividend distribution. Last but not least is the Ministry of Finance’s plan to enable Uzbek citizens to open brokerage accounts online (digitally) over the coming months. This will hopefully be followed by permitting foreign individuals and corporates to do the same sometime in 2022 once the legislation is in place to permit this. Digital account openings will make the onboarding of new brokerage accounts much easier and thus accelerate market development.


Deputy Minister of Finance Odilbek Isakov announcing significant plans for the capital markets at CBonds Tashkent conference on 9th September 2021

Vietnam offers comparable opportunity for solar power to southern Europe

(Source: AFC Research)


During a second conference, the Uzbekistan Economic Forum 2021, held on 29th and 30th September, significant news was announced by Deputy Prime Minister of Economic Development and Poverty Reduction, Mr. Jamshid Kuchkarov, regarding the government’s privatisation plans. The most impressive news was that gold miner, Navoi Mining and Metallurgical Kombinat could see 10% to 15% of its shares privatised through a local and international IPO. He also mentioned the government’s long-term focus of having 30% of board members on SOE companies independent and the hiring of international management to increase transparency and efficiency.

Looking more near term however, our takeaways from the conference include the potential for a partial privatisation (up to 12%) of the Uzbek Commodities Exchange (TSE:URTS), a secondary offering of up to 14% of Uzmetkombinat (TSE:UZMK), and UZMK issuing a corporate bond worth UZS 50 bln (equivalent to USD 5 mln) with a planned coupon of 23% and 18-month duration. These SPOs will greatly improve liquidity and hopefully lead to hundreds, if not thousands, of new brokerage account openings by both local and foreign investors which will give the capital markets a big shot in the arm.

UZMK is just one of several companies we are excited to see undergo further privatization. Surely if the government can achieve some “layups”, to use a basketball term, in the early stages of its privatisation campaign, we should increasingly see private sector companies explore IPOs. We are aware of several companies already interested in a possible IPO as they see the proverbial writing on the wall for what the capital markets of Uzbekistan can become if phase II’s privatisation of SOEs is successful.


Scott Osheroff speaking on a panel with Deputy Minister of Finance, Mr. Odilbek Isakov, at the Uzbekistan Economic Forum 2021

Scott Osheroff speaking on a panel with Deputy Minister of Finance, Mr. Odilbek Isakov, at the Uzbekistan Economic Forum 2021

(Source: AFC Research)


Concluding this month’s update, in early September Scott travelled to Bukhara for the extraordinary general meeting of a portfolio company. Arriving in the evening, he took a walk around the old city and snapped the below photo of the Poi-Kalyan ensemble which is always strikingly beautiful.


Bukhara's Poi-Kalyan ensemble

Bukhara's Poi-Kalyan ensemble

(Source: AFC Research)


At the end of September 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 (51.8%) and consumer (14.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.42x, the estimated weighted harmonic average P/B ratio was 1.59x, and the estimated weighted average portfolio dividend yield was 5.80%.

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AFC Iraq Fund Performance


The AFC Iraq Fund Class D shares returned −3.1% in September with a NAV of USD 737.42, outperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost −3.3% during the month. The fund is up 30.4% year to date versus 22.7% for the index. Since inception, the fund lost 26.3% while the RSISUSD index is down 44.9%.

The last 30 days of the 40-day Arbaeen pilgrimage took place throughout the month, ending on 28th September 2021, and as it progressed life slowed down to a crawl. The Arbaeen pilgrimage is among the world’s largest annual pilgrimages, with the last official figures, before the onset of COVID-19, showing about 14 mln pilgrims taking part in 2019, during the 40 days. About two-thirds came from within Iraq and a third from Iran, Lebanon, the Gulf states, Pakistan, India, the U.K., and the U.S. The pandemic had severely affected the number of pilgrims in 2020, especially the number of foreign visitors though things have started to recover in 2021.

The pilgrimage climaxes at the end of the 40-day mourning period, Arbaeen in Arabic, of the death of Prophet Muhammad's grandson, Imam Hussein. Leading to the climax, pilgrims walk to Karbala from across Iraq. Famed Iraqi hospitality is in full swing throughout the period as residents along the pilgrimage’s many routes to Karbala, and especially in Karbala, open their homes to the visiting pilgrims providing them with shelter and food, as documented in a BBC story in 2017. Some stunning scenes of the pilgrimage can be seen in a 2020 piece by a New York Times photojournalist.

During the month the average daily turnover on the Iraq Stock Exchange (ISX) was in-line with the low levels of the last three months, while the Rabee Securities RSISX USD Index continued with its consolidation after the solid year-to-date gain (chart below).



AFC Iraq Fund Index Turnover

(Source: Iraq Stock Exchange, Rabee Securities, Asia Frontier Capital, data as of 30th September 2021)


Among the index’s constituents, Baghdad Soft Drinks (IBSD) – the index’s largest component by weight at 30.1% and the star of last month’s fireworks – ended the month down 6.1%, while the next largest component by weight, at 20.0%, the Bank of Baghdad (BBOB), was down 2.4%. Other banks in the index were all down, with the Commercial Bank of Iraq (BCOI) down 6.0%, the National Bank of Iraq (BNOI) down 5.6%, Gulf Commercial Bank (BGUC) down 5.3%, and Al-Mansour Bank (BMNS) down 1.7%. Only three of the index’s ten components were up, with Asiacell (TASC) up 5.0%, National Chemical and Plastics Industries (INCP) up 4.2%, and Al-Mansour Pharmaceutical Industries (IMAP) up 3.9%.

Nevertheless, a ho hum month was a welcome reprieve from the fireworks of the prior month and the likely political uncertainty ahead of parliamentary elections on 10th October 2021, which in turn could extend the suspense for a few more months if recent history is a guide. Government formation negotiations following parliamentary elections have, over the last few years, lengthened to span many months as a function of the country’s increasingly fractured political landscape which makes reaching a consensus extremely time-consuming.

However, irrespective of the political uncertainty before, during, and after the election, the one certainty is that on the eve of the elections that Parliament will be dissolved, and the current government will become a caretaker government until a new one is formed by mid-2022. Consequently, as a caretaker government, it no longer possesses the authority to propose bills to Parliament including the 2022 budget bill that would have been due to be presented to Parliament for review and debate around the same time as the start of the elections. The promising aspect of this is that the government, according to the constitution’s “1/12th rule”, will implement the current spending plans of the 2021 expansionary budget until a new government is formed by mid-2022. The rule essentially means that the government can spend up to a twelfth of the appropriations made in 2021 on a monthly basis until a new budget bill is passed by Parliament. Moreover, the new government that will likely be formed by mid-2022 will not have enough time to propose a 2022 budget and so will continue to implement the 2021 budget throughout the year until a new 2023 budget is approved by the new Parliament – an event unlikely to take place before the first quarter of 2023.

The significance of this is that the expansionary 2021 budget, which added fuel to the market’s rally at its passage at the end of  March 2021, as discussed here in “Market Extends the Rally”, will continue to be in force until early 2023. This in turn means the sustainability for the conditions that led to the consumer-led economic rebound as discussed here in “On the Economics of Coiled springs, Crouching Tigers, and Chicken Lickens”.

Sustaining the government’s ability to execute the expansionary 2021 budget throughout the next 18 months is the bounty brought by high oil prices, which are likely to continue throughout 2022 given the stronger than expected demand and less than expected supplies. Brent crude is seen to average USD 68.9 per barrel in 2021 and USD 70.7 per barrel in 2022, according to Oxford Institute for Energy Studies’ latest forecast made in September 2021. 

All of which supports the market’s consolidation thesis and argues that a subsequent rally in Rabee Securities’ RSISX USD Index will likely be supported by expected high government spending, fuelled by oil revenues, that would sustain the consumer-led economic rebound, which in turn will eventually lead to a continued recovery in corporate profits.



AFC Iraq Fund Oil Revenues and Iraq Index

(Source: Ministry of Oil, Rabee Securities, Asia Frontier Capital, data as of 30th September 2021)


At the end of September 2021, the AFC Iraq Fund was invested in 14 names and held 1.5% in cash. The fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (96.1%), Norway (1.9%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (60.2%) and consumer staples (15.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.07x, the estimated weighted harmonic average P/B ratio was 0.91x, and the estimated weighted average portfolio dividend yield was 4.65%.

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