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Asia Frontier Capital (AFC) - March 2022 Update

“ Life’s a bit like mountaineering – never look down " - Sir Edmund Percival Hillary, New Zealand mountaineer, explorer,


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Life’s a bit like mountaineering –
never look down

- Sir Edmund Percival Hillary, New Zealand mountaineer, explorer, and philanthropist


Year to DateSince
AFC Asia Frontier Fund USD A1,497.88N/A4-5.3%+49.8%

MSCI Frontier Markets Asia Net Total Return USD Index2

AFC Iraq Fund USD D804.24+5.5%+16.1%-19.6%

Rabee RSISX Index (in USD)

AFC Uzbekistan Fund USD F1,985.07N/A4-1.2%+98.5%

Tashkent Stock Exchange Index (in USD)

AFC Vietnam Fund USD C3,743.37+6.0%+5.3%+274.3%
Ho Chi Minh City VN Index (in USD) +0.1%-0.5%+171.1%
  1. The NAV given is for the lead share series for the relevant master fund. Investors’ holdings may be in a different share class, series, or currency and have a different NAV. See the factsheets and/or your statement for full details.
  2. Between 31st May 2017 and 30th November 2021 the benchmark was adjusted to be 37% of the MSCI Frontier Markets Asia Net Total Return USD Index “MSCI Index” and 63% of the Karachi Stock Exchange 100 Index in USD due to the removal of Pakistan from the MSCI Index during this period.
  3. NAV and performance figures are all net of fees.
  4. NAV is unfortunately not available for March 2022. See for further details below in the manager comment of the AFC Asia Frontier Fund, and the AFC Uzbekistan Fund.

AFC Asia Frontier Fund – Ten-year anniversary


AFC Asia Frontier Fund – Ten year anniversary



It was an important month for Asia Frontier Capital as the AFC Asia Frontier Fund and the AFC Uzbekistan Fund celebrated their 10th and 3rd anniversaries respectively. Both funds have been pioneers in the frontier markets space as we look for investment ideas and longer-term themes which are outside the “normal” or “mainstream” and back it up with long term performance. We look forward and strive to continue with this contrarian streak in the coming years for the benefit of our investors.


AFC Uzbekistan Fund – Three-year anniversary

AFC Uzbekistan Fund – Three year anniversary



AFC Iraq Fund and AFC Vietnam Fund posted a positive month in a volatile environment

Despite the conflict in Ukraine and the noise about how many times the Fed will raise interest rates this year, the AFC Iraq Fund and AFC Vietnam Fund delivered a powerful performance this month, with gains of 5.5% and 6.0%, respectively.

The AFC Iraq Fund is our best performing fund so far this year with a gain of +16.1%, which is far ahead of all global benchmarks, and this once again signifies the diversification benefits of Asian frontier markets. Meanwhile, the AFC Vietnam Fund continues to reach an all-time high NAV, with its annualised performance since inception now at +17.3%.



AFC Iraq Fund Performance

(Source: Bloomberg)


After having received awards for performance from BarclayHedge for six consecutive months, the winning streak continued with additional awards for the AFC Vietnam Fund. The fund was ranked in the TOP 10 of funds in the sectors “Emerging Markets – Asia” and “Emerging Markets Equity – Asia”. These awards once again show the validity of the investment thesis of the AFC Vietnam Fund and underline that it is well suited as a diversification tool for many equity investors.


BarclayHedge Awards

BarclayHedge Awards





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AFC Vietnam Fund - Manager Comment


AFC Vietnam Fund Performance



The AFC Vietnam Fund returned +6.0% in March with a NAV of USD 3,743.37, bringing the return since inception to +274.3%. This represents an annualized return of +17.3% p.a. since inception. The Ho Chi Minh City VN Index gained 0.1% in March 2022 in USD terms. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 13.79%, a Sharpe ratio of 1.20, and a low correlation of the fund versus the MSCI World Index USD of 0.52, all based on monthly observations since inception.

Once again, Vietnam showed resilience against global volatility, as the conflict in Ukraine has not had meaningful effects on its economy. Our patience to focus on future winners in a rising interest rate environment has started paying off - please read below. Pre-announcements of first-quarter earnings show strong growth, which should lead to a tailwind for the stock market this year if forecasts are correct.

Market Developments

Turbulent political times lead to volatile markets – that is to be expected. But less expected was the strong recovery in most markets in March – but at the end of the day, it is better to have much less volatility in the first place – as was the case in Vietnam.



Vietnamese Exports

(Source: Bloomberg)


Unlike in Europe or the U.S., consumer sentiment is still rising in Vietnam with overall inflation concerns mostly limited to higher energy prices, while the Russian-Ukraine conflict will most likely have little impact on the economy otherwise. Russia contributed only 0.95% of total export revenues in 2021, equal to USD 3.2 bln and 0.69% of total import value, equivalent to USD 2.3 bln. Ukraine plays an even smaller role in the Vietnamese trade balance, equivalent to just 0.1% of total trade in 2021. Consequently, both Russia and Ukraine contributed only 1% of the nation’s total trade in 2021.


Russia and Ukraine contributed only 1% of total Vietnamese export revenue in 2021

Russia and Ukraine contribution to the Vietnamese export revenue in 2021

(Source: GSO, AFC Research)


The effects of the financial sanctions of the West, however, have impacted Vietnam, leading to export stops of many Russian goods desperately needed in agriculture and industrial production. The long-term inflationary impact on the world is currently a guessing game which will be the result of the outcome of this conflict, which is totally unknown. Gasoline prices in Vietnam, for example, were adjusted 10 times in 2022 to the historical record level of VND 29,820 per litre. Given that Vietnam is one of the fastest-growing countries in the world, its energy consumption is also growing strongly. Vietnam explores for its own oil and gas, but given its ever-rising energy appetite, it became a net oil importer in 2015.


Oil & petrol trade in Vietnam (USD bln)

Oil Imports and Exports

(Source: GSO, AFC Research)


However, fuel and transportation are only 3.6% and 9.7% of the CPI basket respectively, compared to 35% for food and beverages. According to the yearly target of the National Assembly, CPI is expected not to exceed 4% this year from currently around 2%.


Inflation in Asia low compared to the West

Vietnam Inflation

(Source: Bloomberg)


The Vietnamese government agreed to fully reopen its borders to foreign tourists again, which should lead to high economic growth this year of around 7% to 7.5%. The peak of COVID-19 infections was reached in mid-March 2022 and Vietnam now allows all tourists to enter the country with a single test before departure. The massive economic stimulus package should boost this positive sentiment even further and with high expected earnings growth for this and next year, we could see the perfect storm for a continuation of last year’s equity market bull run.

If we apply the same valuation of 17x earnings, like in the past two years, on 2024 expected earnings, we are coming up with an index target of 2,650 for the VN-Index, up 75% from current levels. As a comparison, an equivalent rise of 75% in the Dow Jones Industrial Average would be 60,000, or 6,750 for the Euro Stoxx 50. We certainly feel more comfortable with our call for Vietnam!


VN-Index is strongly correlated to earnings expectations

VN Index correlation

(Source: Bloomberg, VCSC)


Our optimism is based on a multitude of reasons, many of which we have repeatedly brought up over the years, and they are intact more than ever. Vietnam’s economy was historically held back for similar reasons to why China was held back for many years. Despite having a strong economic run in recent years, where workers participated and the middle class grew at a very fast pace, labour cost is still relatively low. Therefore, FDI (foreign direct investments) should continue to see strong inflows as foreign companies see the advantage of the attractive combination of better education and lower labour cost.



Total Cost Manufacturing Worker

(Source: Japan External Trade Organization (JETRO), World Bank, VCSC)


Like in many developing countries, Vietnam’s stock market index is heavily weighted towards financials. The beginning of the reversal in interest rates will benefit financial companies worldwide as it will do in Vietnam. We expect that the increase in total earnings from listed financial companies in the next 2 years could be around 60% of the total earnings increase, and we therefore monitor this sector closely to participate in this trend.

Insurance over banks

We are heavily overweight the insurance sector over banks for several reasons, despite, or maybe even because the market cap in the banking sector is much bigger than the mostly overlooked insurance sector, at least until now. Only just recently, insurance stocks started to outperform and helped our overall fund performance. The impressive performance of bank earnings – and stock prices – last year were partly the result of extraordinary reasons which we do not expect to continue over the next few years. 

Net profit of listed banks jumped over 50% YoY in 2021. The reason banks made such huge profits in 2021 was that the Vietnamese state bank allowed commercial banks to roll over all bad debts that were affected by COVID-19. Thanks to this policy, NPL (non-performing loans) provisions in the banking system tumbled and helped banks increase their profits substantially. Besides that, the low-interest rate environment also supported banks to expand their NIM (net interest margin). It is widely expected that the economy will grow strongly in 2022, and banks are expected to benefit alongside this. However, the sector also faces several obstacles, including:

  • Increasing deposit interest rates which may narrow NIMs of the banking system. Meanwhile, the government urges banks to reduce their lending rates to support economic growth.
  • The Vietnamese state bank may stop allowing banks to roll over bad debts affected by COVID-19 in 2022. This would mean that banks would have to increase their provision expenses which will have a negative impact on their P/L statements. 

In contrast to banks, the insurance sector faced many difficulties in 2020 and 2021 due to the low-interest-rate environment, which led to lower income from deposits, which are an important income driver in the insurance sector. But in 2022, interest rates started to move up, which has already had a positive impact on insurance revenues. Despite relatively low insurance penetration in Vietnam, the sector is growing on average 15-20% per annum, even in 2021, where revenues grew at 15.6% despite the negative COVID-19 impact. Overall, we do think that the insurance sector has ample room to grow and will show stable and attractive revenue growth over the years to come. We are therefore overweight this sector in our portfolio.

If we look at insurance premium to GDP, the Vietnamese insurance sector seems to be very attractive with only 2% of GDP in 2019 compared to above 5% of other countries in the region, such as China, Thailand, Singapore, or Malaysia. The low penetration rate of the Vietnamese insurance sector certainly looks attractive, with a high potential for growth in the future.


Premium in % of GDP by country in 2019

Insurance Premium as portion of GDP

(Source: Swiss Re, BVSC)


Besides the attractive organic earnings growth rate, the insurance sector is categorised as defensive. It should have a positive impact and reduce the volatility in our portfolio, which is quite important with the current geopolitical tensions, especially the conflict in Ukraine. The exclusion of some Russian banks from SWIFT and the sanctions on Russia have created a lot of volatility in the global banking sector, and Vietnam is not immune either, even though the effects on the sector are negligible. 

The insurance sector in Vietnam vastly underperformed the VN-index and banks over the last two years, mainly due to the COVID-19 pandemic and the low-interest-rate environment and hence lower growth. But with rising interest rates on the horizon, we believe the positive momentum in the insurance sector is picking up now.


Insurance Sector versus VN Index and Banking Sector

Insurance Sector

(Source: AFC Research, HSX)


At the end of March 2022, the fund’s largest positions were: Agriculture Bank Insurance JSC (8.4%) – an insurance company, PVI Holdings (5.8%) – also an insurance company, Everpia Vietnam JSC (5.3%) – a bedding manufacturer, Power Engineering Consulting JSC No. 2 (5.2%) – a consulting firm, and Tuong An Vegetable Oil JSC (5.1%) – an edible oil producer.

The portfolio was invested in 49 names and held 7.9% in cash. The sectors with the largest allocation of assets were consumer (42.8%) and financials (20.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 11.95x, the estimated weighted harmonic average P/B ratio was 1.85x, and the estimated weighted average portfolio dividend yield was 3.41%.

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AFC Iraq Fund Performance


The AFC Iraq Fund Class D shares returned +5.5% in March with a NAV of USD 804.24, underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which gained 6.9% during the month. The fund was up 16.1% year to date versus 16.2% for the index. Since inception, the fund lost 19.6% while the RSISUSD index is down 36.6%.

The index’s gain this month extends the prior month’s gain in which it reclaimed the upper-end of the uptrend channel that it established over the last two years (chart below). Technically, the index’s medium-term pattern looks like a reverse head and shoulder’s bottoming formation, with the recent gains indicating a breakout to the upside. Supporting this formation’s interpretation are the overall average monthly trading volumes over the two-year uptrend which are meaningfully higher than those that prevailed during the prior downtrend. While technical patterns are of limited value in nascent frontier markets like Iraq, nevertheless the market’s positive action for the second month in a row since the attack in Ukraine started is a positive development in sharp contrast to that of many markets worldwide – underscoring its attractive risk-reward profile and diversification benefits versus these markets.



AIF01 RSISXUSD versus Turnover v2

(Source: Iraq Stock Exchange, Rabee Securities, AFC Research, data as of 31st March 2022)


Among the index's constituents, the best performing constituent was the Bank of Baghdad (BBOB), up 19.8%, followed by Baghdad Soft Drinks (IBSD), up 6.9%, Commercial Bank of Iraq (BCOI), up 3.3%, and Asiacell (TASC), up 2.6%, while Gulf Commercial Bank (BGUC) was flat for the month. On the other hand, both Al-Mansour Pharmaceutical Industries (IMAP) and National Chemical and Plastics Industries (INCP) were down 0.4%, the National Bank of Iraq (BNOI) was down 2.5%, and Kharkh Tour Amusement City (SKTA) was down 5.1%.

The opportunity in Retail Banking

The January 2022 newsletter reviewed the banking sector’s role in the Iraq investment thesis that is hinged on “the opportunity for the group to grow earnings multiple folds as the country moves towards a full adoption of banking, and away from the dominance of cash, as both a store of value and a means of economic exchange – cash accounted for about 85% of all transactions in 2020. The key element in the economy’s adoption of banking is the growth in bank lending leading to an expansion in the money circulating in the economy (i.e., broad money), and consequently to an expansion in non-oil GDP. Over time, banks’ earnings grow substantially, which should lead to meaningful increases in their valuations.” Moreover, the update touched upon the opposing growth strategies pursued by the Bank of Baghdad (BBOB) and the National Bank of Iraq (BNOI) – two of the top banks in the country and among the top five holdings of the AFC Iraq Fund. 

Unlike most banks in the country, the National Bank of Iraq (BNOI)’s strategy was based on growing its retail operation as part of its overall offering of a full spectrum of banking services. The catalyst for this strategy was the government’s “Tawteen” project, launched in 2016, to use the banking system to pay the salaries and pensions of its public sector employees and pensioners, instead of making payments in cash as was done in the past. This involved, among other measures, digitizing the entire process of making these payments – a project undertaken by a home-grown company, International Smart Card (ISC), through the use of a biometric card dubbed “Qi Card.” 

The State-Owned Banks (SOBs) – benefiting from their monopoly position with the public sector, as holders of its deposits and extenders of its loans – provided basic banking services to most of the holders of these cards. However, SOBs, for the most part, offer poor banking services, apart from the basics of providing the means for cash withdrawal of these funds as well as the issuance of loans to the public sector and its employees. Thus, a massive opportunity exists for private sector banks, with the inclination and ability to compete with SOBs by offering enhanced banking services to the millions of public sector employees and pensioners. A sense of the size and potential of the Tawteen opportunity can be appreciated by considering that as of 2021, public sector employees numbered around 3.2 mln, whose annual salary payments totalled about IQD 42 trillion (USD 29 bln) – these numbers don’t include the 600,000 or so employees of State-Owned Enterprises (SOE’s) who participate in the Tawteen initiative. Moreover, these sums are likely to grow over the near term, as governments flush with the enhanced bounty of high oil prices are likely to pursue expansionary budgets as discussed here most recently in the outlook for 2022.

The National Bank of Iraq (BNOI) systematically pursued this opportunity through the development of Tawteen-dedicated teams and centres that vigorously courted the public sector and its employees, offering value-added services such as electronic banking, mobile banking, linkages with mobile money wallets provided by the two largest telecom operators, and high-quality customer services. The process developed over the years and accelerated in 2021 as it reached a critical mass of public awareness, so that by the end of 2021, BNOI counted over 100,000 Tawteen customers, with over 15% from the private sector, spanning over 200 public and private sector employers. This endeavour translated into significant growth in overall customer (retail, SMEs, and corporates) deposits and loan books (chart below). Moreover, by the end of 2021, retail (mostly Tawteen customers) deposits accounted for 35% of total deposits and 59% of total loans. Organic growth accounted for a large part of deposits/loan growth in 2021, but it was enhanced by contributions from the acquisition of the Iraqi branch network of Lebanon's Bank Audi.




(Source: Company reports, Rabee Securities, AFC Research, data as of end of 2021).


This impressive growth in deposit and loan generation did not come at the expense of profitability or loan quality. Company data as of the end of 2021 show that the aggregate cost of funds, or interest expense percentage, was 1.6%; while the aggregate return on funds lent, or interest income percentage, was 9.4% for a net spread of 7.8%. However, the actual spread on a normalized basis is probably significantly higher. This is because: (1) The interest paid/charged is made throughout the year as deposits and loans are generated; (2) The 173% growth year-over-year in deposits and loans means that cumulative interest paid/generated by year-end does not reflect the size of loans/deposits for the full year. Moreover, company data as of year-end 2021 show that aggregate non-performing loans (NPLs) were 4.1% of total loans – however, this is the gross NPL ratio which includes the interest income due from these NPLs, and so the net NPL ratio was 2.7%. Crucially, gross retail NPLs were at under a quarter of the gross aggregate rate – underscoring the attractiveness of the retail segment of the market, mostly shunned and under-served by most banks in the country.


BNOI’s tireless CEO, Ayman Abu Dhaim,


(Source: AFC research, during a meeting with BNOI’s management team on 30th March 2022)


However, this growth presents several challenges, among which the main one is the need to attract long-term deposits in an economy dominated by cash as both a store of value and a means of economic exchange – cash accounted for about 85% of all transactions in 2020. Consequently, most private sector (retail, SMEs, and Corporates) deposits are in the form of current accounts and demand deposits – the average was 74% of aggregate deposits at all private sector banks by the end of 2020. BNOI’s year-end 2021 current accounts and demand deposits accounted for 64% of the total, with retail current accounts and demand deposits accounting for 41% of total retail deposits. BNOI’s figures in comparison to the national average reflect positively on BNOI’s services. Yet BNOI’s future growth, as it peruses the Tawteen opportunity, will be capped by the amounts of long-term customer deposits – especially as the aggregate loan to deposit ratio (LTD) was 76% by the end of 2021. 

To meet its growth objectives, BNOI’s management has embarked on a number of initiatives over the last two years to attract such long-term, primary retail deposits. The latest initiatives which were unveiled at the end of the month are: (1) a campaign to attract fixed short-term retail deposits for one, two, and three years offering attractive rates of 9.9%, 10.5%, and 11.0% respectively; and (2) the planned issuance of IQD 75 bln (USD 53 mln) in three-year IQD corporate bonds, probably a first for any company in Iraq, with rates likely to be similar to those offered for fixed-term deposits. These rates compare favourably to the recent sovereign offering of IQD 1 trln (USD 690 mln) in two-year and four-year IQD Bina bonds at rates of 6% and 7% respectively. The Bina bonds were aimed at the retail sector but were for a large part subscribed to by the banks for their own books – implying that sovereign rates of 6-7% on two-four years bonds had a limited appeal for the retail segment. As such, the rates recently offered by BNOI should be attractive enough to generate such interest. Management, in recent discussions, revealed that the first few days of the campaign for attracting fixed-term deposits generated about IQD 20 bln (USD 14 mln) in deposits – which could grow meaningfully over the campaign’s duration.

This review is not a detailed company analysis but is meant to explain the AFC Iraq Fund’s investment thesis and portfolio weighting of BNOI; is not meant to be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold shares in BNOI. More details on the National Bank of Iraq, are available on the Iraq Stock Exchange (ISX)’s website, and research reports are available from Rabee Securities.


BNOI’s advertising of its interactive online banking

BNOI Advert

(Source: BNOI’s Facebook page)


In conclusion, the Rabee Securities RSISX USD Index’s 16.2% increase year-to-date comes on the back of a +21.4% return in 2021, but by the end of the month, the index was still 55% below its 2014 high – underscoring the potential upside for the equity market. We believe that the AFC Iraq Fund’s holdings will enable it to continue to outperform its benchmark, as it is well-positioned to capture and benefit from the revival of the broader macro-economic backdrop of the country on the back of the revival in crude oil prices. 

At the end of March 2022, the AFC Iraq Fund was invested in 14 names and had a cash level of −2.1%. 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 (99.3%), Norway (2.2%), and the UK (0.6%).

The sectors with the largest allocation of assets were financials (68.4%) and consumer staples (14.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.35x, the estimated weighted harmonic average P/B ratio was 1.02x, and the estimated weighted average portfolio dividend yield was 3.76%.

Disclosure: The AFC Iraq Fund built its position in the National Bank of Iraq (BNOI) throughout the years from its initial investment at the fund’s launch in mid-2015. The CIO of the AFC Iraq Fund, in 2020, joined the board of Capital Investments, a wholly-owned company by Capital Bank of Jordan, a majority owner of the National Bank of Iraq with a 61.85% as of the end of 2021.

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AFC Asia Frontier Fund - Manager Comment

AFC Asia Frontier Fund Performance


The AFC Asia Frontier Fund USD A-shares are estimated to have declined by 1.3% in March 2022. However, the March 2022 NAV was temporarily suspended since the directors of the fund came to the conclusion that the NAV will not represent “true and fair value” due to the fact that the fund’s second largest investment, the AFC Uzbekistan Fund, suspended its March 2022 NAV due to a corporate action by its largest holding. You can learn more about this in the manager comment of the AFC Uzbekistan Fund below this section.

The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−2.8%) but underperformed the MSCI Frontier Markets Net Total Return USD Index (−0.1%) and the MSCI World Net Total Return USD Index (+2.7%). The performance of the Fund since inception on 30th March 2012 now stands at an estimated +47.8% versus the benchmark, which is up by 12.1% during the same period. The fund’s annualized performance since inception is +4.0%. 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 0.54, all based on monthly observations since inception.

March ended a volatile quarter for both global and Asian frontier stock markets. The earlier part of the month was highly volatile, with the fund being down almost 5% at one point, but performance recovered in the last ten trading days, and if not for the steeper than expected Sri Lankan rupee (LKR) depreciation, the fund would have closed in the green this month. However, Mongolia, Vietnam, Iraq, and Jordan had strong positive contributions, which reduced the negative impact on performance from the LKR depreciation.

We initiated our first investments in Jordan this month. The fund purchased The Arab Potash Company (APOT) and Jordan Phosphate Mines (JOPH) as both companies are expected to benefit from the fallout of the Russia-Ukraine conflict, which we elaborate on below.

Potash is one of the critical elements for the production of potassium-based fertilisers, with Belarus and Russia together accounting for almost 40% of global potash production. Most large agricultural producers like Brazil, China, India, Indonesia, and Malaysia depend heavily on Belarusian and Russian potash supplies, and the conflict in Ukraine with the resulting sanctions on both Belarus and Russia will create severe supply issues that have already led to much higher global potash prices.

These events should have a very positive impact on APOT’s profitability in 2022 since it is one of the key potash suppliers globally, especially to Asian consumers who are very dependent on Belarusian and Russian potash supplies. Furthermore, APOT has a monopoly on potash mining in Jordan.



Belarus and Russia account

(Source: Arab Potash, Government of Canada)


Similarly, phosphate is one of the key elements for producing phosphorus-based fertilisers and here too, Russia has a dominant role in global supplies, with the Russian company PhosAgro being the third-largest producer of phosphate globally. In addition to this, China, which accounts for 30% of global phosphate exports, has banned these exports until June 2022. The resulting shortage in supplies has also pushed up global phosphate prices, which will be beneficial for JOPH’s net profits since it is the fourth-largest producer of phosphate globally.



Phospate Production

(Source: Bloomberg)


Both APOT and JOPH are blue-chip names in Jordan with a market cap of USD 3.6 bln and USD 3.3 bln respectively and are reasonably priced at a P/E of 11.9x and 10.5x, respectively. JOPH is also the largest weight of the Amman Stock Exchange Index, while APOT is the eighth largest weight of the index.


Global potash and phosphate prices have rallied after the Russia-Ukraine conflict – higher prices a positive for Arab Potash and Jordan Phosphate Mines

Global potash and phosphate prices

(Source: Bloomberg)


The fund’s Vietnam holdings continue to perform exceptionally well, with our logistics holding (Gemadept) and tech holding (FPT) rallying by +17.5% and +14.7% respectively this month. For March 2022 and year to date in 2022, the fund’s Vietnam holdings have gained +5% and +14.6% versus 
+0.1% and +1.2% for the VN-Index, respectively.

Vietnam’s economic growth continues to see a recovery with 1Q22 GDP growth coming in at 5.0% and with the second half of 2022 having a favourable base, overall growth rates including earnings should pick up momentum in the latter part of the year.


The fund’s key Vietnam holdings have significantly outperformed the benchmark VN-Index

Vietnam Performers

(Source: Bloomberg, % change in price between 31st December 2021 – 1st April 2022)


Vietnam GDP growth on its way to recovery

Vietnam GDP Growth

(Source: Bloomberg)


A lot of attention has been given to the negative impact of the Russian-Ukraine conflict on Central Asia, but anecdotal evidence suggests that there are also some positive offshoots of the current conflict, especially for Georgia and Kazakhstan, as there have been reports that certain trade routes linked to Russia are being redirected via these two countries while some companies in the technology and consulting industries are also relocating staff to Tbilisi and Almaty. We believe this could be a larger and longer-term trend as sanctions on Russia are not expected to be lifted any time soon even if there is some resolution to the conflict in the coming months.

There are indications that the Sri Lankan government is looking to initiate discussions with the International Monetary Fund (IMF) regarding a financial package. The Central Bank of Sri Lanka (CBSL) appears to have taken a step in this direction by allowing the Sri Lankan rupee (LKR) to depreciate by 46% this month. Furthermore, the CBSL raised benchmark interest rates by a steep 700 basis points on 8th April which also signals an intent to go into an IMF program in the coming months.

Though this currency depreciation led to a one-time hit on our performance, the floating of the exchange rate is a good move as it will bring back much-needed worker remittance flows, which have seen a significant decline in recent months due to an artificial exchange rate while the weaker currency will also make Sri Lankan exports more competitive. Overall, the weaker currency will allow Sri Lanka to rebuild both its foreign exchange reserves and macro-economic stability. The fund’s weight to Sri Lanka is less than 4% and most of our holdings benefit from a weaker currency which should result in much stronger earnings for these companies in 2022.

The State Bank of Pakistan (SBP) raised benchmark interest rates by 250 basis points in an emergency meeting held on 7th April 2022. This does not come as a surprise to us given the weakening macro-economic fundamentals of the economy on the back of higher commodity prices as well as the ongoing political uncertainty in the country, which has had a negative impact on the currency. However, the positive aspect of such an aggressive move by the SBP is that we are closer to the peak of interest rates last seen in June 2019. 

On the political front, it is all but certain that the current Prime Minister, Imran Khan, will lose in the upcoming no-confidence vote to be held on 9th April as the opposition parties appear to have the required numbers to form a new government. In all likelihood, the new Prime Minister of Pakistan will be Shehbaz Sharif, the younger brother of the exiled former Prime Minister Nawaz Sharif, and who currently leads the opposition coalition to Imran Khan’s party.


Interest rates in Pakistan appear to be peaking out

Interest rates in Pakistan

(Source: Bloomberg)


The best performing indexes in the AAFF universe in March were Iraq (+6.9%) and Jordan (+3.7%). The poorest performing markets were Sri Lanka (-23.1%) and Laos (-3.5%). The top-performing portfolio stocks this month were a Mongolian coking coal miner (+50.8%), a Jordanian phosphate miner (+23.0%), a Vietnamese port operator (+17.5%), a Vietnamese technology company (+14.7%) and a Mongolian gold miner (+14.0%).

In March, the fund bought one potash miner and one phosphate miner in Jordan, also purchased a nickel miner in Vietnam and sold a mall operator in Mongolia. The fund also added to existing positions in Cambodia, Kazakhstan and Mongolia and also reduced exposure to some positions in Mongolia.

At the end of March 2022, the portfolio was invested in 78 companies and 2 funds. The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 9.11x, the estimated weighted harmonic average P/B ratio was 1.21x, and the estimated weighted average portfolio dividend yield was 3.27%.

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AFC Uzbekistan Fund - Manager Comment

AFC Uzbekistan Fund Performance


March 2022 marks the third anniversary of the AFC Uzbekistan Fund. Uzbekistan has radically changed for the better since we first visited the country in May 2018 and since the fund’s launch on 29th March 2019. The country’s future as a manufacturing hub (bolstered by strong foreign direct investments and domestic demand from the emerging middle class), coupled with economic policies that mitigate its exposure to global economic shocks, specifically in the realm of natural resources, positions Uzbekistan very favourably for continued outperformance over the coming years.

However, it is unfortunate to note that on the third anniversary of the fund, during March 2022, due to an extraordinary circumstance stemming from a corporate action in the largest holding of the AFC Uzbekistan Fund, Uzmetkombinat (TSE: UZMK), after much consideration, the directors of the AFC Umbrella Fund and AFC Umbrella Fund (non-US) decided to suspend issuing a NAV for the AFC Uzbekistan Fund and AFC Uzbekistan Fund (non-US) for March 2022, as the current market price of UZMK does not reflect reality.

AFC Uzbekistan Fund valuations as of 28th February 2022:

Estimated weighted harmonic average trailing P/E (only companies with profit): 5.70x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 5.40%


Uzmetkombinat update

As stated in the February 2022 fund update, the fund’s largest holding, steel company Uzmetkombinat (TSE: UZMK), was to hold its annual general meeting (AGM) on 15th March 2022. As state-owned enterprises (SOE’s) typically distribute 75% of their net income, we predicted there would be either a cash dividend or, more likely, an issue of new shares as the company seeks to capitalize profits as it is undergoing a significant capacity expansion and would prefer the cash to remain within the company.

Excerpt from the AFC Uzbekistan Fund February 2022 Update:

As the annual general meeting (AGM) season quickly approaches, early news is coming out that some of our portfolio companies indeed had a superb 2021. One outshining example of the value that exists among the fund’s holdings is Uzbekistan’s largest steel producer, Uzmetkombinat (TSE: UZMK). Preliminary results show that UZMK saw net income grow by 594% in 2021 to UZS 1.53 trln, up from UZS 220.2 bln in 2020.

UZMK will hold its AGM on 15th March 2022, where the main item on the agenda will be the distribution of net income. Typically, state-owned companies distribute 75% of net income, but assuming UZMK distributes only 50% this would equate to UZS 19,766 per share and thus a dividend yield of 21.9% as of 31st January 2022. This attractive potential yield caused UZMK’s share price to rally 38.8% during February and as of month end a 50% distribution of profits would translate to a yield of 15.8%, still highly attractive in an economy where inflation is under 10%!

Also on the agenda is the potential for the distribution of accumulated retained earnings in order to increase charter capital. Assuming no dividend distributions are paid and retained earnings go toward increasing charter capital, this would equate to the issuance of nine new shares for every share held. While we would prefer dividends, the company would certainly appreciate the cash to stay in the company as they have large funding requirements coming up as UZMK undergoes a capital expenditure program which will see a doubling of production to 2.5 mln tons of steel per year by 2026.

In all countries that we are aware of (except for Laos), at an AGM, if a company announces a dividend will be paid, it is normal for the ex-dividend date to be at a point after the AGM, say for example, 5 to 30 days after the AGM. However, in Uzbekistan it works differently: when an annual general meeting (AGM) of a public company is held, there is an “ex-date” which is 5 business days before the meeting where the register of shareholders closes. Legislation actually states three business days, but the Tashkent Stock Exchange operates on a T+2 settlement, meaning it takes two days for trades to settle, hence five days.

Later this year, when Uzbekistan’s new securities legislation is passed, Uzbekistan’s capital markets should operate in a “normalised” manner where the ex-date for dividends and corporate actions is after the AGM. However, the existing legislation is antiquated, and the following is what happened to UZMK during March 2022 that has artificially suppressed the share price, making a March 2022 NAV not representative of the true value of the fund’s holdings.

UZMK’s ex-date for the AGM was on Monday 7th March 2022, and on that day, one or several shareholders thought they would be clever and sell their shares to unsuspecting buyers who thought they were getting a bargain. The sellers were gambling, effectively speculating that if they sold their shares after the ex-date and bonus shares were announced, then they would receive them, while the buyers of their shares would be paying multiples the current price after accounting for dilution. It is typical, but not part of the legislation that the ex-dividend date in Uzbekistan is often the same as the ex-date for the AGM (again, in most parts of the world at an AGM a dividend may be announced, but the ex-date is announced to be a future date). These sellers therefore aggressively sold shares, and from 4th March 2022 to 11th March 2022, the share price of UZMK fell from its March high of UZS 129,000 to UZS 51,528. On Monday 14th March 2022, the Tashkent Stock Exchange halted the shares due to the significant share price volatility, with UZMK’s shares having dropped 60% in five trading days.

At the AGM on 15th March 2022, it was decided that no cash dividend would be paid, but rather an increase in capitalisation would occur, whereby 10 new shares (rather than the 9:1 we predicted in our February 2022 update) would be issued for every existing share. The caveat however was the ex-dividend date to be included in the registry for these shares was NOT 7th March 2022, but will be sometime in the near future (probably in April 2022) after the Ministry of Finance has approved the decision on the share issue.

This means the speculative sellers who drove the stock price lower, thinking they would profit handsomely, actually sold (in hindsight) shares at phenomenally cheap prices and will now have to buy shares back on the market if they wish to participate in the issue of bonus shares.

We expected that the shares of UZMK would be halted until the results of the AGM were published, but they were published on 28th March 2022 and as of 31st March 2022, trading is still halted. Therefore, we would expect the shares to begin trading in early April, and unless the ex-dividend date to receive these bonus shares is announced in short order, with the commencement of trading UZMK’s share price should trade limit up (the Tashkent Stock Exchange has a trading band of 20% per day) for several days as the share price reverts to more normal levels.

One great piece of news however, indicating that UZMK’s business remains healthy, is that the financial results for 2021 were announced and they were superb! Earnings per share surged year-on-year 568% to UZS 33,269, while book value per share surged 85% to UZS 70,129.

Uzbekistan is well-positioned in the age of protectionism

Leading up to the COVID-19 pandemic, the world had already passed “peak globalisation” and we saw a transitioning into a new area of rising regionalisation and protectionism. We have discussed this in several prior updates but believe it is worth revisiting due to global events that prove Uzbekistan is well-positioned to handle this new world of shortages and protectionist measures that will inevitably create significant challenges for countries that are reliant on a globalised world, specifically in food and energy.

The war in Ukraine is only the latest contributor to market dislocations, as are the current energy crisis and coming global food crisis. During the heights of the COVID-19 hysteria in 2020, countries banned exports of food (Vietnam banned rice exports, Kazakhstan banned flour exports, while Russia put export duties on sunflower oil) in order to ensure ample supply for the domestic market. This certainly not free-market thinking resulting from rising energy and food prices is beginning to impact consumers' pockets. We anticipate further restrictions on the once free flow of goods, as the war in Ukraine has, directly or indirectly, led Hungary to ban grain exports, Turkey meat exports, and Russia temporarily banning grain and sugar exports, while Ukraine has followed suit as well.

The countries best positioned in this new environment are those with a high degree of control over their supply chains and self-sufficiency, while those that are not risk suffering negative economic shocks. A recent example is Sri Lanka, which has nearly run out of foreign exchange reserves and has been forced to curtail fuel imports, leading to day-long queues at petrol stations and power cuts of up to 13 hours a day.


Long term prices for Wheat, Corn and Soybeans (1998-2022)

Prices for Wheat, Corn and Soybeans

(Source: Bloomberg)


In this age of rising protectionism and de-globalisation, Uzbekistan is very, very well positioned for not only continued economic and social stability, but also to benefit from this new environment. Having historically had aggressive protectionist policies under the country’s first President, Islam Karimov, who led the country to become the largest industrial and agricultural producer in the region, under President Mirziyoyev, many of these restrictions were relaxed, while the government still maintains semi-protectionist policies. However, the existing policies, we believe, make the country an ideal opportunity for investors looking for a stable country with an ample supply of cheap commodities.

In Uzbekistan, the fertiliser urea sells for USD 300 per ton compared with USD 930 per ton on the international market. While raw urea cannot be exported (with the aim of supplying cheap fertiliser to the domestic market as well as forcing the industry to add value to it before exporting), Uzbekistan’s farmers win, as well as the country as a whole, with value-added exports being much more valuable in dollar terms. Such policies have been one reason that announced foreign direct investments (FDI) reached USD 8.6 bln in 2021, a 30% increase over 2020.


International Urea – fertiliser – pricing

International Urea

(Source: Bloomberg)


To support this trend, it was announced in March that Uzbekistan plans to increase natural gas production to 66.1 bln cubic meters by 2030, up from 53.6 bln cubic meters in 2021, and that the increased production will be kept within the country to satisfy retail and industrial demand.

These types of semi-protectionist policies will continue to help insulate the Uzbek economy from external shocks, attract growing FDI, and help the Central Bank of Uzbekistan (CBU) achieve its inflation targets. The CBU had a 2021 inflation target of 10%, but exceeded it, with inflation reaching 9.98% in December 2021. 2022 will be interesting to watch with the CBU inflation target of 9% (February 2022 inflation reached 9.7%).

One of the CBU’s tools to contain inflation is of course the central bank policy rate. In an attempt to stabilise the Uzbek som after the selloff in the Russian Ruble during March 2022, on 17th March 2022 the CBU raised the central bank policy rate from 14% to 17%. This policy action helped make the Uzbek som the best performing currency in the region year-to-date, down only 2.2%.

While the sharp policy rate increase and modest depreciation are not atypical in frontier markets, to put this in perspective, Uzbekistan has real interest rates of 7.2%. This compares very favourably to the USA and EU which both have negative real rates of 7.4% and 5.65% respectively, as a result of out-of-control inflation.


Central Asian currencies and Russian Ruble versus USD year-to-date

Central Asian currencies and Russian Ruble versus USD year-to-date

(Source: Bloomberg)


Boycott of Uzbek cotton ends

Uzbekistan is the world’s 7th largest cotton producer, and its textile industry has long suffered due to a boycott by the International Coalition Cotton Campaign (ICCC) since 2009 due to large-scale forced and child labour. This prevented many western fashion brands from sourcing textiles from Uzbekistan, as 331 brands including C&A, Gap, H&M, Levi Strauss, Tesco, and Walmart refused Uzbek cotton.

Once President Mirziyoyev came to power, he became focused on eradicating forced and child labour in the industry. He finally succeeded and on 1st March 2022, the International Labor Organization recognised that Uzbekistan had managed to completely eliminate forced and child labour from the cotton industry in 2021. This was followed on 10th March 2022 by the ICCC calling for an end to the boycott, thus paving the way for Uzbekistan’s textile industry to kick into high gear. Having already contributed USD 3 bln (18%) to Uzbekistan’s exports in 2021, we believe we are on the cusp of significant growth in the sector, which will not only boost exports but also increase employment and therefore consumption as the middle class grows, sustaining indirect demand for the goods and services the fund’s portfolio companies sell.

At the end of February 2022, the fund was invested in 28 names and held 8.6% in cash. The portfolio was allocated to Uzbekistan (91.35%) and Kyrgyzstan (0.03%). The sectors with the largest allocation of assets were materials (50.9%) and financials (24.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.70x, the estimated weighted harmonic average P/B ratio was 1.30x, and the estimated weighted average portfolio dividend yield was 5.40%.

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