The AFC Uzbekistan Fund Class F shares returned −1.0% in March 2023 with a NAV of USD 1,750.72, bringing the return since inception (29th March 2019) to +75.1%, while the return for the year stands at +0.8%. On an annualised basis, the fund has returned +15.0% p.a. with a Sharpe ratio of 0.95.
March saw yet another announcement on the government’s planned privatisation program after several unsuccessful attempts in recent years. What makes this announcement different, however, is the program’s terminology and assistance from a foreign team that has led a successful privatisation program in another frontier market. During the month, market activity was muted with modest net selling pressure due to the Navruz holiday.
AFC Uzbekistan Fund Valuations as of 31st March 2023:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Light Trading and News in the Month of Navruz
Navruz is the celebration of the first day of spring, literally translating to “New Day”. A Persian holiday celebrated throughout Central Asia and as far as the Middle East, this year it was celebrated on 20th March.
In Uzbekistan, this meant a prolonged holiday of five days. The country has an interesting way of adjusting its holiday schedules, borrowing Saturday days off from one weekend and making other weekends workdays in order to take what was a three-day holiday and extending it, so people have more time with family. It’s the only country I’ve ever been to where arbitrary Saturdays become workdays in order to extend a weekday holiday. Nonetheless, this is Uzbekistan and a mix of the unique work schedule toward month-end and the inevitable need for cash among locals to celebrate Navruz with their families is what we pinpoint to be the contributor to the moderately weak stock market during the month.
Amid the muted trading, the Central Bank announced a cut in the policy rate from 15% to 14%, returning rates to where they were before the Russia-Ukraine war when they were raised 200 basis points due to increased foreign exchange volatility in the region. Furthermore, inflation over the past year has been stable and ended February at 12.23%. This relaxing of credit conditions should trickle down to the economy later this year as credit growth is likely to accelerate off the back of cheaper financing, leading to more demand across the economy and indirectly more demand for the fund’s core holdings of materials, financial services, and consumer goods companies.
Another Privatisation Plan Announcement?!
False starts are never good and too many can turn off investors. This is something we have discussed extensively with market participants on the ground, especially the government. Uzbekistan has a limited timeframe to get its act together and initiate significant reforms, for too many false starts risks alienating foreign investors. While the country is certainly moving in the right direction, when the government makes announcements, they need to be followed through rather than falling on deaf ears. Now, while this continues to frustrate us, the investment climate continues to improve and Uzbekistan does have an ace up its sleeve as it is going to benefit greatly from the accelerating bifurcation between the East and the West due to its strategic location in this emerging new world order where the influence of the countries in the “Global South” become much stronger. This is set to benefit Uzbekistan with its commodity-rich economy and young, fast-growing workforce in the heart of Central Asia.
During March, some significant international developments confirming our opinion on the bifurcation of the world and the “New Fertile Crescent” region being a key place to be investing unfolded. China, with its increasingly important geopolitical clout (much to the dismay of the United States) brokered a deal between Iran and Saudi Arabia which saw them announce plans to re-establish diplomatic relations after seven years. Also, Syria and Saudi Arabia agreed to re-open embassies after more than a decade, and Saudi Arabia additionally announced it will join the Shanghai Cooperation Summit which is a political and security union consisting of countries in Eurasia, including China, Russia, and India. Further, there were reports from Ghana to France and Brazil which announced that certain trade would be conducted in currencies other than the U.S. dollar, something we expect to start seeing an increasing amount of as countries shift in varying capacities away from the U.S. dollar in global trade, a clear risk to America’s superiority in global trade. As the world is reshaped, Uzbekistan stands to benefit with its commodity-rich economy, large and young population, as well as being an integral logistical connection between east and west, providing an alternative land route which circumvents Russia.
All of the aforementioned is very bullish for Central Asian economies as the region falls within the orbit of Russia, China, and the Middle East, where we see the majority of investment originating from. Thus, it was good timing when on 24th March 2023 President Mirziyoyev announced a three-part privatisation program in Uzbekistan.
This announcement includes the partial privatisation of shares in 40 SOE’s ranging from gold and copper mining to banking and insurance which are to be offered to the public in what is being termed the “People’s IPOs”. Privatisations will happen via an auction process on the “E-Auksion” trading platform where it is planned that up to 2% of each company will be sold. Further, state ownership in 1,000s of other companies and an equal amount of real estate objects are also planned to be auctioned.
While we will wait to see how this planned program evolves, we were more intrigued by the government’s use of the term “People’s IPO’s” as this term has been used in several post-Soviet countries and may indicate a better-planned process for this program. Specifically, this ties into news that Franklin Templeton has agreed to help Uzbekistan create a national investment fund whose shares will be listed on the Tashkent Stock Exchange and which will help to attract foreign institutional capital. This is on the back of their signing a cooperation agreement with the State Asset Management Agency in January 2023 during President Mirziyoyev’s visit to Singapore.
Franklin Templeton simultaneously announced plans to open an office in Tashkent by the end of April 2023. This is a potentially very positive development for the capital markets because reading the tea leaves, we believe Franklin Templeton will be attempting to create a similar investment vehicle to the one they managed in Romania called “Fondul Proprietatea”. The Romanian vehicle at listing held shares in 80 SOE’s and underwent an IPO on the Romanian Stock Exchange to give local and foreign investors access to the “crown jewels” of the economy. If a similar structure can be executed in Uzbekistan and eventually dual-listed abroad, this could be the catalyst that transforms the domestic capital market, from both a liquidity standpoint as well as attracting foreign institutional investors and in due course, private sector IPO’s.
As is always the case in Uzbekistan, we will be keeping an eye out for more news on this privatisation program as we want to see the government announce more specifics and see that the timeframe that is announced for privatisations is adhered to. Uzbekistan is moving in the right direction and as a frontier market will of course stumble, but getting back up and continuing to push forward is necessary for the country’s transformation, something we remain confident in.
At the end of March 2023, the fund was invested in 26 names and held 14.0% cash. The portfolio was allocated to Uzbekistan (86.00%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (38.3%) and financials (28.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.65x, the estimated weighted harmonic average P/B ratio was 1.00x, and the estimated weighted average portfolio dividend yield was 4.50%.