Dear Investors and Newsletter Readers,
2023 was an excellent year for the AFC Asia Frontier Fund and for Asian frontier markets. The AFC Asia Frontier Fund and our investment universe significantly outperformed global benchmark indexes and other peer Asian stock markets. With a year-to-date performance of +22.7% as of 30th November 2023, the AFC Asia Frontier Fund is one of the best performing frontier funds globally this year.
In last year’s Review and Outlook, we wrote that we were cautiously optimistic as we believed that the fund and Asian frontier markets were well positioned for a re-rating in 2023. This was because, in our view, the key headwinds of higher inflation and higher interest rates had peaked out and we thought some of these headwinds had a chance to become tailwinds for Asian frontier markets in 2023.
During 2023 (especially towards the second half of the year), we saw both inflation and interest rates come down remarkably in many of our markets. Georgia, Kazakhstan, Sri Lanka, and Vietnam are some of the key markets in our universe that cut benchmark interest rates in 2023. This played an important role for the excellent fund and stock market performances. In addition to this more favourable interest rate environment, significantly discounted valuations and greater macroeconomic stability also drove overall returns, especially in Pakistan and Sri Lanka.
Looking forward to 2024, we expect the positive performance for the AFC Asia Frontier Fund and the Asian frontier stock markets to continue as we believe 2023 was only the start of a broad-based rally in Asian frontier equity markets. The key factors which will drive returns in 2024 will be:
- Continued monetary easing in key countries like Georgia, Kazakhstan, Sri Lanka, and especially Pakistan.
- With a more benign macroeconomic environment and lower interest rates, we expect a strong earnings recovery in Bangladesh, Pakistan, Sri Lanka, and Vietnam, while Georgia, Kazakhstan, and Uzbekistan should continue with their stable earnings growth.
- Discounted fund valuations which still have lot of room to re-rate despite a rally in 2023. The AFC Asia Frontier Fund still trades at a very low P/E ratio of only 6.5x.
More importantly, the key global headwind which has been an overhang on global stock markets since the start of 2022, i.e. a hawkish U.S. Fed, has now abated as the Fed announced a pivot at its recent monetary policy meeting with interest rate cuts expected in the U.S. in 2024.
This change in interest rate outlook by the U.S. Fed and possibly other global central banks will be one of the key drivers of buoyant sentiment across global stock markets and will also support the positive momentum in Asian frontier markets.
2022 was the bottom for Asian frontier markets, 2023 was the year of the rebound, and in our view, 2024 will be “the” year of Asian frontier markets as all the important positive triggers fall into place – Asian frontier markets are well positioned at the right time and right place.