“Smart men go broke three ways - liquor, ladies and leverage.”

– Charlie Munger - American businessman, investor, and philanthropist.

AFC Funds Performance Summary

It was a softer month for Asian frontier markets after remarkable rallies for the AFC Asia Frontier Fund and AFC Iraq Fund over the past 12 months. We believe that this breather in fund performance is a good opportunity for investors looking to gain exposure to our AFC Funds, given that the positive catalysts of monetary easing, macro and earnings recovery, and attractive valuations still remain in place.

Interim Technocratic Government is Positive for Bangladesh Equities

The fast paced political events which have transpired in Bangladesh in the last few days leading  to the resignation of Prime Minster Sheikh Hasina could in our view turn out to be positive for Bangladesh in the near future.

Though some amount of investor nervousness is valid given the transitional phase that Bangladesh is going through, our reasoning is that with a smooth and quick transition to an interim government led by the very well-respected Nobel Laureate Mr. Muhammad Yunus could add further momentum to reforms and policy making which are already underway through the ongoing IMF (International Monetary Fund program). Furthermore, with a technocratic interim government in place we could also see regulatory burdens of the last few years ease significantly on certain important industries.

Overall this should build back investor confidence as well as help Bangladesh regain economic momentum. The Dhaka Stock Exchange Broad Index appears to be factoring in these expected positive changes in Bangladesh with the index rallying by +13.3% in the three days post the resignation of the former Prime Minister.

The AFC Asia Frontier Fund is well exposed to Bangladesh with a weight of 10.1%, with investments in key sectors like banking, consumer goods, healthcare, and industrials.

The Dhaka Stock Exchange Broad Index has Rallied by +13.3% in Three Days Since the Resignation of the Former Prime Minister and We Expect Further Gains in the Near Term

AFC Quarterly Webinar was held on Wednesday, 24^th July 2024

AFC held its regular quarterly webinar on Wednesday, 24^th July 2024, which was well attended by existing and prospective investors who, as usual, posted excellent questions. If you missed the webinar, you can watch the recording or view the presentation below.

August 2024 Subscription Cut-Off Date

The next cut-off date for subscriptions for our funds will be 26^th August 2024. 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 July 2024.

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 Vietnam Fund - Manager Comment

The AFC Vietnam Fund returned +1.7% in July with a NAV of USD 3,384.20, bringing the year-to-date return to +7.6% and return since inception to +238.4%. The fund outperformed the benchmark, the Ho Chi Minh City VN Index, which gained 1.3% in July 2024 and has gained 6.4% year to date in USD terms. The fund’s annualized return since inception stands at +12.2% p.a. The broad diversification of the fund’s portfolio resulted in an annualised volatility of 14.82%, a Sharpe ratio of 0.71, and a low correlation of the fund versus the MSCI World Index USD of 0.51, all based on monthly observations since inception.

Market Developments

The AFC Vietnam Fund is outperforming the benchmark index, with a year-to-date return of around 7.2%, compared to the VN Index's year-to-date performance of 6.4% in USD terms. This success is primarily due to our strategic focus on sectors with strong growth potential this year, such as export, consumption, and public investment. Since April, stocks in the consumption and export sectors began to surge following impressive Q1 earnings, initiating their recovery. From May to July, stocks in the public investment sector also rallied significantly, including LBM, one of our largest portfolio positions.

Performance Comparison of AFC Vietnam Fund Versus VN-Index in USD

The Purchasing Managers' Index (PMI)

Vietnam ranked first in ASEAN for PMI, a measure of the prevailing direction of economic trends in manufacturing in June, reflecting the country's remarkable economic growth and improvement in the second quarter. GDP growth in Q2 2024 reached the second-highest reading over the past 13 years. The economy showed improvement across all aspects, including industrial production, exports, FDI, consumption, and even a state budget surplus. This positive economic performance was strongly supported by a sharp increase in the PMI figure, which rose by 4.4 points from 50.3 in May to 54.7 in June, marking the highest PMI in Southeast Asia.

As mentioned above, export and consumption earnings improved significantly in the first half of 2024, boosting the fund's performance. For example, Haxaco (HAX), the largest Mercedes car dealer in Vietnam, reported a substantial increase in Q2 2024. HAX's net profit skyrocketed by 11 times to VND 22 bn from the low of VND 2 bn in 2Q2023 (the second quarter is normally the low season of the year)

HAX Net Profit (VND bn)

The low interest rate policy supported HAX's business as clients began purchasing more luxury cars. In addition to Mercedes, Haxaco recently became a dealer for MG, originally a British sports car manufacturer now under Chinese ownership that offered numerous favourable terms for distribution in Vietnam, significantly boosting HAX's profits. Other consumer companies in our portfolio also showed impressive improvements. For instance, Mobile World Group (MWG) saw its earnings increase by 69 times, and Thien Long Group (TLG), Vietnam's largest stationery company, achieved a 43.4% growth in net profit in Q2 2024. TLG had faced challenges due to low demand post-COVID-19 and competition from Chinese products. However, leveraging its strong financial position, TLG launched high-margin products related to art, such as colouring books, drawing books, and crayons. This shift, coupled with the recovery of domestic consumption, bolstered TLG's earnings and improved its stock performance. We strongly believe that TLG will soon surpass its previous peak of VND 61,500 per share to reach a new 52-week high.

TLG from March 2023 to July 2024

Besides consumption stocks, our export stocks also showed significant improvements in Q2 2024, supported by strong fundamentals and earnings. For instance, Phu Tai Company (PTB), the largest Vietnamese furniture exporter, reported a robust recovery. PTB's net profit in 1H 2024 increased by 23.4% to VND 204 bn, driven by strong revenue growth in the U.S. market and the restocking trend among U.S. enterprises. While PTB's net profit hasn't yet surpassed its peak in 2022, we believe this milestone will be reached in 2025 or 2026 when the U.S. recognizes Vietnam as a market economy and the Comprehensive Strategic Partnership becomes effective. As we analysed in our previous reports, the Comprehensive Partnership with the U.S. in 2013 significantly boosted Vietnam's FDI and exports to the U.S., growing from USD 24 bn in 2013 to USD 100 bn in 2022. We are optimistic that the Comprehensive Strategic Partnership established in 2023 will similarly drive a sharp increase in Vietnam's export value to the U.S. over the next decade.

PTB from March 2023 to July 2024

Another sector we focus on is public investment, which has also started to show strong performance. One of our largest positions is Lam Dong Mineral JSC (LBM), the largest concrete provider in Lam Dong Province. LBM is a highly profitable company with a return on equity (ROE) of more than 20%. It holds a 50% market share in Lam Dong Province and more than 80% in Dalat City. LBM's net profit has been increasing steadily over the last 10 years.

However, in the first three months of 2024, LBM's stock price tumbled due to the exit of one of its largest shareholders, who owned a 10% stake. This aggressive sell-off caused the stock price to plunge nearly 15%, from around VND 23,500 per share to VND 20,000 per share, significantly affecting LBM's market performance and, unfortunately, the performance of the AFC Vietnam Fund in Q1 2024. 

The stock price only began to rally in June after the announcement of the Dau Giay—Lien Khuong expressway project, for which LBM is a key stone and concrete provider. This project is expected to bring substantial profits to LBM, estimated at around VND 300 bn—three times its annual profit. While the project has not yet impacted LBM's financial reports directly, the expectation among retail investors has already driven the stock price up.

Some may view the stock price increase with skepticism, thinking it is a trap since profits have not yet risen. However, considering LBM's valuation, this jump is justified. After rising more than 50% in June and July, LBM's price-to-earnings ratio (PER) is still only around 11 times earnings, a reasonable figure for a fast-growing company with a strong 10-year track record.

Moreover, as we have analyzed in previous reports, the Vietnamese government is committed to aggressive infrastructure investments to sustain long-term economic growth. The rapid completion of the South-North Highway Network within the next 2-3 years will be a significant driver for economic growth, mirroring China's infrastructure boom 20 years ago. Therefore, the increase in public investment is not a temporary measure but a long-term trend, benefiting companies like LBM that are strategically positioned to capitalize on this growth.

Net Profit of LBM Over the Last 10 Years (VND bn)

LBM from March 2023 to July 2024

Currently, the AFC Vietnam Fund remains focused on the export, consumption, and public investment sectors. We believe that the growth in these areas is not merely a short-term trend but a long-term movement that will continue for at least the next 5-6 years. Therefore, we are confident that the fund will experience sustainable, fundamental growth over the long term, rather than being influenced by short-term market fluctuations.

The passing of Party General Secretary of Vietnam, Nguyễn Phú Trọng

Party General Secretary Nguyễn Phú Trọng passed away on Friday, 19^th July 2024 at the age of 80. Mr. Trọng was a key leader of the Vietnamese Communist Party and a central figure in the country's anti-corruption campaign over the past decade. His significant achievements greatly contributed to reducing the corruption rate in Vietnam. Following his death, there are concerns among many investors, particularly foreign investors, about the potential for political instability or economic turmoil in Vietnam. 

However, from our perspective, Mr. Trọng’s death is unlikely to lead to instability in Vietnamese politics or the economy. Firstly, the Vietnamese Communist Party has already selected a successor for Mr. Trọng’s position, ensuring that there is no leadership vacuum akin to a "snake without a head." Secondly, Vietnam is managed and governed by collective leadership rather than a single individual. No single person can unilaterally alter significant policies, especially long-term ones such as foreign policy or economic strategies.

Over the nearly 40 years since the Đổi Mới period began in 1986, Vietnam has seen several leaders pass away or be replaced during their terms without any immediate significant changes in political or economic policies. This is because most long-term policies are established for periods of 5-10 years, making it difficult for any leader to enact sudden changes. Therefore, while the loss of Mr. Trọng is a significant moment, it is unlikely to disrupt the long-term stability and growth trajectory of Vietnam.

At the end of July 2024, the fund’s largest positions were: Lam Dong Minerals and Building Materials JSC (7.7%) – a building material supplier, Thien Long Group (7.4%) – a manufacturer of office supplies, Agriculture Bank Insurance JSC (6.8%) – an insurance company, Minh Phu Seafood Corp (6.3%) – a seafood company, and TNG Investment and Trading JSC (5.0%) – an apparel manufacturer.

The portfolio was invested in 38 names and held 7.7% in cash. The sectors with the largest allocation of assets were consumer (48.1%) and financials (17.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 12.26x, the estimated weighted harmonic average P/B ratio was 1.29x, and the estimated weighted average portfolio dividend yield was 4.80%. The fund’s portfolio carbon footprint is 3.02 tons per USD 1 mn invested.

 AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares returned −0.4% in July 2024 with a NAV of USD 1,699.30. The fund outperformed the benchmark MSCI Frontier Markets Asia Net Total Return USD Index (−0.8%) and underperformed the MSCI Frontier Markets Net Total Return USD Index (+1.9%) and the MSCI World Net Total Return USD Index (+1.8%). Year-to-date, the fund shows a +9.4% return versus the benchmark, which went down by 1.3%. The performance of the AFC Asia Frontier Fund A-shares since inception on 30^th March 2012 now stands at +69.9% versus the benchmark, which is down by 24.7% during the same period, showing an outperformance of +94.6% since inception. The fund’s annualized performance since inception is +4.4%. 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.

After a solid run over the past 12 months, the AFC Asia Frontier Fund took a breather in July. Georgia, Pakistan, Mongolia, and Vietnam were the key performance drivers this month while Uzbekistan, Sri Lanka, Iraq, and Bangladesh were the main negative contributors.

Political events in Bangladesh have moved at a fast pace in the last few weeks which resulted in the resignation of Prime Minister Sheikh Hasina. With the resignation of the Prime Minister, an interim government has been announced led by the very well-respected Nobel Laureate Mr. Muhammad Yunus.

We believe an interim government led by Mr. Yunus is a very good move as he will bring a lot of credibility and is also a well-known personality, especially in the U.S. and Europe, which are the largest markets for Bangladesh’s garment exports.

Though there could be some near-term economic uncertainty, Bangladesh is already in an IMF (International Monetary Fund) program and has taken multiple tough measures in the past year like raising interest rates, devaluing the currency, bringing reforms to the banking sector, removing fuel subsidies, and raising electricity prices.

These challenging economic decisions have already impacted the stock market in Bangladesh with the Dhaka Stock Exchange Broad Index down by -13.1% in USD terms in the last 12 months. However, with a well-respected and technocratic interim government in place in a smooth fashion, investor sentiment is already turning positive in anticipation of further reforms in policy making.

The Dhaka Stock Exchange Broad Index has rallied by +13.3% in the three days since the resignation of the former Prime Minister and we believe that an interim government headed by a stable hand will be able to follow through on the IMF reform program and attain macroeconomic stability once again.

We expect the Dhaka Stock Exchange Broad Index to continue its positive run in the near term as investors build in expectation of less regulatory burden on certain industries and the overall economy in general.

The AFC Asia Frontier Fund is well exposed to Bangladesh with a weight of 10.1%, with investments in key ectors like banking, consumer goods, healthcare, and industrials.

We Expect the Dhaka Stock Exchange Broad Index to Add to its +13.3% Rally of the Last Three Days

Our fund universe is in the midst of results season, and our key fund holdings announced quarterly results which were above our expections. Kaspi (KSPI), the Kazakh fintech giant, and the fund’s largest stock position, once again reported another strong quarter, with 2Q24 net profits growing by +25% while also maintaining its full-year 2024 net profit growth guidance of +25%.

Kaspi has been one of the fund’s key performance contributors this year, as its stock price reflects its solid strategy execution and financial results. However, the stock continues to trade attractively at a P/E ratio of 10.4x its estimated 2024 net profits.

Kaspi has been a Key Contributor to Fund Performance in 2024 and Has Significantly Outperformed Frontier and Emerging Market Benchmark Indexes

In Vietnam, the fund’s largest position, FPT Corp. (FPT), also declared another very strong quarter with net profits growing by 24% in 2Q24, while it continues to report a strong inflow in its software outsourcing order book. FPT has also been one of the top stock performers for the fund in the past year, and despite the rally, we expect the company to have a robust earnings outlook for the next 3-5 years and believe its market cap can see further growth in the years ahead.

FPT is the AFC Asia Frontier Fund’s Largest Position in Vietnam and has Outperformed the VN-Index Significantly

One of the key tailwinds that we believe will drive returns in Asian frontier markets is that easing monetary policies continue to play out in our universe, as we have anticipated over the past few quarters. The Central Bank of Sri Lanka reduced its benchmark interest rates by an additional 25 basis points in July, bringing the total reduction to 725 basis points since June 2023. These lower interest rates are now getting reflected in corporate profitability and will be an important driver for earnings growth in Sri Lanka over the next 12-24 months.

The Central Bank of Sri Lanka has Reduced Benchmark Interest Rates by 725 Basis Points Since June 2023 – This is Positive for Investor Sentiment and Earnings Growth

The State Bank of Pakistan cut its benchmark interest rate by 100 basis points following on from its 150 basis point cut in June 2024. This is the first time in four years that the State Bank of Pakistan is easing interest rates and is in line with our expectations. 

With inflation easing, we believe there is room for benchmark interest rates in Pakistan to go down by another 400 basis points in the next few quarters, which should be extremely positive for investor sentiment and corporate profitability. The fund has a healthy weight of 11.6% in Pakistan and is well positioned to capture the ongoing re-rating in Pakistani equities.

We Expect the State Bank of Pakistan’s Interest Rate Easing Cycle to Support the Ongoing Re-Rating in Pakistani Equities

The best-performing indexes in the AAFF universe in July were Mongolia (+13.5%) and Kazakhstan (+1.6%). The poorest-performing markets were Sri Lanka (−6.1%) and Bangladesh (−0.9%). The top-performing portfolio stocks this month were a stock exchange operator in Mongolia (+54.0%), a Georgian bank (+20.6%), a stock exchange operator in Pakistan (+15.5%), a Pakistani mobile phone assembler (+15.0%), and a Pakistani oil and gas producer (+14.1%).

In July, the fund added to existing positions in Mongolia, Myanmar, and Sri Lanka and reduced its weight in some existing positions in Mongolia.

At the end of July 2024, the portfolio was invested in 67 companies, 2 funds, and held 8.2% in cash. The two biggest stock positions were a fintech company in Kazakhstan (4.6%) and an information technology company in Vietnam (4.6%). The countries with the largest asset allocation were Vietnam (15.2%), Pakistan (11.6%), and Iraq (11.4%). The sectors with the largest allocation of assets were financials (30.3%) and consumer goods (21.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.68x, the estimated weighted harmonic average P/B ratio was 1.24x, and the estimated weighted average portfolio dividend yield was 3.24%. The fund’s portfolio carbon footprint is 0.49 tons per USD 1 mn invested.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned −1.3% in July 2024 with a NAV of USD 1,652.27, underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which gained 0.1% during the month. The fund was up 15.5% year to date versus 12.6% up for the index. Since inception, the fund has gained 65.2% while the RSISUSD index is up by 16.6%, an outperformance of 48.6%.

During the last few days of the month, the risks of a widening Middle East conflict resurfaced with the attack in the Golan Heights, the counterattack in Beirut, and the attack in Tehran. Within Iraq, the U.S. counterattacked in response to two recent attacks on its forces. However, irrespective of the promises of retaliation and counterretaliation, all sides in the conflict made it clear that each did not want an escalation or a widening of the conflict. The risk remains that a miscalculation or an overreaction would lead to such an escalation and/or a widening, irrespective of intentions otherwise. However, this is mitigated by the fact that Iran and Israel pulled back from the brink of the abyss in April 2024, which, at the time, was brought about by a miscalculation that threatened a widening of the conflict. Oil markets, so far, apart from a knee-jerk reaction, seem to be discounting a similar pull-back from the brink of yet another abyss.

Away from these events, a hotter-than-normal July (second chart below), combined with the start at the middle of the month of the 40-day Arbaeen pilgrimage, set the stage for subdued trading activities in which the market meandered aimlessly while trading volumes were low most days of the month. The Arbaeen’s start marks the martyrdom of Prophet Muhammad’s grandson Imam Hussein, and is among the world’s largest annual pilgrimages, which set a record last year with about 22.2 million pilgrims taking part.

Monthly Weather Averages for Baghdad (°C)

July 2024 Temperature Graph for Baghdad (°C)

The top two banks in the RSISX USD Index, the Bank of Baghdad (BBOB) and the National Bank of Iraq (BNOI), which led the market’s recent powerful rally, were down 4.6% and 7.7% respectively – down for the second month in a row after making multi-year highs in late May 2024 (chart below). On the other hand, the other two banks in the RSISX USD Index, Mansour Bank (BMNS) and the Commercial Bank of Iraq (BCOI), were up 5.3% and 2.5% respectively. While some non-bank index constituents rallied strongly, such as Iraqi for Seed Production (AISP) and Baghdad Soft Drinks (IBSD), which were up 13.7%, and 11.9% respectively.

Bank of Baghdad (BBOB) and the National Bank of Iraq (BNOI) versus RSISX Index

The market’s technical picture continues to be positive. Bouts of profit-taking are possible given the full onset of the hot summer months (top chart above), but these should take place within the market’s current multi-month uptrend in the same way that they did over these months (chart below).

Rabee Securities U.S. Dollar Equity Index

We believe that the upside opportunity for the AFC Iraq Fund will come about as the RSISX USD Index, which by the close of the month is 16.9% below its 2014 peak, regains that peak and rallies further, reflecting the developments discussed here over the last few months. However, risks remain given Iraq’s recent history of conflict, extreme leverage to volatile oil prices, as well as the risks that the widening of the current Middle East conflict will not be contained and evolve to destabilise the region.

At the end of July 2024, the AFC Iraq Fund was invested in 8 names and had a cash level of 10.0%. 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 (88.4%), Norway (1.3%), and the U.K. (0.3%).

The sectors with the largest allocation of assets were financials (69.9%) and consumer staples (11.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.95x, the estimated weighted harmonic average P/B ratio was 1.54x, and the estimated weighted average portfolio dividend yield was 5.09%. The fund’s portfolio carbon footprint is 0.08 tons per USD 1 mn invested.

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned −7.6% in July 2024 with a NAV of USD 1,392.59, bringing the return since inception (29^th March 2019) to +39.3%, while the return for the year stands at −19.9%. On an annualised basis, the fund has returned +6.4% p.a. with a Sharpe ratio of 0.29.

July was a frustrating month for the fund as market liquidity came to a near standstill as sellers had virtually no bids to hit, causing share prices to move lower. While markets fluctuate and investing is a long-term focus, our frustration remains that we have been witnessing a two-speed economy and capital markets. While the industrial economy has slowed down this year as the government tightens its belt, the services sector is visibly strong, while first half 2024 GDP grew 6.4%. However, the lack of market participation in the stock market creates a significant gap between the financial and real economy. Still, we appear to be at a turning point which is discussed further below.

Market Update:

The challenge which continues to face the AFC Uzbekistan Fund is the marked dislocation between equity prices and their underlying financial performance amid the backdrop of a strong Uzbek economy. In the first half of 2024, Uzbekistan’s GDP grew 6.4%, foreign direct investments increased 250% to USD 5.32 billion, and in July, the central bank policy rate was cut 50 basis points, from 14% to 13.5%. However, while the fund’s holdings largely reflect this reality as they report quarterly financials, their share prices are not responding accordingly.

This dislocation has been a persistent drag for the fund, and while frustration is not an excuse, it has been expected that after the 2020 – 2021 bull market, which was sparked by what we believe to have been less than USD 10 million in capital invested into the stock market, facilitated by several local brokers and one international broker, that transformative capital markets development would be the catalyst for the market’s next, more sustained move, higher. Our previous discussions on capital markets legislation and infrastructure development are the specific topics that are advancing, though due to the speed of development, equity prices are languishing, even though the underlying companies are performing.

For example, a top-five holding for the fund is Uzmetkombinat (TSE: UZMK). From the launch of the fund on 29^th March 2019, the company’s shares traded from UZS 1,568.64 (adjusted for bonus shares and rights issues) to a high of UZS 17,490 in April 2022, subsequently correcting to UZS 4,100 (-76.5%) by the end of July 2024. During this time, the company’s financial situation has been transformative, to say the least. Undergoing a capacity expansion to double steel production, expected to launch in the fourth quarter of 2024, trailing twelve-month earnings from Q1 2019 were UZS 412.90. This compares to trailing twelve-month earnings from Q2 2024 with earnings per share of UZS 1,179.48, a 186% increase, not accounting for dividends. Over the same period, book value per share has grown from UZS 1,903.52 to UZS 7,208.62, a 278% increase. Based on the last price of UZS 3,760 the P/E ratio is 3.19x, price to book ratio (P/B) 0.52x and the dividend yield 18.1% taking into account the 2022 dividend.

Uzmetkombinat (TSE: UZMK)

Another core holding of the fund is the Uzbek Commodity Exchange (TSE: URTS). Upon the launch of the fund, the company’s shares traded at UZS 2,000 per share (adjusted for bonus shares), rallying to UZS 30,899 per share by January 2022, and ending July 2024 at UZS 14,500 (-53.1%). Trailing twelve-months earnings from Q1 2019 were UZS 515.71, compared to UZS 3,780.45 from Q2 2024 (current P/E ratio of 3.83x), a 633% increase. Over the same period, book value per share increased 237.7% from UZS 1,110.71 to UZS 3,751.70. Meanwhile, total dividends paid out since 2019 are UZS 8,895 per share the current dividend yield is 17.9% (FY 2023 dividend of UZS 2,600 per share).

Uzbek Commodity Exchange (TSE: URTS)

The fund’s portfolio companies largely continue to execute, but share prices are struggling due to the nascent capital markets ecosystem, which again we foresaw when we first started investing here, saying the thesis could take five to seven years to play out as the country opened and liberalised and is now building capacity to better understand how to grow the economy sustainably. Regarding the capital markets, below is an update on specific developments that should in due course lead to greater investor participation and thus enhanced liquidity and the long overdue share price re-rating.

A Near-Term Catalyst? Individual Investment Accounts:

As a refresher we discussed in the May 2024 newsletter that the government was working to implement Individual Investment Accounts (IIAs) which will allow Uzbek residents and citizens, age 18 and older to open an IIA designated brokerage account with the ability to allocate up to 100x the minimum wage (UZS 105 million), or ~USD 8,300 of salaried income that would otherwise be taxable at 12%. 

On 13^th June 2024, the resolution of the Cabinet of Ministers approved the introduction of IIAs and the Tashkent Stock Exchange and stock brokers are now in the process of updating their internal processes to officially launch these accounts, which we anticipate to begin in the third quarter and pick up pace thereafter. 

It remains to be seen if the government will promote this scheme or if brokers and companies will bear this responsibility. Regardless, if introduced correctly, this scheme could lead to a step-change in the capital markets. While the government might be wary of the scheme reducing tax receipts, encouraging development of the capital markets would in due course lead to growing businesses and eventually new employment.

Two Real Examples of What We are Aware of so Far Regarding This Scheme That Will Help to Kickstart the IIA Program: 

Firstly, we are aware of a leading private sector financial institution looking to issue a corporate bond to its employees and clients with a coupon in the high teens. Why would this be attractive to both parties? Well, retail investors would be getting a double-digit interest rate on their capital they would otherwise pay to the tax man, and the company is able to borrow at a roughly 30% discount to what they would be able to borrow at if they issued a corporate bond outside of this scheme, based on current market dynamics and interest rates.

Secondly, a private sector multinational financial institution with over two-million Uzbek clients is developing the internal infrastructure and partnerships with stockbrokers to open IIAs, with plans to launch this offering later this year. 

So, the big question is what does all this mean, and what’s the theoretical potential of the IIA scheme on the capital markets? Well, using the second piece of news from above, a push by a private sector company with a large client base could be “the game changer”. 

According to stat.uz, the home of Uzbek government statistics, the average monthly salary in the country increased 17.4% YoY in the second quarter to UZS 5.09 million (~USD 405). In Tashkent, the average wage has risen to UZS 8.45 million (~USD 673). Thus, if the company in the second example above, with over 2 million customers, is able open IIAs for just 2.5% of its client base, this translates into 50,000 new brokerage accounts. While this may not sound significant, one needs to consider that today, there are only ~40,000 brokerage accounts in existence in Uzbekistan, of which only 10,000 to 15,000 are regarded as being active by the Tashkent Stock Exchange. The addressable investor market would increase dramatically. 

Of course, we aren’t talking about huge sums of capital on an individual basis with an average salary of only ~USD 405, but the law of large numbers can do beautiful things. If 50,000 IIAs are opened and accounting for the 12% tax paid by the average earner in Uzbekistan (not Tashkent), this equates to ~USD 48.60 per month. Multiply by 50,000 and that’s USD 2.43 million PER MONTH of new capital that can go into Uzbekistan’s debt and equity markets. Annualised, this is ~USD 29.16 million, a truly substantial sum of capital for such a nascent market that would be consequential for its development.

Tired of writing this ourselves, our thesis for Uzbekistan’s capital market development since day one has been that it will become easier for local and foreign investors to gain exposure to the market as the on-ramp to account opening is made seamless (digital account openings will facilitate this). With foreign capital via the new custodian in the capital markets “sandbox” (Bank of Georgia), easing bureaucracy for foreigners to increase their investments, building a large domestic retail market has been paramount. We appear to be on the cusp of this which is several painful years of waiting in the making. Once we see market participation grow, we anticipate seeing new corporate bond offerings (several of which we are aware of and which will be issued as a result of the AAI scheme), as well as government privatisations of state-owned enterprises and eventually, private sector IPOs.

Waiting is the hardest and most mundane part in an investment, especially in a world where patience is in short supply, but it’s necessary nonetheless to sit on one’s hands and be patient, even amid the volatility.

At the end of July 2024, the fund was invested in 24 names and held 7.2% cash. The portfolio was allocated to Uzbekistan (92.7%) and Kyrgyzstan (0.1%). The sectors with the largest allocation of assets were financials (43.4%) and materials (23.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.35x, the estimated weighted harmonic average P/B ratio was 0.73x, and the estimated weighted average portfolio dividend yield was 4.54%.

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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