“The individual investor should act consistently as an investor and not as a speculator.”

- Ben Graham – American economist, professor and investor

AFC Funds Performance Summary

July saw a strong recovery in the U.S stock markets with the S&P 500 rallying by 9.1% as investors viewed a possible pivot from the U.S. Fed later this year. This momentum in the U.S. seeped into some Asian frontier markets which led to a gain of 2.5% for the AFC Vietnam Fund.

Whether this rally last month is sustainable is debatable as there continue to be question marks on the outlook for U.S. inflation and Fed hawkishness. However, the anticipated volatility over the next few months will certainly provide entry points for investors, especially in Asian frontier markets whose valuations have corrected significantly in 2022. 

This is evident in the valuations of the AFC Asia Frontier Fund, which is trading at a P/E ratio of only 8.0x. This multiple is close to where it was in March 2020 when the pandemic first struck, and returns after March 2020 were extremely strong for the fund in the following 18 months.

These were some of the key points discussed in our quarterly AFC Market Update Webinar held on 28^th July 2022, which was very well attended. If you missed this webinar, you can always watch the recording or view the webinar presentation using the links below.

AFC Market Update Webinar Recording
AFC Market Update Webinar Presentation Slides

Save the date! The next AFC Market Update Webinar will be held on Friday, 28^th October 2022.

Our AFC Vietnam Fund was recognized once again by BarclayHedge, this time for ranking 5^th in the Emerging Markets-Asia-Past Three Years category for the period that ended in the first quarter of 2022, a testament to our stock selection skills.

Below please find the manager comments relating to each of our four funds for the month of July 2022.

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..

AFC in the Press

Upcoming AFC Travel

Thomas Hugger, Ruchir Desai, and Peter de Vries are based in Hong Kong, while Andreas Vogelsanger is based in Bangkok, Vicente Nguyen in Ho Chi Minh City, Scott Osheroff in Tashkent, and Ahmed Tabaqchali in London and Iraq. If you have an interest in meeting with our team at their homeports or during their travels, please contact Peter de Vries at This email address is being protected from spambots. You need JavaScript enabled to view it..

AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund returned +2.5% in July with a NAV of USD 3,274.78, bringing the year-to-date return to −7.9% and return since inception to +227.5%. The fund significantly outperformed the benchmark, the Ho Chi Minh City VN Index, which gained 0.4% in July 2022 and has lost 21.3% year to date in USD terms. The fund’s annualized return since inception stands at +14.8% p.a. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 14.08%, a Sharpe ratio of 0.99, and a low correlation of the fund versus the MSCI World Index USD of 0.54, all based on monthly observations since inception.

Market Developments

The VN-Index didn’t move much in the month of July combined with very low trading volume. The benchmark index closed the month at 1,206.33 points, +0.78%. Due to the fact that the Vietnamese government arrested some high-level real estate and stock market manipulators in April of this year, the VN Index corrected by around 20%. It is now trading at very attractive levels with a 2022 forward P/E Ratio of 11.5x and seems to have formed a bottom at the 1,200 level.

VN-Index from 31^st Dec 2021 to 31^st July 2022

Domestic retail investors have been burnt – but don’t write them off yet

The Vietnamese stock market was and is still driven by domestic retail investors, and over the last 2-3 years this situation was accentuated, given the large influx of small retail investors who opened stock brokerage accounts and became active on the stock market. Many of them are unfortunately not very sophisticated and are “trend followers”, investing often based on rumors. Their trading activity can be seen when observing the advance/decline ratio, especially on the Hanoi Stock Exchange, where many small and speculative stocks are listed.

Advance/Decline Ratio on Hanoi Stock Exchange

With the outbreak of COVID-19 at the beginning of 2020, declining stocks clearly outnumbered advancing stocks in the short term, but soon advancing stocks took over again and the stock market started to recover. This positive sentiment lasted until April 2022 when the government, stock market, and real estate manipulation investigations and arrests started and both the advance/decline ratio and the Hanoi Index started to decline. This correction seems to have come to an end now given that short term speculators finished their selling and the balance between sellers and buyers is neutral again.

Even though most domestic retail investors have probably been burnt over the past few months, the influx of new retail investors opening stock trading accounts hasn’t stopped. In the first 6 months of 2022, a staggering 1.8 million new accounts were opened, bringing the total number of trading accounts in Vietnam to 6.1 million. This equates to over 6% of Vietnam’s population which is still relatively low when comparing to Taiwan, for example, with a penetration rate of over 90%.

New trading accounts (in thousands)

Vietnam catches up with global ESG trends

The past decade has seen a palpable rise in demand for businesses to be transparent about their environmental, social and governance (ESG) performance, including their contributions to local economies. In Vietnam, the framework with regards to environmental, social, and other sustainable development issues is fairly new, especially for businesses. However, Vietnam is catching up with global ESG trends and is implementing new laws to tackle ever increasing environmental, social, and governance challenges. 

The Vietnamese government recently approved a detailed national strategy on “green growth” up to 2030, with a vision to 2050. Also, the new law on investment from June 2020 describes how to achieve ESG policy objectives for foreign direct investments but also includes guidelines on disclosure of information on the securities market, which sets out certain ESG reporting requirements for public and listed companies in Vietnam.

In parallel with the developments in the state legislation, numerous state bodies, especially the State Securities Commission of Vietnam, as well as non-governmental organizations in Vietnam, have worked gradually to introduce guidance and policies to raise awareness and to enhance the ESG practices of Vietnamese businesses. In July 2017, the Ho Chi Minh City Stock Exchange launched the Sustainable Development Index (VNSI) on HOSE. Hereby, all listed companies on the exchange are required to either produce a separate sustainable development report or to include this information in their annual report.

The continuous improvements in ESG legislation, policies, and corporate governance have been attracting investment into Vietnamese companies from foreign investors, such as the AFC Vietnam Fund, who take into account ESG criteria when investing in local companies. 

“Green bonds” have also become increasingly popular among Vietnamese issuers. As of 2020, Vietnamese companies have issued four green debt issues with an aggregate value of nearly USD 284 mn. Most of the proceeds from green bond issues (57%) are used for renewable energy development – the main industry of Vietnam’s interest, along with the waste treatment and agriculture sectors. In 2021, BIM Land Real Estate, a member of BIM Corporation, successfully completed the issuance of USD 200 mn worth of green bonds that have subsequently been listed on the Singapore Exchange, with the proceeds being used for its greater excellence-certified real estate projects and those of a green and environmentally friendly nature.

The biggest difference between now and a few years ago is that ESG was once a mere cost item in the perception of local businesses but now they have seen the fruits of their investments. Many Vietnamese listed companies have made a strong commitment to ESG and are focusing on the transition to embrace renewable energy, to continuously improve social standards, and to improve corporate governance. The popularity of ESG-focused investment will raise ESG awareness among local businesses and Vietnamese companies will be incentivized to move towards more sustainable development and growth. Companies with strong sustainable values and robust ESG standards will have much better access to capital in the future.

Vietnam is one of two key partners of Japan in ASEAN in terms of implementing climate change response strategies. At the end of July 2022, the Vietnamese Prime Minister Pham Minh Chinh signed a memorandum of understanding with JBIC (Japan Bank for International Cooperation) to support with capital, technology, human resources, and governance for Vietnam’s development of its energy industry.

Enterprise earnings growth on track

So far, about half of all companies listed on the Ho Chi Minh Stock Exchange have published their results and around 98% of those companies were profitable in 1H/2022. 

We continue to focus on insurance companies which are expected to benefit from an increasing interest rate environment and consumer companies from a strong post COVID-19 recovery. We also see a great opportunity now in the banking sector after most stocks have corrected by around 40-50%. Many bank stocks are now trading at book value (P/B ratios of around 1x) and forward 2022 P/E ratios of around 5x. As mentioned in our last report, LPB particularly stands out, after the stock corrected and is now trading at around 51% of its peak from June 2021 and at a 7.3x (forward P/E 4.0x) and P/B ratio of 1.1x. LPB just reported its results with impressive earnings growth of 76% in the first half of 2022.

LPB from Oct 2017 to July 2022

LPB net profit by first half year (VND bn)

We believe that the insurance sector will continue to benefit from the rising rate environment and banks in general will face many difficulties in the short term. However, LPB might be an exception and looks attractive and undervalued at these levels in our view, even if we do not exactly know when the stock will rebound and trade again at fair value. However, given that we are quite positive about the economic outlook of Vietnam, we are quite comfortable with the risk reward ratio of this investment.

At the end of July 2022, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.9%) – an insurance company, PVI Holdings (6.0%) – also an insurance company, Lam Dong Minerals and Building Materials JSC (4.9%) – a building material supplier, National Seed JSC (4.9%) – a producer of agricultural seed and Viet Tien Garment Corporation (4.6%) – a garment manufacturer.

The portfolio was invested in 47 names and held 8.5% in cash. The sectors with the largest allocation of assets were consumer (40.7%) and financials (23.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.05x, the estimated weighted harmonic average P/B ratio was 1.43x, and the estimated weighted average portfolio dividend yield was 4.45%.

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned −0.0% in July 2022 with a NAV of USD 1,792.05, bringing the return since inception (29th March 2019) to +79.2%, while the year-to-date return stands at −10.8% at the end of July 2022. On an annualized basis, the fund returned +19.1% p.a. with a Sharpe ratio of 1.22.

July saw the second-quarter earnings season commence with some positive results for the AFC Uzbekistan Fund. Furthermore, during the month the fund exited one of its smaller positions after the company was privatized by the government of Uzbekistan.

AFC Uzbekistan Fund valuations as of 31^st July 2022:

Uzbekistan’s economy is humming

First half 2022 statistics for the Uzbek economy have been published and the results are very positive. During the period, GDP grew 5.4% and the Central Bank increased its full-year 2022 GDP estimate from 3.5% - 4.5% to 5% - 5.5%. Exports surged 40.5% to USD 9.92 bn (22.5% of which were gold exports), while import growth moderated to 27.4%, or USD 14.57 bn. Real income of the population also rose by 10.8%, while the average salary increased 20% to UZS 3.54 mn or USD 323. 

On Central Bank policy, they raised the policy rate by 300 basis points when the conflict between Russia and Ukraine broke out, and have since subsequently lowered by 200 basis points, to 15%, as of July 2022. The reduction in the policy rate has occurred while inflation has remained relatively stable at 11%, which is encouraging when one looks at other developed and developing countries which are experiencing inflationary shocks, largely due to a lack of control over their food and energy supply, something which Uzbekistan is well positioned for.

Second-quarter earnings season begins

Second-quarter earnings season kicked off in July with overall positive results. The standout was a glass producer which saw its profits surge by 599% after several years of poor performance due to the company undergoing a large capacity expansion which included them borrowing about USD 70 mn which saddled the company with debt service costs impacting profitability. Year-over-year debt decreased by 32% with the company’s debt-to-equity ratio now standing at a comfortable 1.04x. The company ended the month trading at a P/E ratio of 2.71x and a P/B ratio of 0.75x.

Another fund holding which performed well during the quarter was a chemical company which saw its earnings and book value per share growing by 22% and 56% respectively. The company ended the month trading at a P/E ratio of 5.66x and P/B ratio of 2.06x.

One underperformer was the fund’s second largest holding, Qizilqum Cement (TSE: QZSM), which suffered due to a gas shortage in the first quarter 2022. Uzbekistan’s cement industry has been powered by natural gas since the Soviet times and in the fourth quarter 2021 and into 2022 the country experienced a natural gas shortage which impacted the entire cement sector, forcing production to be curtailed. The effects of the gas shortage carried into the beginning of 2022, but nevertheless the company only reported an earnings decrease of 10% year-over-year. As the gas shortage has been resolved for this year with winter behind us, the company is now operating at full capacity and should be inaugurating its new 1.1 mn ton per year production line later this year. The company ended the month trading at a P/E ratio of 14.48x and a P/B ratio of 0.70x. The P/E ratio should compress markedly during the second half of the year as trailing twelve-months earnings were negatively impacted by a bad Q4 2021 and Q1 2022 due to the shortage of gas.

Exiting a position

During July, the AFC Uzbekistan Fund exited a position in an oil and gas logistics company as the majority share in the company had recently been privatized with the new shareholder looking to buy out minority investors in order to take the company private. Preferring to not hold shares in the company, especially with the share price trading around our average cost, we were able to negotiate the sale of our block of shares at a 27% premium.

At the end of July 2022, the fund was invested in 27 names and held 6.4% in cash. The portfolio was allocated to Uzbekistan (93.57%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (44.5%) and financials (29.8%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.20x, the estimated weighted harmonic average P/B ratio was 1.06x, and the estimated weighted average portfolio dividend yield was 2.63%.

AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares returned −1.8% in July 2022 with a NAV of USD 1,273.92. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (-2.6%) but underperformed the MSCI Frontier Markets Net Total Return USD Index (+1.2%) and the MSCI World Net Total Return USD Index (+7.9%). The performance of the AFC Asia Frontier Fund A-shares since inception on 30^th March 2012 now stands at +27.4% versus the benchmark, which is down by −13.1% during the same period. The fund’s annualized performance since inception is +2.4%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.7% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.54, all based on monthly observations since inception.

Most Asian frontier markets witnessed a recovery in July with positive contributions to the fund from Kazakhstan, Sri Lanka, Mongolia, Georgia, and Jordan. However, Pakistan and Iraq held back fund performance this month with each of them causing a 1.2% loss for the month. Most of the declines in Pakistan were caused by the depreciation of the Pakistani Rupee, despite the fund having a low weight to the country, while the AFC Iraq Fund was down -8.9% in July. 

Without the declines from Iraq and Pakistan, fund returns would have been positive which reflects the broader stock market recovery in our universe.

Kaspi, the fund’s fintech holding in Kazakhstan, declared better than expected 2Q22 results with net profits growing by 32% driven by its higher margin payments and marketplace platform which continue to increase their share of total net profits. 

The success of the Kaspi Super App has also led to the launch of new services in the last few quarters like e-grocery. Though these new segments are still gaining scale, Kaspi has already become the largest e-grocer in Kazakhstan and if this initiative scales up it will be another value driver for the Kaspi story.

Besides a strong quarter, Kaspi’s management also upgraded their full year 2022 net profit guidance to the higher end of their previous estimate from 20-30% to 27-30% which is a sign of confidence during a volatile macro and geopolitical environment in Kazakhstan. 

Historically, the second half of the year has been better financially for Kaspi, and we would not be surprised if management upgrades their guidance again when 3Q22 results are announced given the momentum they are building up in their key businesses. 

Kaspi is one of the few highly profitable fintech plays globally but it appears to be painted with the same brush impacting most tech companies due to higher global interest rates. However, Kaspi is on track to deliver net profits of approximately USD 1.2bn this year which is an outlier in the fintech space. At a 2023 P/E of 7.1x, this valuation appears to more than discount some of the geopolitical concerns surrounding Kazakhstan.

In Jordan, our beneficiaries of higher potash and phosphate prices as a result of the conflict in Ukraine declared excellent 2Q22 results, with Arab Potash reporting a 3.7x increase in net profits while Jordan Phosphate Mines reported a 4.2x increase in net profits. 

July was also results season in Vietnam and our portfolio companies in Vietnam reported on average a 51% increase in net profits, led by robust increases for PetroVietnam Gas (+125%), Gemadept (+103%), Vincom Retail (+100%), Phu Nhuan Jewellery (+65%), and Vietcom Bank (+50%). These results reflect the ongoing economic recovery that is taking place in Vietnam across industrial production, retail sales and exports.

However, export growth in July did see some softness compared to the last few months. Though worries of an economic slowdown in the U.S. and Europe are valid concerns, the shift of supply chains and the importance of Vietnam as a manufacturing hub should continue to keep exports growing and if there happens to be a sharper economic slowdown in Vietnam’s key export markets, an 8-10% growth number for exports will be very reasonable and realistic to achieve in that kind of environment.

Furthermore, elaborating on the point of Vietnam become entrenched in global supply chains, its monthly exports to the U.S. have increased significantly in the past two years, which signifies the importance of Vietnam as a supply chain partner to the U.S. 

The best performing indexes in the AAFF universe in July were Kazakhstan (+10.4%) and Mongolia (+5.9%). The poorest performing markets were Iraq (-5.3%) and Bangladesh (-3.8%). The top-performing portfolio stocks this month were a Sri Lankan consumer and healthcare conglomerate (+34.6%), a technology company operating in various Asian frontier countries (+33.3%), a Maldivian resort operator listed in Sri Lanka (+17.0%), a junior nickel miner operating in Vietnam (+16.7%) and a Mongolian hotel operator (+15.7%).

In July, the fund added to existing positions in Papua New Guinea and Mongolia and reduced some positions in Mongolia.

At the end of July 2022, the portfolio was invested in 76 companies, 2 funds and held 1.9% in cash. The two biggest stock positions were a convenience store operator (4.7%) and a bakery chain (4.6%), both in Mongolia. The countries with the largest asset allocation were Mongolia (23.8%), Iraq (12.4%), and Vietnam (12.0%). The sectors with the largest allocation of assets were consumer goods (29.1%) and materials (13.5%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.97x, the estimated weighted harmonic average P/B ratio was 1.11x, and the estimated weighted average portfolio dividend yield was 2.29%.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned −8.9% in July with a NAV of USD 666.83, underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost 5.6% during the month. The fund was down 3.8% year to date versus the index which was down 0.8%. Since inception, the fund has lost 33.3% while the RSISUSD index is down 45.9%.

The combination of the start of one of the two hottest months of the year (first chart below) and the nine-day Eid holiday starting on 8th July 2022 contributed to the evaporation of local market liquidity and to a decline of over 40% in the average daily turnover (ex-block trades) from the prior month. Most local participants, worn down by a much higher number of sandstorms than usual since mid-April 2022 as discussed here in “Sandstorms, and a stroll down Al-Mutanabbi Street”, took advantage of the longer than usual Eid holiday, to escape an unusually hot July (second chart below), and took away liquidity with them in the domestic version of the classic stock market adage “Sell in May and go away”.

Monthly Weather Averages for Baghdad (°C)

July 2022 Temperature Graph for Baghdad (°C)

Despite the resumption of the market’s decline, its technical picture continues to be positive, as the RSISX USD Index’s decline is within its two-year up-trending channel (chart below) – an uptrend that ended a brutal multi-year bear market. The macroeconomic fundamentals discussed here three months ago suggest that the market’s uptrend will likely remain in force. However, the market’s upward slope might moderate as the liquidity injection – as a consequence of the passage of the supplementary budget – works its way through the economy and eventually into the equity market. The significance of the passage of the supplementary budget to the economy, and the transformative impact of the higher oil price environment on Iraq, was discussed here last month in “Supplementary Budget Stabilises the Market” and on 28th July during AFC’s “Asian Frontier Markets Update” webinar.

Political Stalemate Boils in the July Heat

The July heat took its toll as nerves frayed and the political impasse, as a consequence of the surprising results of the October 2021 parliamentary elections, came to a boil on the last day of the month with the occupation of parliament by the supporters of the Sadrist Movement – the apparent winner of the elections with a plurality of seats; yet whose parliamentarians resigned in June in protest over the 10-month impasse over government formation. As perplexing as it may sound, the motivation for the occupations were moves by the apparent losers in the election, the Fateh Alliance, to assert control over parliament which was only made possible by the resignations. The Fateh Alliance, which morphed into the Coordination Framework with the addition of groups who fared just as badly in the elections, seemed to have papered over its internal divisions and started the government formation process, thereby leading to events that culminated in the occupation of parliament. Not to be outdone, the supporters of the Coordination Framework staged counter-demonstrations denouncing the occupation of parliament, raising fears of an escalation of the conflict. However, the ensuing melodrama did not develop into violent clashes between supporters of the opposing sides, who mostly confined their activities to the theatrics of street demonstrations.

Supporters of the Sadrist Movement inside Parliament Building

Supporters of the Coordination Framework

Both parties in the conflict, irrespective of their fierce rivalry, have been members of the all-inclusive governments formed following successive elections post the US invasion in 2003. Importantly, as major players in the post-2003 ethno-sectarian political system, both parties have built substantial patronage networks, and consequently could risk the loss of the wealth and sources of economic rent created by these networks, if their conflict evolved into a violent confrontation. Therefore, the most likely outcome would instead be a renegotiation of the post-2003 elite bargain, with a redistribution of power and re-allocation of resources to accommodate the increased relative strength of the Sadrist Movement.

This would be reflected in an agreement for holding a new set of national elections that would solidify the renegotiated elite bargain with “no major winners nor major losers” – a modified version of the Lebanese political logic of “neither the winner nor the loser.” 

A new set of national elections, however, would be months away, and as such the current caretaker government would remain in its role and would continue implementing the expansionary economic policies discussed here in the past.

Conclusion

While the political uncertainty would continue to dampen foreign interest in Iraq's equity market until the resolution of the political impasse, we continue to believe that Iraq’s value proposition is compelling as its economy is a huge beneficiary of the high crude oil price environment. And its equity market is in the very early stages of emerging from a multi-year bear market, and as such its risk-reward profile is very attractive against most global markets. Moreover, we believe that the AFC Iraq Fund’s holdings will enable it to continue to outperform its benchmark, as they are very well-positioned to capture and benefit from the revival of the broader macro-economic backdrop of the country on the back of the higher crude oil prices. 

At the end of July 2022, the AFC Iraq Fund was invested in 14 names and had a cash level of −0.9%. 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 (97.5%), Norway (2.8%), and the UK (0.6%). 
    
The sectors with the largest allocation of assets were financials (63.4%) and consumer staples (15.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.97x, the estimated weighted harmonic average P/B ratio was 0.90x, and the estimated weighted average portfolio dividend yield was 2.86%.

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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