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Asia Frontier Capital (AFC) - January 2023 Update

Asian Frontier Markets Start the Year Strong - Asia Frontier Capital (AFC) - January 2023 Update


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“Storms make the oak grow deeper roots.”

– George Herbert, an English poet


AFC Asia Frontier Fund USD A1,229.32+0.6%+22.9%

MSCI Frontier Markets Asia Net Total Return USD Index2

AFC Iraq Fund USD D676.50-0.5%-32.4%

Rabee RSISX Index (in USD)

AFC Uzbekistan Fund USD F1,769.32+1.9%+76.9%

Tashkent Stock Exchange Index (in USD)

AFC Vietnam Fund USD C3,020.41+4.7%+202.0%
Ho Chi Minh City VN Index (in USD) +11.2%+96.6%
  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.



The year began on a strong positive note for global equity markets and most AFC funds also had a positive return at the start of the year. Investor sentiment continues to improve as confidence grows that we are at the peak of global inflation and interest rate hikes. This was also evident in the less aggressive 25 basis point increase in interest rates by the U.S. Fed on 1st February 2023, as well as less hawkish messaging from the U.S. Fed in the past few weeks.

The weakness in the U.S. dollar and the upgrade to global economic growth by the International Monetary Fund "IMF" are also positives for investor sentiment especially in frontier and emerging markets.

We believe a combination of peaking inflation and interest rates, a weaker U.S. dollar, China’s re-opening, and a bottoming out of global economic growth should be very positive for Asian frontier markets in 2023 and these were some of the key points discussed in our quarterly webinar held on 30th January 2023. Many current and prospective investors attended the event and posed some excellent questions. If you missed our webinar, you can watch the replay by clicking on the link below, or view the webinar presentation, which is also linked below.



Year of the Rabbit



Year of the Rabbit




Year of the Rabbit



I am glad to report that BarclayHedge has again awarded our AFC Vietnam Fund for its outstanding performance. The fund was recognized with the top 10 award in the category “Emerging Markets Equity – Asia” for its performance during December 2022. This award shows the validity of the investment thesis of the AFC Vietnam Fund and underlines that it is well suited as a diversification tool for many equity investors.

Please find the manager’s comments relating to each of our four funds for January 2023 below.

If you have any questions about our funds or would like to receive additional information, please be in touch with our team at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Baghdad 10th February - 31st March Ahmed Tabaqchali
Ho Chi Minh City 11th February - 2nd March Ruchir Desai
Ho Chi Minh City 27th February - 3rd March Andreas Vogelsanger
Hong Kong 5th - 10th March Andreas Vogelsanger
Dubai 6th - 10th March Ruchir Desai
Pattaya 23rd - 24th March Andreas Vogelsanger
Hong Kong 26th - 31st March Andreas Vogelsanger
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AFC Vietnam Fund - Manager Comment


AFC Vietnam Fund Performance



The AFC Vietnam Fund returned +4.7% in January 2023 with a NAV of USD 3,020.41, bringing the return since inception to +202.0%. This represents an annualized return of +12.9% p.a. since inception. The fund underperformed the benchmark, the Ho Chi Minh City VN Index, which gained 11.2% in January 2023 in USD terms. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 14.92%, a Sharpe ratio of 0.80, and a low correlation of the fund versus the MSCI World Index USD of 0.48, all based on monthly observations since inception.

2023 had a flamboyant start with European and U.S. stock markets in positive territory. The VN-Index also gained an impressive 10.3% in the first month of the year, mainly due to the strong performance of bank stocks.

Market Developments


VN-Index from July 2000 to Jan 2023

VN-Index from July 2000 to Jan 2023

(Source: Bloomberg)


This substantial gain in January was mainly due to the performance of the banking and basic material sectors, two of the larger sector weightings in the VN-Index at 35.3% and 8%, respectively. The banking sector increased by an impressive 13.5% and the basic material sector increased even more at 18%, with steel manufacturers contributing to most of this gain. Both sectors pushed the benchmark index significantly higher. However, for most of 2022, the banking sector performed poorly, given that some of the banks had rather large exposure to the real estate sector, and hence our exposure to banks is relatively small, and we have no exposure at all to the basic material sector. We do, however, envisage increasing our exposure to banks again. Still, we are not very bullish on the basic materials sector, given that large steel companies, such as Hoa Phat Group (HPG) for example, reported huge losses in 3Q 2022 and 4Q 2022. Despite the bad results, HPG’s stock price rallied 22.8% in January 2023 and 87.2% from the low in November 2022.

Vietnamese Stock Market Poised to Rebound in 2023

Despite impressive GDP growth of over 8% in 2022, the Vietnamese stock market tumbled around 35% in USD terms last year. The main reasons for this abysmal performance of the VN-Index in 2022 were a sweeping crackdown on corruption, the sudden stop in corporate bond issuance, and a sharp increase in deposit rates. We do however believe that some of these problems will be solved in 2023, and combined with the fact that the current valuation of the Vietnamese stock market is very attractive with decent earnings growth of around 14% and a healthy GDP growth forecast of about 6% for this year, we are reasonably optimistic that the market has strong potential to rebound. When we look at the corporate bond market, it clearly shows that the shock of November 2022, with exploding bond yields, is behind us and we expect bond yields to ease further to around 12% to 15% over the next couple of months.


Corporate Bond Yield Eases (%)

Corporate Bond Yield Eases (%)



The Vietnamese Government recently issued a new regulation, allowing companies to extend the maturity of their corporate bonds to up to 2 years, which was welcomed by the market in mid-December 2022. Nam Long Group, a real estate company, issued a VND 500 bn corporate bond at a yield of 12.94% to the IFC (International Finance Corporation).

In 2022, the banking sector was leading the corporate bond issuance with 53.8% (USD 5.8 bn) of total volume, followed by real estate with 20.5% (USD 2.2 bn)


Corporate Bond Issuance in 2022 (~ USD 10.8 Bn) by Sector

Corporate Bond Issuance in 2022 (~ USD 10.8 Bn) by Sector

(Source: VBMA, Vietstock)


USD / Interest Rates / Inflation

The USD strengthened considerably in 2022, mainly due to the Fed’s aggressive interest rate hikes in order to bring inflation back under control. Towards the end of 2022, we started seeing the first signs that inflation was slowly coming down and at the same time the USD also started to weaken.


Inflation in U.S.

Inflation in US

(Source: Bloomberg)


U.S. Dollar Starts to Correct

US Dollar starts to correct

(Source: Bloomberg)


The market expects that the U.S. has now passed the peak for headline inflation but the Fed will probably continue to raise rates early in 2023 to bring down inflation further and eventually cut rates in 2024. In uncertain and volatile times like we are living in now, it is certainly challenging to provide accurate longer forecasts, and it might very well be that we will experience some unforeseen, hopefully positive surprises, but the future will tell.

In Vietnam, we have also seen some interest rate hikes from the State Bank of Vietnam (SBV) in 2022, not in order to bring inflation under control but to manage the exchange rate of the Vietnamese dong. The weakening of the USD towards the end of 2022 was seen with great relief by the SBV and will certainly ease the pressure to manage the FX rate and the country’s liquidity. We therefore believe that foreign reserves will rise again and that Vietnam’s deposit rates will likely come down further after the strong increase in 2022.


Deposit Interest Rate Skyrocketed in 2022 (12M Fixed-Term Deposit; %)

Deposit interest rate skyrocketed in 2022 (12M fixed-term deposit; %)

(Source: BVSC, Fiinpro)


Market Bottom

As mentioned, we think that the Vietnamese stock market bottomed out in November 2022 and we see strong potential for a rebound in 2023. It is interesting to note that foreigners came back to the Vietnamese stock market right at the bottom and poured in over USD 1.1bn in the last 2 months of 2022 alone.


Foreign Investors Net Buying Value in 2022 by Month (USD M)

Foreign investors net buying value in 2022 by month (USD m)

(Source: HSX)


Despite a strong start of the year, the valuation of the VN-Index still looks very attractive, trading well below its historical average with a P/E ratio of around 10.5x. It is also interesting to note that if you look back over the last 15 years, the VN-Index always had a strong rebound after a negative year.


VN-Index Performance (%; yoy)

VN-Index performance (%; yoy)

(Source: HSX, AFC Research)


Outlook 2023

We believe that the Fed is going to keep interest rates elevated for the foreseeable future and we think the same applies for Vietnam. We will therefore keep an important allocation in our portfolio to the insurance sector, given that insurance companies are one of the main beneficiaries in a high-interest rate environment. Many of these companies are cash rich and are generating a lot of interest income as they are keeping their liquidity invested in fixed-term deposits. The valuation of the insurance sector also looks attractive, with a P/E ratio of around 9x and Q4/2022 earnings results look encouraging. The insurance companies we invested in particular hold substantial cash balances in relation to their total assets and they have no debt at all in their balance sheets.


Cash / Total Assets Ratios of Insurance Companies

Cash / total assets ratios of insurance companies

(Source: Companies, HSX, HNX, AFC Research)


Net Profit Insurance Companies (VND bn)

Net profit insurance companies (VND bn)

(Source: Companies, HSX, HNX, AFC Research)


The banking sector will also benefit in a high-interest rate environment and the market expects this sector to recover strongly in 2023, given its attractive valuation (P/B 1x and P/E 5.5x) after a relatively poor performance for most of 2022. But banks are probably a riskier bet than insurance companies and are facing more challenges, given their exposure to the real estate sector with its recent liquidity and credit crunch, for example. Nevertheless, they are considered the “engine” of the economy and with an expected GDP growth of around 6% this year, they will continue to play an important role.


Bank Stocks Attractive Valuation (P/E)

Bank stocks attractive valuation (P/E)

(Source: Vietstock, AFC Research)


Bank stocks P/B

VN-Index (2007 to 2022)

(Source: Vietstock, AFC Research)


Also, the banking sector plays an important role in VN-Index structure with a 35% weighting.


VN-Index Sector Weightings (%)

VN-Index sector weightings (%)

(Source: HSX, AFC Research)


We also have exposure to the banking sector and we plan to increase it over the coming weeks. We will however be cautious in choosing the banks we want to invest in. We believe that banks with a high exposure to corporate bonds and real estate will be more volatile and riskier to invest in. But we are less concerned to invest in banks, such as STB, ACB or LPB. Lien Viet Post Bank (LPB), for example, reported strong profit growth in 2022 of 56%, reaching a record high of VND 5,690 bn. The total assets of the bank also jumped 13% compared to 2021.


LPB profit before tax (VND bn)

LPB profit before tax (VND bn)

(Source: Vietstock, LPB, AFC Research)


The long Tet holidays in Vietnam from 20th-26th January 2023 just came to an end and there was extensive travelling around the country by many Vietnamese citizens to famous tourist places such as Vung Tau, Ba Den Mountain or Sapa etc.


Full of Visitors at Famous Places during Tet Holidays

Full of visitors at famous places during TET holidays

(Source: Vnexpress, AFC Research)


The Vietnamese tourist sector continued to recover strongly, but in addition to domestic tourism, we also expect a surge in international tourist arrivals, especially with China's reopening after three years of COVID-19 restrictions in terms of tourism and trade. Chinese tourists accounted for a 35% market share pre-COVID-19, equivalent to 5.8m visitors, contributing USD 5.8bn to this sector.

We also have exposure to this sector and invested in two tourism companies in our portfolio. Already in 2022, we saw a very strong recovery in revenues for both companies, particularly Dam Sen Water Park (DSN), whose net profit increased by 445%, surpassing pre-COVID-19 levels. DSN just announced that they will more than double their cash dividend from VND 1,500 to VND 4,000 for FY 2022.


Net Profit of DSN (VND bn)

Net profit of DSN (VND bn)

(Source: DSN, HSX, AFC Research)


At the end of January 2023, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.7%) – an insurance company, PVI Holdings (7.2%) – also an insurance company, BIDV Insurance Corporation (6.1%) – an insurance agency, Minh Phu Seafood Corp (6.0%) – a seafood company, and Everpia Vietnam JSC (5.8%) – a bedding manufacturer.

The portfolio was invested in 49 names and held 4.5% in cash. The sectors with the largest allocation of assets were consumer (39.3%) and financials (32.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.10x, the estimated weighted harmonic average P/B ratio was 1.16x, and the estimated weighted average portfolio dividend yield was 5.31%. The fund portfolio carbon footprint is 18.62 tons per USD 1 mn invested.

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AFC Uzbekistan Fund - Manager Comment

AFC Uzbekistan Fund Performance


The AFC Uzbekistan Fund Class F shares returned +1.9% in January 2023 with a NAV of USD 1,769.32, bringing the return since inception (29th March 2019) to +76.9%. On an annualised basis, the fund has returned +16.0% p.a. with a Sharpe ratio of 1.02.

The AFC Uzbekistan Fund began 2023 in positive territory even though the economy suffered a setback due to a “once-in-a-generation” cold snap which spiralled into a domestic energy crisis. Aside from the cold, during the month, Clearstream paid a visit to Uzbekistan to advance discussions on establishing a custody link for foreign investors, and the over-the-counter stock exchange “Elsis-Savdo” was brought under the management of the Tashkent Stock Exchange. Relative to the past twelve months, with a lack of news flow, January was a busy and positive month for Uzbekistan’s capital markets.

AFC Uzbekistan Fund Valuations as of 31st January 2023:

Estimated weighted harmonic average trailing P/E (only companies with profit): 5.72x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 3.97%


Capital Markets Update

On 17th January 2023, Clearstream paid a visit to Uzbekistan, meeting with the Central Bank, Ministry of Finance, and Tashkent Stock Exchange to advance discussions on establishing a custody link which will enable overseas investors to gain access to Uzbekistan’s capital markets without undergoing the bureaucratic process of opening a domestic brokerage account. This was of course just another round of talks, but nonetheless a positive, as establishing a link with Clearstream is one of George Paresishvili’s main objectives as CEO of the Tashkent Stock Exchange (TSE). The biggest hurdle at present for this project to advance is for a large foreign bank to enter the Uzbek market, which would enable Clearstream to offset currency risk in the Uzbek som. As mid-sized foreign banks from Georgia and Kazakhstan have entered the Uzbek market in recent years, it is only a matter of time and development of the local financial sector until a larger player enters the market, which would enable Clearstream to be more comfortable operating here. This is a matter which we will be keeping a close eye on, as easier access for foreign investors to the local market would likely have a significant positive effect on both liquidity and asset prices.

During the month, the Elsis Savdo OTC platform was brought under the management of the TSE. Previously a separate entity, per a presidential decree in early 2022, this merger was supposed to happen last year but was delayed. During the month, trading on the OTC platform was halted pending approval from the Ministry of Finance for the TSE to take over management, and trading resumed on 31st January 2023 with the exchange operating as usual. As regulation of the exchange is brought in line with the TSE, we foresee this bringing about further liquidity in the OTC market, where several of the AFC Uzbekistan Funds positions are traded.

Cold Snap Strangles Central Asian Countries

Every December and January, Central Asia experiences a moderate cold snap. In Uzbekistan in recent years, this has led to short-term energy shortages, which affects people living in the rural areas more as gas and electricity supplies are curtailed. The shortages also impact domestic industry with gas supplies being cut which has led to producers of textiles and cement being forced to either curtail or shut down operations for a few weeks until temperatures improve. 

This year, however, Uzbekistan (and greater Central Asia) was hit with the coldest temperatures in 50 years as an arctic blast, which is currently impacting Europe and North America, severely impaired the country and its citizens. While Uzbekistan has sufficient natural gas, a near doubling of domestic demand in recent years and very healthy subsidies have done little to encourage more frugal usage of the country’s energy resources. One would have thought there would have been a wake-up call to the underinvestment and lack of preparation in the energy sector in previous winters, but it appears the government has only now finally realised the challenges it is up against to prevent energy shortages in the future.

As temperatures plunged to a low of minus 27 degrees Celsius in Tashkent, Uzbekistan had planned to bridge its January energy deficit with gas supply from Turkmenistan. However, on 12th January 2023, wellheads in Turkmenistan’s gas fields froze, forcing them to shut-in production. This meant the country couldn’t export gas to neighbouring Uzbekistan, which sent Uzbekistan into a short-term crisis as the population experienced a lack of water, heat, and electricity, in some regions for up to a week. This led to embarrassing scenes of some residents in Tashkent resorting to cooking over wood in the streets. 

Due to the crisis and anger among citizens as a result of the country’s lack of preparation for winter, on 16th January 2023, the Mayor of Tashkent and the head of Thermal Power Plants JSC were both fired. Surely these firings were partially symbolic as a way to show the government “hears the people”, but also certainly is due to incompetence, especially from the Tashkent Mayor, who is an influential businessman owning some of the largest manufacturing businesses in the country but who is equally very unpopular for his lack of transparent governance and development of Tashkent.


Frozen Tashkent

Frozen Tashkent

(Source: AFC Research)


At present, Uzbekistan’s mini energy crisis is over, and we can only hope the government has woken up to the lack of investment in its oil and gas fields which it needs to re-focus on to prevent this from happening in future winters, especially as the country continues to industrialise and copes with a growing population, which last year reached 36 million, and is becoming increasingly wealthy, thereby consuming greater quantities of energy.

At the end of January 2023, the fund was invested in 26 names and held 12.0% cash. The portfolio was allocated to Uzbekistan (87.91%) and Kyrgyzstan (0.05%). The sectors with the largest allocation of assets were materials (36.6%) and financials (32.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.72x, the estimated weighted harmonic average P/B ratio was 1.01x, and the estimated weighted average portfolio dividend yield was 3.97%.

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AFC Asia Frontier Fund - Manager Comment

AFC Asia Frontier Fund Performance


The AFC Asia Frontier Fund (AAFF) USD A-shares returned +0.6% in January 2023 with a NAV of USD 1,229.32. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+8.2%), the MSCI Frontier Markets Net Total Return USD Index (+4.5%), and the MSCI World Net Total Return USD Index (+7.1%). The performance of the AFC Asia Frontier Fund A-shares since inception on 30th March 2012 now stands at +22.9% versus the benchmark, which is down by 23.4% during the same period. The fund’s annualized performance since inception is +1.9%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.6% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.52, all based on monthly observations since inception.

Almost all of the fund’s markets did well at the start of the year, with positive contributions from Vietnam, Jordan, Mongolia, Cambodia, and Georgia. Though the fund does not have a large weight to Pakistan, the 18% depreciation of the Pakistani rupee (PKR), which was required to be done for the country to avail of IMF funding, cost the fund around 1.5% in performance.

We have been positive on Georgia over the past year as it has been the key beneficiary in Central Asia from the conflict in Ukraine via the supply chain shift and increased tourism revenues and remittances. 2022 GDP growth came in at 10.1%, the highest growth rate for the country since 2007. With such a robust economic performance and a stable macroeconomic position, it is no surprise that Fitch Ratings upgraded Georgia’s outlook from "stable" to "positive".


Georgia's Outlook Upgraded to Positive by Fitch
(GDP Growth Shown below)

Georgia's Outlook Upgraded to Positive by Fitch (GDP Growth Shown below)

(Source: International Monetary Fund, Galt & Taggart)


Our Vietnamese holdings reported outstanding 4Q22 results with a median net profit growth of 34%, as they all benefitted from the strong economic rebound in Vietnam last year. Though earnings growth may slow down in 2023, we own quality names in Vietnam which are very well leveraged to the Vietnamese growth story. 

Tourist arrivals into Vietnam continue to pick up, with January 2023 arrivals increasing by 23% compared to December 2022. Though tourist arrivals in Vietnam are still 42% below 2019 levels, we believe 2023 can see significant momentum for the Vietnamese tourism sector, especially now that China has reopened.


Vietnam Tourist Arrivals Continue to Gain Momentum (Monthly Arrivals)

Vietnam Tourist Arrivals Continue to Gain Momentum (Monthly Arrivals)

(SSI Securities)


Bangladesh successfully gained IMF board approval for a USD 4.7 bn loan program spread across 3.5 years. This funding from the IMF will help Bangladesh build up further macroeconomic buffers while also pushing the government to carry out much-needed reforms, which will be positive for the economy in the long run. 

Furthermore, Bangladesh was able to close this funding in less than three months since signing the staff-level agreement with the IMF in November 2022. This illustrates the relatively stronger macroeconomic position of Bangladesh compared to Pakistan and Sri Lanka, who are still struggling to close an IMF deal.


GDP Growth in Bangladesh Should See a Recovery Going Forward

GDP Growth in Bangladesh Should See a Recovery Going Forward

(Source: International Monetary Fund)


The best-performing indexes in the AAFF universe in January were Laos (+33.6%) and Vietnam (+10.3%). The poorest-performing markets were Pakistan (+0.6%) and Bangladesh (+1.0%). The top-performing portfolio stocks this month were a coking coal miner in Mongolia (+53.7%), a Mongolian ceramic factory (+35.1%), a frontier market focused technology company (+30.9%), a Vietnamese nickel miner (+22.2%) and a Jordanian phosphate miner (+21.7%).

In January, the fund initiated a position in a Vietnamese bank and exited an Asian frontier beverage producer listed in Turkey. The fund also bought and sold existing positions in Mongolia.

At the end of January 2023, the portfolio was invested in 74 companies, 2 funds and held 6.4% in cash. The two biggest stock positions were a fintech company in Kazakhstan (4.2%) and a beverage producer in Mongolia (3.6%). The countries with the largest asset allocation were Mongolia (15.4%), Vietnam (14.1%), and Iraq (13.3%). The sectors with the largest allocation of assets were consumer goods (21.2%) and materials (13.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.19x, the estimated weighted harmonic average P/B ratio was 1.17x, and the estimated weighted average portfolio dividend yield was 3.19%. The fund portfolio carbon footprint is 0.81 tons per USD 1 mn invested.

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AFC Iraq Fund Performance


The AFC Iraq Fund Class D shares returned −0.5% in January 2023 with a NAV of USD 676.50, outperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost 5.0% during the month. Since inception, the fund has lost 32.4% while the RSISUSD index is down 50.1%. 

For the third month in a row, the decline in the parallel market’s price of the Iraqi dinar (IQD) versus the U.S. Dollar (USD) negatively affected the market’s performance by reversing the index’s 5.5% increase in IQD terms to a decline of 5.0% in USD terms, and the fund’s 9.0% increase in IQD terms into a 0.5% decline in USD terms. However, unlike the prior two months, the market has started looking through and discounting the currency’s volatility as seen from the market action and, in particular, those of banks and industrial stocks – two groups that stand out as net beneficiaries of the depreciation of the market price of the IQD vs the USD.

This market performance is mirrored in the index’s constituents. In local currency terms, Al-Mansour Pharmaceutical Industries (IMAP) was way ahead of the rest with an increase of 41.8%, followed by the National Bank of Iraq (BNOI) up 19.1%, Kharkh Tour Amusement City (SKTA) up 8.3%, Al Mansour Bank (BMNS) up 8.1%, Iraqi for Seed Production (AISP) up 6.9%, the Bank of Baghdad (BBOB) up 5.1%, AsiaCell (TASC) up 5.0%, Commercial Bank of Iraq (BCOI) up 4.0%. While Al-Mansour Hotels was flat, and Baghdad Soft Drinks (IBSD) was down 6.7%. A bout of profit-taking in the last few days of the month trimmed down most of these performances – in particular, at the peak, IMAP was up 60.1%, BNOI was up 30.9%, BMNS was up 11.3%, and BBOB was up 8.0%.

The currency’s volatility means that the index is under the low end of its 33-month up-trending channel (chart below) – which still supports the market’s positive technical picture as discussed here in the past few months. The macroeconomic fundamentals discussed here last year support our view that this uptrend will likely remain in force; however, its upward slope might moderate or even go sideways, as this month’s action suggests. The 2023 budget proposal was not submitted in January as expected, which means a delayed catalyst for the market’s next move – especially as all indications suggest that it would be a much more expansionary budget than was discussed here a few months ago.


RSISX USD Index Versus Average Daily Turnover

RSISX USD Index vs. Average Daily Turnover

(Source: Iraq Stock Exchange, Rabee Securities, AFC Research, data as of 31st January 2023)


Continued Currency Volatility

Background: As written here last month, the Central Bank of Iraq (CBI), as part of an ongoing process of encouraging the move towards the adoption of banking and away from the informality that dominates economic activity, implemented in mid-November 2022 new procedural requirements to those for its provisioning of U.S. Dollars (USD) for importers. These procedural requirements would bring the country’s cross-border fund transfers in-line with global standards, require a high level of transparency. However, they represent a seismic shift to the country’s cash-dominated economy, in which large informal sectors drive the bulk of economic activity. As such, the introduction of the new regulations had an immediate detrimental effect on the volumes of the CBI’s daily USD-Iraqi dinar (IQD) transactions for cross-border fund transfers, which led to a supply-demand mismatch and consequently to a depreciation in the market price of the IQD vs the USD.

The government and the CBI subsequently introduced a sequence of measures to create demand for the IQD, and for furthering the adoption of banking – crucial measures to de-dollarize the economy, and to accelerate its evolution away from the dominance of cash. These gradually brought a measure of calm to the exchange rate; however, the raiding of two of Baghdad’s largest Forex trading houses in late January brought the currency’s upheavals back. Initially intended to deter currency speculators, the raid had a chilling effect on the market in that most other Forex houses in Baghdad stopped providing quotes, and consequently led to a very illiquid currency market which exaggerated the currency’s depreciation by about 10% by month end, and with it, the premium over the official price of the USD/IQD exchange rate increased to 14.8% from 2.6% in mid-November 2022. 

A measure of the disruptions brought to the economy at large, given the country’s dependence on exports, can be seen from the increases in the monthly average of the premium, which averaged 1.8% in January 2021-October 2022, increased to 2.6% in November 2022, to 5.5% in December 2022, and to 11.3% in January 2023 (green line in the chart below) – and in line with prior periods of disruptions.


USD/IQD Monthly Exchange Rates

USD/IQD Monthly Exchange Rates

(Central Bank of Iraq (CBI), AFC Research, data as of 31st January 2023; note data are monthly averages of the daily exchange rates, and monthly averages of the delta)


The decreased volumes of the CBI’s USD-IQD transactions, versus the continued high demand for USD to satisfy the need for imports, will continue to pressure the market price of the exchange rate of the IQD versus the USD, but will likely stabilize from the very high levels seen at month end once the market attains a measure of calm. However, the high degrees of informality and dollarization in economic activities, and the time needed for the market to adjust to the increased levels of transparency demanded in cross-border fund transfers, means that in the medium term, the monthly average of the premium will likely settle at over 5.0%, but lower than the recent highs.

25th Arabian Gulf Cup and the end of Iraq’s Isolation

Away from the currency’s upheavals, the month was joyous for the country, as the city of Basra hosted the 25th edition of the bi-annual Arabian Gulf Cup football tournament, known as Khaleeji 25, for the first time since 1979; and to top it all off Iraq won the championship in a thrilling final that was full of suspense and drama to the last minute in extended time.

Crucially, the tournament marked the final stages of the reconciliation between Iraq and its once close-knit neighbours in the countries of the Gulf Corporation Council (GCC) – which was ruptured by the invasion of Kuwait in 1990. Tentative reconciliations began following the decades of conflict that Iraq has been through since then but were on a small scale until the tournament, in which over 50,000 GCC visitors streamed into Basra over the two weeks of the tournament. This influx was matched by that of Iraqis from across the country keen to take part in the country’s first hosting of an international tournament in decades.

The atmosphere is best captured by a recent article in the Washington Post by Mustafa Salim titled “How a soccer tournament in Iraq became a celebration of Arab unity”. Two quotes from the article show the reconciliation between a Kuwaiti and a Basrawi (resident of the city) – two communities that for centuries were closely knit in marriage and tribal relationships, but which were severed by the invasion of Kuwait. The first “I came from Kuwait with my own car a week ago, and so far, I have not spent a single dinar” while the second “Could you have imagined that the Kuwaiti who was occupied by Iraq 30 years ago would come here to play football with us and sing about the love of Iraq?”


Basra International Stadium – Close Up

Basra International Stadium – Close Up

(Personal photo provided by Mustafa Salim **)


While the 65,000 + capacity stadium’s official name is the “Basra International Stadium”, in Iraq, it is known as the “Palm Trunk Stadium”, as its external façade was designed to mirror that of a palm tree trunk – the symbol of Basra.


Basra International Stadium – Aerial View

Basra International Stadium – Close Up

(Personal photo provided by Essam Al-Sudani **)


At the end of January 2023, the AFC Iraq Fund was invested in 14 names and had a cash level of 1.9%. The fund invests in both local and foreign-listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (95.3%), Norway (2.3%), and the UK (0.5%). 

The sectors with the largest allocation of assets were financials (66.6%) and communications (10.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.85x, the estimated weighted harmonic average P/B ratio was 0.98x, and the estimated weighted average portfolio dividend yield was 4.43%. The fund portfolio carbon footprint is 0.31 tons per USD 1 mn invested.

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