The AFC Uzbekistan Fund Class F shares returned −1.4% in October 2022 with a NAV of USD 1,705.93, bringing the return since inception (29th March 2019) to +70.6%, while the year-to-date return stands at −15.1% as of the end of October 2022. On an annualized basis, the fund has returned +16.0% p.a. with a Sharpe ratio of 1.01.
October saw new market entrants circling the Tashkent Stock Exchange who began to deploy capital, bidding up some of the fund’s holdings. Over the coming months, this should translate into a new round of liquidity in the market, supporting existing stock prices and potentially continuing the re-rating the market experienced in 2021. During the month, general market activity was quiet which allowed the AFC Uzbekistan Fund to continue acquiring shares at attractive prices.
AFC Uzbekistan Fund valuations as of 31st October 2022:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Uzbekistan remains in a phase of strong and accelerating growth
For the nine months of 2022, GDP growth in Uzbekistan reached 5.8%. This was supported by growth in exports of 36%. Furthermore, there is increasing tourism and relocation of Russians, Ukrainians, and Belarussians to Uzbekistan for a variety of reasons including relocation of companies, mainly in the services sector, but also industrial companies seeking either relocation or expansion into Central Asia, where Uzbekistan is expected to be the companies’ operational and manufacturing headquarters.
We have said since 2018 that Uzbekistan reminds us of a double-landlocked Vietnam of sorts from a manufacturing angle. It appears that with COVID-19 well behind us, this trend can now accelerate. It is of course also helped by the war in Ukraine. On the back of this high growth, the IMF increased its 2022 GDP estimate from 3.4% to 5.2% and to 4.7% for 2023, while forecasting inflation of 11.2% for 2022 and 10.8% in 2023.
During the month, the Central Bank of Uzbekistan approved its conceptual monetary policy framework for the period 2023 to 2025. Estimates for GDP growth are 4.5% to 5% in 2023, 5% to 6% in 2024 and 6% to 6.5% in 2025. Meanwhile, the long-term inflation target of 5% which the government hoped to achieve next year has been pushed to the second half of 2024. Furthermore, the budget deficit is expected to decrease from 3% in 2023 to 2% in 2024 and 2025.
While the government’s projections on the above are encouraging, we are skeptical of the inflation figure as we believe that due to significant underinvestment across the commodities complex and the accelerated de-globalisation that that we are seeing, an inflation target of 5% will at the very least be a challenge (current inflation is 12.2%), but it will still be better than the runaway inflation being experienced across the developing world and in countries that don’t have control over their necessary supply of food and energy. Thus, Uzbekistan remains in a very attractive position economically on a relative basis going forward.
Tashkent Stock Exchange about to continue its re-rating?
Trading on the Tashkent Stock Exchange over the past year has been relatively subdued compared to 2021 when the AFC Uzbekistan Fund was up 46.2%. This could be due to investors having taken profits after the big 2021 run-up in equity prices or due to the war in Ukraine (which was a catalyst for several local retail investors we know to sell their entire portfolios). Nonetheless, current equity prices remain highly attractive, especially those levered to economic growth, specifically companies in the materials, industrial, consumer goods, and financial services sectors.
Over the past month, we have been approached by several local and foreign investors (institutional and retail) looking to buy blocks of equity from us. This is from new money entering the market which is an encouraging sign and validation of our original thesis that being in the market first and hoovering up shares of good companies at rock bottom prices would pay dividends as new participants enter the market. With most companies having small free-floats, this plays well into the fund’s hands and during October the fund exited a metal fabrication company at a 45% premium to the market price. The company was a mid-sized position for the fund and one that we definitely liked, but the price offered was attractive enough for us to exit and re-deploy the proceeds into cheaper companies. We are optimistic that other such deals will happen in the future as the capital markets ecosystem continues to grow.
At the end of October 2022, the fund was invested in 26 names and held 6.8% in cash. The portfolio was allocated to Uzbekistan (93.13%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (46.6%) and financials (29.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.05x, the estimated weighted harmonic average P/B ratio was 0.91x, and the estimated weighted average portfolio dividend yield was 3.24%.