“Great things are done by a series of small things brought together.”

– Vincent van Gogh – Dutch post-impressionist painter

AFC Funds Performance Summary

AFC Iraq Fund’s Stellar Performance Continues

Our AFC Iraq Fund’s winning streak in 2023 continues with a big gain of +16.8% in August, which takes the fund’s year-to-date return to an outstanding +74.7%. The performance of our AFC Iraq Fund has now not only beaten major global benchmarks in 2023 but has also outperformed over a time frame of 3- and 5-year performance metrics, as the chart below shows.

This performance only goes to show the significant diversification benefits that Asian frontier markets offer to global investors at a time when other larger emerging markets in Asia face volatility and uncertainty.

The AFC Iraq Fund has Outperformed Global Benchmarks not only in 2023 but also over the Last 3 and 5 Years

Continued Monetary Easing Benefits the AFC Asia Frontier Fund

Another Asian frontier central bank entered an interest rate easing policy with the National Bank of Kazakhstan reducing its benchmark interest rate by 25 basis points. This does not surprise us since we have communicated since the beginning of the year that 2023 is when central banks in our universe will adopt a more dovish stance as inflation peaks out and macroeconomic indicators stabilise. 

So far in 2023, we have now seen interest rate cuts from central banks in Georgia, Kazakhstan, Sri Lanka, and Vietnam, and we expect that in 2024 central banks in the Asian frontier universe more broadly will have less restrictive monetary policies than those we have seen in the last twelve to eighteen months.

Less restrictive interest rates and an earnings recovery going into 2024 should continue to provide tailwinds to fund performance, and we believe that after a robust +15.2% year-to-date return for the AFC Asia Frontier Fund there is a lot more room to run, given the strong potential for the fund’s P/E multiple to re-rate from its all-time low of 6.3x.

Kazakhstan was the Latest to Reduce Interest Rates in the Asian Frontier Universe 
(Cut in Benchmark Interest Rates in 2023 in Basis Points)

The AFC Asia Frontier Fund Trades at an All-time Low P/E ratio and is Positioned for a Strong Re-Rating as Interest Rates Ease and Earnings Recover

AFC Participates in the Asia Investment & Banking Conference (AIBC)

For the sixth year running, AFC participated in the AIBC which is organised annually by the students at the London School of Economics. After being held virtually since 2020, this was the first time the conference was back in person at the Hong Kong Convention and Exhibition Centre. Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund participated in the Asset Management panel with other esteemed panellists from Fidelity, HSBC, PIMCO and Point 72. AFC is proud to continue supporting student-led initiatives like the AIBC.

Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund at the Asia Investment & Banking Conference held in Hong Kong on 31^st August 2023

The next cut-off date for subscriptions for our funds is 25^th September 2023. If you would like to know more about the subscription process, please get in touch with us at This email address is being protected from spambots. You need JavaScript enabled to view it. 

Please find below the managers’ comments on each of our four funds for August 2023.

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 Travel

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned +16.8% in August 2023 with a NAV of USD 1,188.00, outperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which gained 16.3% during the month. For the year, the AFC Iraq Fund is up 74.7%, outperforming the index’s increase of 65.5%. Since inception, the fund has gained 18.8% while the RSISUSD index is down 13.1%, an outperformance of 31.9%.

As written here over the last few months, and most recently in “Market Rallies as it Begins to Discount the Budget’s Passage”, the 2023-25 budget (following its passing in June) will lead to sizeable liquidity injections into the economy. In combination with the positive global macro-economic developments, this will drive economic growth that should eventually feed into meaningful growth in corporate profits, which in turn would sustain the market’s current rally. The banking sector, in particular the top-quality banks, are likely to be key beneficiaries of this emerging economic growth that would come with an increased adoption of banking, and a move away from the dominance of cash as both a store of value and a means of economic exchange. AFC Iraq Fund’s investment thesis for the banking sector, as discussed in “Banks & the Iraq Investment Thesis” in February 2022, argues that the increased adoption of banking would come with growth in bank lending resulting in an expansion in the money circulating in the economy and consequently to an increase in non-oil GDP. Over time, banks’ earnings should grow substantially, leading to meaningful increases in their valuations, and ultimately feeding into much higher market multiples.

This thesis is getting a substantial boost from a potent combination of recent fundamental and technical developments that promises to accelerate the adoption of banking and bring about a transformation of the sector and its role in the economy. In time, such a transformation should lead to sustainable strong earnings growth, particularly for the top-quality banks, which would provide the fuel for the stock market’s next phase. The recent fundamental developments have come about as a consequence of the currency’s upheavals, following the Central Bank of Iraq’s (CBI) new procedural requirements for its provisioning of U.S. dollars (USD) for importers in mid-November 2022. In the following months, the CBI introduced a raft of measures to further regulate cross-border transfers, accelerate the adoption of banking, and strengthen the banking system – all of which have led to meaningful increases in new banking customers and growth in deposits and loan books that have disproportionally benefited the top-quality banks (*).  

While more time is needed for these developments to shape these banks’ future earnings profiles as they adapt their strategies and infrastructure, nevertheless, a glimpse of an emerging strong earnings profile can be had from the just-released second quarter earnings for 2023. The tables below feature four of the top-quality banks that are among the AFC Iraq Fund’s top holdings, of which three are among the top constituents of the RSISX USD Index (**). The tables compare selected balance sheet and income statement metrics for the second quarter of 2023 versus the first quarter of 2023 to highlight the near-term changes as the CBI’s measures came into effect; and versus the second quarter of 2022 to highlight the scale of these changes.

Selected Balance Sheet and Income Statement Metrics

Cementing this emerging leading market position for the top-quality banks was the latest of the CBI’s measures in early August 2023, mandating all banks to increase their capital to no less than Iraqi dinar (IQD) 400 bn (USD 308 mn) by the end of 2024 – representing an increase of up to 60% as most banks’ capital base is IQD 250 bn. Additionally, foreign banks’ branches are mandated to increase their working capital by no less than 60% of their operating capital by the end of 2023. Significantly, should any of the banks fail to comply with these mandates, then the CBI would initiate a merger, an acquisition, or a liquidation of such banks. 

The technical development boosting the banking sector would come about as banks increase their capital by up to 60% – in three stages as mandated by the CBI by the end of 2024 – through either a series of rights issues, stock dividends or a combination of the two. The peculiarities of the securities’ regulation, and of the stock market action before and following a rights issue or stock dividend issuance, could have major effects on the banking stocks’ future prices. The first peculiarity is a stock’s par value is always IQD 1.0, and as such rights issues are priced at par value irrespective of the stock’s market price. The second peculiarity is that stock prices don’t always adjust fully for the effects of a rights issue or an issuance of a stock dividend – in other words, stock prices post-rights issues or ex-dividend issuance don’t decline proportionally to compensate for the rights issue or the stock-dividend. These peculiarities, when the market momentum is strong, can lead to a buying frenzy in a stock that is expected to have a capital increase, ahead of the company’s annual general meeting (AGM) that would drive the stock’s price substantially above IQD 1.0 to provide holders the opportunity to own more of the stock at discounts to the market price. A sector-wide capital increase, under such a scenario, can lead to a substantial rally in the sector that could move the market. 

The three-year period following the last time the CBI mandated sharp bank capital increases in late October 2010 illustrates the effects of the abovementioned peculiarities on the stock market. Then, the CBI mandated banks to increase their capital to IQD 100 bn by mid-2011, to IQD 150 bn by mid-2012, and then to IQD 250 bn by mid-2013. Subsequently, between October 2010 and the peak in January 2014, the Rabee Securities RSISX USD Index increased by 102.7% in three phases – the first an increase of 80.2% between October 2010 and September 2011, followed by a correction of 24.0% by the end of May 2012, and finally by a further rally of 48.0% by the end of January 2014. The rally’s peak was soon followed by the fall of Mosul to ISIS in June 2014 and the multi-year crises that led to a brutal bear-market that saw the market decline by 68.0% by the end of 2020 (chart below).

RSISX USD Index

It is a major market fallacy and folly in the extreme to expect that history would repeat in this case with the RSISX USD Index’s future returns mirroring those of October 2010-January 2014. Moreover, Iraq’s recent history of conflict, and extreme leverage to volatile oil prices, cautions against such excessive optimism. However, it is important to highlight that the earnings’ profiles, the quality of earnings, and the opportunity of the top-quality banks are all substantially better that those that prevailed in the prior cycle. An improvement brought about by the increased adoption of banking since then, and the top-quality banks’ strategies to address the structural weaknesses that were exposed in the 2014-17 crisis (see “Banks & the Iraq Investment Thesis” and ** below). Finally, the RSISX USD Index - even after its 65.5% increase year-to-date - is still 38.1% below its January 2014 peak (above chart). As such, we believe that the upside opportunity for the AFC Iraq Fund would come about as the RSISX USD Index regains that peak, and to rally further reflecting the expected increase in banks’ earnings driven mostly by the fundamental developments discussed earlier, while also potentially benefiting from some of the technical developments as banks increase their capital base.

At the end of August 2023, the AFC Iraq Fund was invested in 14 names and had a cash level of 10.7%. 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 (87.9%), Norway (1.1%), and the UK (0.3%).

The sectors with the largest allocation of assets were financials (70.0%) and consumer staples (7.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 9.47x, the estimated weighted harmonic average P/B ratio was 1.33x, and the estimated weighted average portfolio dividend yield was 3.34%. The fund’s portfolio carbon footprint is 0.16 tons per USD 1 mn invested.

 AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares returned +3.2% in August 2023 with a NAV of USD 1,408.06. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−1.0%), the MSCI Frontier Markets Net Total Return USD Index (−0.9%) and the MSCI World Net Total Return USD Index (−2.4%). The performance since inception on 30^th March 2012 now stands at +40.8% versus the benchmark, which is down by 19.6% during the same period. 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 0.51, all based on monthly observations since inception.

It was another solid month of performance by the AFC Asia Frontier Fund, and more importantly, it was a month of significant outperformance against global benchmarks. The performance of the AFC Asia Frontier Fund in 2023 continues to signify the diversification benefits the fund offers to global investors, especially at a time when other larger emerging markets like China are facing a volatile period. Performance this month was led by Iraq, Kazakhstan, Georgia, Vietnam, and Bangladesh, while Mongolia and Pakistan were negative contributors. 

Asian frontier markets have continued to outperform in 2023, and we expect this momentum to continue in light of lower inflation and more dovish monetary policies by Asian frontier central banks. One more Asian frontier central bank began its interest rate easing cycle with the National Bank of Kazakhstan cutting its benchmark interest rates by 25 basis points as inflation in the country eases. This interest rate reduction also signifies the confidence the National Bank of Kazakhstan has in the overall macro-outlook, considering the recent currency weakness in the Kazakh tenge due to a fall in the value of the Russian ruble. 

Since Russia is a significant trading partner for many Central Asian countries, historically, any major volatility in the Russian ruble has impacted Central Asian currencies. However, the Kazakh tenge remained stable against the USD in 2023 despite its recent weaker performance, signifying the strong macro fundamentals of the Kazakh economy.

The 25 Basis Points Cut in Interest Rates by the National Bank of Kazakhstan Adds to the List of Asian Frontier Central Banks that are Reducing Interest Rates
(Georgia, Sri Lanka, and Vietnam have also Reduced Interest Rates in 2023)

The Kazakh Tenge Remained Stable this Year Despite a much Weaker Russian Ruble

The fund’s holding in Georgia, TBC Bank Group listed in London (TBCG), declared excellent results for 2Q23 with net profits growing by 25%. Momentum in both the banks’ Georgian and Uzbek businesses helped profitability. The bank’s Uzbek business, which is centred around digital offerings, continued to gain traction during the quarter in terms of user base and profitability. 

We believe TBCG is one of the standout stories in our universe due to its strong position in Georgia and first-mover advantage in the Uzbek digital banking space which should provide support to a robust 28% return on equity. There are not many banks in our universe that trade at a P/E of less than 5x and offer a combination of strong growth and fundamentals. 

Furthermore, the management also guided to achieving net profits of nearly USD 600 mn by 2025 from its 2022 net profits of USD 343 mn. In the first half of 2023, the bank has already achieved net earnings of USD 207 mn. TBCG has been one of the fund’s best performers over the last two years, with its stock price more than doubling since its initial purchase in September 2021.

TBC Bank Group Stock Price has More than Doubled since the Fund’s Initial Purchase and is now the Third-largest Stock Position of the Fund

In Sri Lanka, consumer confidence is witnessing a strong turnaround as inflation and interest rates ease significantly while tourism and remittances earnings rebound. A combination of these factors leads to an improvement in consumer sentiment, which should be a positive for the earnings outlook of Sri Lankan companies going into 2024.

Consumer Confidence in Sri Lanka has shown a Marked Improvement which Bodes Well for Future Earnings Growth

The fund’s Vietnamese holdings maintained their outperformance despite the VN-Index correcting by 1.6% in USD terms, and this reflects the high conviction we have in our top picks in Vietnam, whose stock prices are driven by fundamentals rather than short-term investor frenzy or speculation, which we have seen in some Vietnamese property and conglomerate names in the past month or so.

The AFC Asia Frontier Fund’s Top Picks in Vietnam have Significantly Outperformed the VN-Index Year to Date in 2023

The best-performing indexes in the AAFF universe in August were Iraq (+16.3%) and Kazakhstan (+4.3%). The poorest-performing markets were Mongolia (−6.6%) and Pakistan (−6.2%). The top-performing portfolio stocks this month were a Mongolian coking coal mining company (+17.8%), a Mongolian consumer company (+15.0%), a Georgian bank (+14.3%), a Kazakh uranium producer (+14.2%) and a Vietnamese nickel miner (+13.6%).

In August, the fund reduced existing positions in Mongolia and Vietnam.

At the end of August 2023, the portfolio was invested in 74 companies, 2 funds, and held 2.2% in cash. The two biggest stock positions were a fintech company in Kazakhstan (5.2%) and a bank in Kazakhstan (4.4%). The countries with the largest asset allocation were Iraq (22.2%), Mongolia (13.0%), and Vietnam (12.3%). The sectors with the largest allocation of assets were consumer goods (18.5%) and financials (15.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.29x, the estimated weighted harmonic average P/B ratio was 1.00x, and the estimated weighted average portfolio dividend yield was 3.59%. The fund’s portfolio carbon footprint is 1.30 tons per USD 1 mn invested.

AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund returned −3.5% in August with a NAV of USD 3,292.96, bringing the year-to-date return to +14.1% and return since inception to +229.3%. The Ho Chi Minh City VN Index lost 1.6% in August 2023, gained 19.3% year to date, and is up by 110.9% since inception of the fund, in USD terms. Since inception, the fund strongly outperformed the index by 118.4%. The fund’s annualised return since inception stands at +13.1% p.a. The broad diversification of the fund’s portfolio resulted in an annualised volatility of 14.85%, a Sharpe ratio of 0.80, and a low correlation of the fund versus the MSCI World Index USD of 0.49, all based on monthly observations since inception.

Market Developments

August's market dynamics were notably influenced by two significant factors, namely Vingroup's (VIC) stock performance and speculative activity surrounding real estate stocks.

Vingroup, a significant index constituent with an index weight of about 5%, surged by over 50% in mid-August, propelling the VN-Index higher by more than 2.5%. This surge was fueled by VinFast, Vingroup's electric vehicle subsidiary, which ventured into the U.S. stock market via a SPAC listing on 14^th August. Despite VinFast's substantial historical losses, its valuation soared beyond USD 200 bn by 28^th August, a remarkable feat.

This surge triggered heightened trading activity for VIC, driven by the belief among local retail investors that Vingroup's 51% ownership of VinFast would amplify VIC's market capitalization. Nevertheless, VIC's valuation, currently at approximately 44 times its earnings, is notably high. VinFast's role as a trailblazer in the electric vehicle sector doesn't erase its recurring annual losses, reaching USD 2.1 bn in 2022 and accumulating to an overall loss of USD 5.4 bn.

Interestingly, VinFast's stock journey experienced twists. Its rapid ascent was marked by a significant correction in the final trading days of August, with the stock price plummeting from a peak of USD 93 on 28^th August to a closing price of USD 34.71 by end of August. Despite this correction, VinFast's market capitalization remains substantial at USD 80.6 billion, surpassing established automotive giants like Mercedes Benz, BMW, and Volkswagen in size.

Net Loss of VinFast (USD mn)

Vingroup Surged Strongly with the Nasdaq Listing of VinFast

VinFast Stock Performance on Nasdaq Since its Listing on 14^th August 2023

A considerable portion of the VN-Index's outperformance can also be attributed to speculative activity surrounding real estate stocks. In August, retail investors, often influenced by media and social networks, poured substantial capital into speculative real estate stocks. The prevailing sentiment was rooted in the belief that decreasing interest rates would bolster the real estate sector. This surge affected several real estate stocks, even those grappling with substantial losses and default situations. A prime example is Novaland (NVL), Vietnam's second-largest real estate company, which skyrocketed by 38% in the last two months despite reporting substantial losses of more than VND 1,000 bn in 1H 2023 and which auditors had substantial doubts about as a going concern. This phenomenon extended to Phat Dat Group's PDR, a company unable to fulfill its bond obligations and operating with plummeting revenue. In the last two months, PDR's stock price soared by 48% despite dismal financials, leading to an inflated trailing P/E valuation of 69x. Unfortunately, such speculative trends within the sector persist despite fundamental challenges, with 55 gainers among the 65 real estate stocks listed in the same period, despite a corresponding decline in sector earnings.

Real Estate Stocks Performance in the Last Two Months

Valuation of Some Real Estate Stocks (Trailing P/E)

The outlook for the real estate sector remains uncertain, and a full recovery appears to be a matter of time, likely spanning around 2-3 years, despite the sector's recent buoyant stock market performance. The persistent high level of bad debts originating from the real estate sector within the banking system further underscores the existing challenges, with no definitive signs of recovery thus far.

This scenario of speculative surges triggering market volatility echoes our experience in the past, notably in 2018. During that period, local individual investors heavily allocated funds into overvalued index-heavy stocks, propelling a substantial surge in the VN Index. However, this was followed by a sharp index decline in 2019, illustrating the potential pitfalls of speculative trends.

While we acknowledge the potential continuation of this trend, we opt to avoid it, given our historical observations. Instead, we concentrate on investments in recovery sectors, such as export companies. Over the past quarters, we have noted a downturn in the export sector due to inflationary pressures in the U.S. and EU, impacting industries like furniture, seafood, and garments. However, signs of recovery emerged in Q2 2023, with August marking a narrowing decline in export revenues, reaching USD 32.4 bn, increasing 7.7% against July, reflecting a yoy decline of 7.6%, compared to 13% in H1 2023.

Additionally, the prospect of an upgraded strategic partnership between the U.S. and Vietnam, as hinted by a Reuters article on 19^th August 2023, may significantly bolster Vietnamese economic growth in the coming decade. The existing comprehensive partnership between the two nations, signed a decade ago during President Obama’s visit, has proven instrumental in driving Vietnam’s exports to the U.S. from USD 19.6 billion in 2012 to USD 109.3 billion in 2022.

Export Value to U.S. (USD bn)

Moreover, we anticipate a positive impact on foreign direct investment (FDI) from U.S. allies like South Korea and Japan. These nations, pivotal U.S. partners in the Asia-Pacific region, have heavily invested in Vietnam since the comprehensive partnership was established in 2013. Notably, South Korean investment has surpassed USD 60 billion through several large projects.

FDI from South Korea to Vietnam in the Last 10 Years (Accumulated USD bn)

Given these considerations, we have chosen to focus on export-oriented companies in our portfolio, including MPC, PTB, LTG, TNG, and VGG. Despite enduring challenges amid weak U.S. and EU consumption and consequent profit declines, we see the potential for recovery in the second half of 2023 and 2024. Furthermore, if the U.S.-Vietnam partnership upgrade materializes, these companies’ prospects over the next decade appear promising. Presently, these export firms are undervalued, trading at an average P/E ratio of 10.0x due to their substantial profit dips in H1 2023. As their profitability recovers, the valuation is anticipated to reduce to an appealing 5.0 - 6.0 times earnings, representing a compelling investment opportunity.

Valuation of Exporters (PER, x)

Emerging Economies Lead the Battle Against Inflation

In a notable departure from the U.S. Federal Reserve's aggressive interest rate hikes since March 2022, several emerging economies, such as Vietnam and China, have embarked on rate-cutting cycles to stimulate their economic growth. This trend reflects a broader global shift in monetary policy, as developing nations proactively tackle inflation rather than awaiting signals from the Fed, European Central Bank, or Bank of England.

What sets this cycle apart is its unprecedented breadth. Over the last two decades, instances of policy easing in select emerging economies while the Fed maintained a tightening stance have often resulted in positive outcomes for equities in these developing nations. This stands in contrast to the previous norm, wherein Fed policy largely dictated market dynamics.

The Federal Reserve's latest hike in July pushed the benchmark overnight interest rate to a range of 5.25%-5.50%, with the possibility of another increase in September. Yet emerging economies have adopted a divergent strategy. Vietnam, for example, has proactively reduced interest rates in response to diminishing inflationary pressures. It is interesting to note that emerging and frontier markets are increasingly navigating their economic trajectory independently of the more established central banks. The evolving landscape in emerging economies underscores the increasingly dynamic and interconnected nature of global financial markets.

At the end of August 2023, the fund’s largest positions were: Lam Dong Minerals and Building Materials JSC (7.6%) – a building material supplier, Minh Phu Seafood Corp (7.6%) – a seafood company, Agriculture Bank Insurance JSC (7.2%) – an insurance company, Thien Long Group (7.1%) – a manufacturer of office supplies, and TNG Investment and Trading JSC (7.0%) – an apparel manufacturer.

The portfolio was invested in 55 names and held 3.7% in cash. The sectors with the largest allocation of assets were consumer (49.3%) and financials (27.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 10.52x, the estimated weighted harmonic average P/B ratio was 1.27x, and the estimated weighted average portfolio dividend yield was 4.68%. The fund’s portfolio carbon footprint is 4.48 tons per USD 1 mn invested.

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned −5.6% in August 2023 with a NAV of USD 1,728.23, bringing the return since inception (29^th March 2019) to +72.8%, while the return for the year stands at −0.5%. On an annualised basis, the fund has returned +13.2% p.a. with a Sharpe ratio of 0.81.

August saw additional great results from some of the fund’s portfolio companies, though what took eyes off the stock market was the surprise adjustment of the Russian ruble, which, along with weakness in the currencies of Uzbekistan’s other trading partners, led the Central Bank of Uzbekistan to devalue the Uzbek som by 3.5% to UZS 12,075.03 on 10^th August. This impacted fund performance and led to some profit-taking among bluechip names on the Tashkent Stock Exchange. 

AFC Uzbekistan Fund Valuations as of 31^st August 2023:

New Capital Markets “Sandbox” Legislation Announced 

Before getting into what led to August’s negative performance, on Monday, 4^th September 2023, Presidential Decree #291 was signed “on additional measures of development of the capital markets”. Having undergone drafting since the beginning of the year, the decree covers a wide range of upgrades to the capital markets infrastructure with plans for rollout from the second quarter of 2024. This decree parallels the broader capital markets legislation, which is currently in the Oliy Majlis (Parliament) and is still scheduled to be passed in time. However, this presidential decree and the accompanying roadmap for execution of the decree’s details certainly accelerate the much-needed capital markets reform we have been anxiously waiting for. 

Below is a snippet of the most notable items from the decree, most of which we hope to receive and share more clarity on as they come to fruition. Each item below is included in the decree’s roadmap, which outlines measures to be taken, by which department of government, and the respective timeframe to make them a reality.

1. By 2025:
   1. The Central Securities Depository will consolidate the custody of corporate and state securities and will be transferred to the oversight of the Central Bank of Uzbekistan from UzSAMA (the State Asset Management Agency);
   2. The National Clearing Center will be established together with the Republican Currency Exchange (which currently operates the State Securities Market). The company will become the central counterparty and will be regulated by the Central Bank;

   3. Dividend distribution will be automated (from a cumbersome manual paper process today);
       

2. Legislation and regulation:
   1. A new regulator - The National Agency of Perspective Projects – will be taking over control of the capital markets, insurance market, and the planned development of the crypto/blockchain market from 4^th September 2023 onwards;
   2. A regulatory sandbox regime will be introduced for operations with international clearing companies, nominees, and brokers. This section additionally discusses the terms and conditions of operations for such organisations. Legislation will need to be updated to allow terms such as “foreign broker”, “foreign nominee holder”, “foreign UBO”, and “omnibus accounts” to be utilised. Such organizations and clients can operate in Uzbekistan without licenses and open accounts with Central Securities Depository and Central Bank. Such accounts and assets will be protected by most types of possible seizure and limitations (this pertains to criminal activity or failing to disclose information requested by the government);
   3. Amendments of the measures in “2b” above will pave the way for Uzbekistan’s capital markets to be connected to Clearstream and other international organisations by February 2025;
       
3. Market activity stimulation:
   1. Uzbek citizens will be able to invest up to 100x the minimum wage (currently approximately USD 8,100) of their salary on an annual basis into local securities and have this portion of their income be exempted from income tax;
   2. Employees of state-owned companies planned for IPO will have preferential rights to subscribe to the offerings and their investments into said IPOs;
   3. The tax benefits on dividends (currently 5% for institutional investors and 0% for retail investors) and income tax on corporate bonds (0%) provided for investors in 2020 will be prolonged from the end of 2024 to the end of 2028;
   4. The Central Bank of Uzbekistan will consider changes in the legislation regarding limitations on investments into banking shares from off-shore jurisdictions (currently this is a significant issue inhibiting the much-needed capital increase into the equity of banks across the banking system);
   5. Remote brokerage account opening and annual general meeting/extraordinary general meeting voting system modernisation and development;
       
4. Minority rights protection:
   1. Companies that place shares on the open market will be required to distribute at least 30% of profits via dividends for seven years;
   2. The regulator will be able to force the replacement of management of publicly traded companies that violate capital markets legislation requirements on financial reporting and announcements two or more times within a year

Currency Volatility Leads to Adjustment in Uzbek Som

In mid-August, the Russian ruble briefly touched 100 to the USD before the Central Bank of Russia increased the policy rate by 350 basis points to 12% on 15^th August. The ruble has depreciated 22.8% year to date. One key reason for the ruble’s weakness is the country’s budget deficit due to falling hydrocarbon exports. However, the currency depreciation isn’t expected to cause much, if any, domestic inflation in Russia as the country has heavily invested in import substitution since 2014, and aside from outbound tourism, shouldn’t put much pressure on the finances of Russian citizens. Thus, Russia’s economy looks quite resilient even in the face of the depreciating ruble.

However, as Russia is Uzbekistan’s second-largest trading partner and biggest source of inward remittances (representing 87% of all remittances), with Russia being a key market for Uzbek textiles and agricultural products, the Central Bank of Uzbekistan decided to loosen the currency’s trading band and allow the som to devalue 3.5% on 10^th August 2023 in order to keep the country competitive on the regional market. Surely another incentive for the Central Bank of Uzbekistan to devalue the currency during August is weakness in the currencies of its other key trading partners, China and Turkey, whose currencies are down 4.7% and 42.97% year to date versus USD.

Year to date, the Uzbek som is down 7%, and we are comfortable with this, having stated from the inception of the fund that annual depreciation in the mid-single digits should be expected as Uzbekistan is a manufacturing and export centre, thus following in Vietnam’s footsteps of preventing the currency from strenghtening to remain competitive. For the remainder of the year, while we could see some additional minor depreciation, we don’t foresee any big devaluations like last month.

August Inter-Ministerial Shakeup

The market saw very positive developments during August in regards to the Ministry of Economy and Finance being back in charge of major economic decisions and reforms after they were handed over to the Presidential Administration in December 2022. As the MinFin’s wings were clipped, with the head of the Presidential Administration and former member of the Ministry of Investment, Sardor Umurzakov, gaining more control of economic decision-making, most of the western-educated Uzbeks who had come back to partake in nation-building and worked at the MinFin quit, along with the Minister of Economic Development and Poverty Alleviation and Deputy Prime Minister, Jamshid Kuchkarov who was heavily involved in economic reforms.

The investment community, including us, were hopeful these changes would accelerate broader economic reforms as the presidential administration could facilitate reforms, sidestepping the Oliy Majlis, Parliament, including in the realm of privatisations where they controlled the Agency for Strategic Reforms, which oversees 31 SOE’s slated for privatisation. However, with no forward progress in the first seven months of the year, August saw some radical changes as the MinFin regained its former power as “nature heals.”

As a result of the Presidential Administration’s failure to manage the budget and broader economy, last month Mr. Umurzakov was fired, while former Minister Kuchkarov was promoted to Minister of Finance, as well as retaining his position as Deputy Prime Minister. Several Uzbeks who left last year are in discussions to come back to the ministry, and the most high-profile name on this subject is former Deputy Minister of Finance Odilbek Isakov, who has returned as an advisor to the MinFin where he will be focusing on government debt, collaborating with international rating agencies, and more. Mr. Isakov was a key driver in getting Uzbekistan’s sovereign credit rating, issuing Eurobonds and pushing for the development of the capital markets, and we couldn’t be more pleased that he is involved again with the government. Further, the Agency for Strategic Reforms is in the process of being overseen by the MinFin, which means they will have more direct power in regard to facilitating SOE restructuring and privatisations.

Lastly, as the sideways choppy action in the market has certainly been monotonous, nothing moves in a straight line and a bet on Uzbekistan is a bet on what I like to call the New Fertile Crescent. As the world bifurcates and investment in the region accelerates, Uzbekistan is among the best-placed countries in the region to benefit from this interconnectivity and growth from the Middle East into Central Asia, especially as it has roughly USD 33 billion in foreign exchange reserves and thus can retain its independence without worry of falling into a debt trap.

So, while the fund is now flat for the year, under the hood, our portfolio companies continue to do very well. During August, one of the fund’s five largest holdings, a consumer goods conglomerate, filed second-quarter 2023 earnings, which were superb! Second quarter year-on-year profit grew 370%, while trailing twelve-month earnings rose 45%. The company ended August at a P/E of 5.75x and P/B of 3.14x.

Second AFC Uzbekistan Fund Investor Tour "Sold Out"

Thanks to the significant interest in our second Uzbekistan investor tour, we are planning to host our 3^rd tour in early May 2024. We will share more details about this over the coming months.

At the end of August 2023, the fund was invested in 25 names and held 8.4% cash. The portfolio was allocated to Uzbekistan (91.60%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (40.4%) and financials (34.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.72x, the estimated weighted harmonic average P/B ratio was 0.74x, and the estimated weighted average portfolio dividend yield was 4.78%.

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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