“Start where you are. Use what you have. Do what you can.”

– Arthur Ashe - Former American professional tennis player

AFC Funds Performance Summary

Asian Frontier Markets Report Another Positive Quarter

The momentum continued for Asian frontier markets, with June 2024 ending another solid quarter for our universe and a positive monthly performance by our AFC Asia Frontier Fund and AFC Vietnam Fund. It is not just the past few months that have been good for Asian frontier markets; over the past year, many markets in our universe are now among the top performers globally.

We have consistently communicated since the beginning of 2023 that Asian frontier markets are on the cusp of a strong re-rating and this has played out, leading to a very strong performance of +40% for the AFC Asia Frontier Fund since December 2022.

We expect the AFC Asia Frontier Fund’s strong performance to continue into the second half of 2024 as the key tailwinds of lower interest rates and an earnings recovery are still in place and this is backed by valuations that are still very attractive.

Key Asian Frontier Markets Are Top Performers Globally in the Last 12 Months:
We are not Surprised !
(Returns in USD)

Furthermore, we believe that active management is the way to go when accessing Asian frontier markets since the AFC Asia Frontier Fund’s strategy is benchmark agnostic and looks for ideas by being on the ground. This gives us an edge when it comes to generating outperformance against passive/ETF strategies.

This is important because in June 2024, Blackrock announced the closure of its iShares Frontier and Select EM ETF which has approximately USD 400 million of assets under management. Once this ETF is liquidated, there will be no pure frontier market ETF that we know of which investors can access. Hence, Asia Frontier Capital is one of the few sound platforms offering investors pure frontier market exposure while also outperforming passive/ETF strategies.

The AFC Asia Frontier Fund has outperformed the iShares Frontier and Select EM ETF since its inception in September 2012 and also over a 1, 3- and 5-year time horizon which once again signifies the importance of stock selection, being benchmark agnostic, and active management when it comes to investing in frontier markets.

Actively Managed AFC Asia Frontier Fund Has Outperformed Passively Managed Frontier Markets ETF (Total Returns in USD)

HFM APAC Performance Awards 2024

I am pleased to announce that our AFC Asia Frontier Fund has been nominated for the 21^st HFM APAC Performance Awards 2024 in the category of "Emerging Manager - Smaller Fund - Equity Strategies". We are optimistic about receiving this prestigious award at the ceremony in September 2024.

BarclayHedge Awards
 

Our work was recently acknowledged through two awards from BarclayHedge. The AFC Vietnam Fund was ranked in the Top 10 funds in the sectors “Emerging Markets – Asia” and “Emerging Markets Equity – Asia”. These awards are a testament to the validity of the investment thesis of the AFC Vietnam Fund and underline that it is well-suited as a diversification tool for many equity investors.

AFC Quarterly Webinar on Wednesday, 24^th July 2024

We will host our regular quarterly webinar to update existing and potential investors on the performance and outlook for our funds. The webinar will be held on Wednesday, 24^th July 2024, at 9:00am NY, 2:00pm UK, 3:00pm Swiss, and 9:00pm HK/SG time and will be recorded for viewing at your convenience.

The speakers on the webinar will be:

• Thomas Hugger, CEO & Fund Manager
• Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund
• Ahmed Tabaqchali, Chief Strategist of the AFC Iraq Fund
• Scott Osheroff, CIO of the AFC Uzbekistan Fund
• Vicente Nguyen, CIO of the AFC Vietnam Fund

The webinar will highlight the following key points:

• Drivers of performance for the AFC Asia Frontier Fund in the first half of 2024
• Outlook for the AFC Asia Frontier Fund in the second half of 2024 and beyond
• Key country and stock picks for the AFC Asia Frontier Fund
• Longer-term structural trends benefitting Asian frontier countries
• Outlook for the AFC Asia Frontier Fund / AFC Iraq Fund / AFC Uzbekistan Fund / AFC Vietnam Fund

The webinar will run for 75 minutes, including an extended 30-minute Q&A session following the fund managers' presentations. 

Please click on the button below to register for the webinar. If you are interested but unable to attend, please still register, and we will send you a link to the recording afterwards.

July 2024 Subscription Cut-Off Date

The next cut-off date for subscriptions for our funds will be 25^th July 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 June 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 Travel

AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund returned +1.7% in June with a NAV of USD 3,328.76, bringing the year-to-date return to +5.8% and return since inception to +232.9%. The fund outperformed the benchmark, the Ho Chi Minh City VN Index, which lost 1.3% in June 2024 and has gained 5.1% year to date in USD terms. The fund’s annualized return since inception stands at +12.1% p.a. The broad diversification of the fund’s portfolio resulted in an annualised volatility of 14.88%, a Sharpe ratio of 0.70, 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

June has been an interesting month for the Vietnamese stock market, with the VN-Index surpassing the 1,300 level on 12^th June 2024 for the first time in over two years. This milestone indicates a strong recovery following the market crash from its peak in March 2022. Although the index stayed above the 1,300 threshold for only two days, there is optimism that the VN-Index will soon overcome this important resistance, bolstered by supportive macroeconomic data and positive enterprise earnings.

VN-Index Surpassed the 1,300 Level Again on 12^th June 2024

Local individual investors are rapidly returning to the market, driving its momentum. May saw another increase in the number of stock trading accounts, reaching a record high of 7.9m, equivalent to around 8% of the country's population. According to the Vietnam Securities Depositary (VSD), more than 133,000 new accounts were opened in May 2024 alone.

Number of Trading Accounts Hits an All-Time High in May 2024

Although local individual investor participation in the Vietnamese market has increased significantly over the last four years, it remains relatively small compared to other regional markets such as South Korea, Taiwan, or Thailand. According to our research, individual investor participation is 93.6% in Taiwan, 77.5% in South Korea, and 14.2% in China. This indicates that Vietnam still has enormous potential for growth in the coming decades.

Account Number of Population by Country (%)

As we mentioned in our previous reports, local individual investors were the key factor supporting the market's rise above the 1,300 threshold in June. In recent months, foreign investors have been net sellers with ever-increasing volume. In June, foreign investors sold more than USD 760m, reaching USD 1.9 bn over the last 12 months. Without solid buying by local individual investors, the benchmark would have likely fallen significantly. The low-interest rate policy and the rise in stock trading accounts have considerably supported the market. Looking back at the data from the last 10 years, it is clear that local individual investors have already taken over the key role from foreign investors. While foreign investor participation in daily trading volume was 36% in 2018, it gradually dropped to around 19% in 2024.

Foreign Investors Share in Daily Trading Volume

From 2013 to 2019, local investors and the index were negatively impacted whenever foreign investors sold aggressively. However, this trend started to change during 2020-2024. The impact began to diminish gradually year by year, and in the first half of 2024, even though foreign investors net sold more than USD 1.9 bn, the benchmark still increased by 5.6% (USD term), closing the month at 1,245.32 points. Therefore, we don't see any significant risk from the net selling movement of foreign investors in the last 12 months.

Strong Economic Growth

Vietnam's economy showed a bullish performance in the first half of 2024 with many records in exports, state budget, FDI, and more. In the second quarter of 2024, GDP growth reached 6.93% compared to one year ago, showing an impressive recovery trend for the country after a slowdown in 2023. This economic growth is driven by a recovery in consumption, strong export growth, and stable FDI growth. According to IMF estimates, Vietnam will be the second fastest-growing country in ASEAN in 2024, with a GDP growth rate estimated at 5.8%.

GDP Growth Forecast by IMF in 2024 (%)

Consumption Recovery

The real estate crisis in 2022 led to a slowdown in consumption in 2023, negatively impacting key consumption companies in Vietnam such as Mobile World Group (MWG), the largest electronics and mobile phone store chain, and Haxaco (HAX), the largest Mercedes dealer. However, the low interest rate policy in 2024 has helped consumption to bottom out and start to recover. In June 2024, retail sales in Vietnam showed an impressive growth of 9.1%. With consumption accounting for around 64.3% of GDP components, its recovery plays a crucial role in driving economic growth.

Retail Sales Growth (%)

Strong Export Growth

If you are already an AFC Vietnam Fund investor, then you already know our strong focus on the export sector since 2023. With the belief that Vietnamese export turnover would recover and grow robustly, we allocated more than 20% of our portfolio to export enterprises, anticipating a strong rebound. In 2023, there was a sharp fall in Vietnamese export turnover, causing widespread concern among investors and experts. However, our investment philosophy has been validated. Since September 2023, export turnover has bottomed out and continued to increase strongly each month. In June 2024, exports grew by 10.5%, bringing total turnover to USD 190.1 bn for the first six months of 2024. This already surpasses the export turnover for the same period in 2022, when Vietnam reached its peak in total export revenue. Therefore, we strongly believe that 2024 could hit an all-time high in exports.

We follow this trend closely not only because of our heavy investment in the export sector, but also due to its significant role in the economy. Initially, we observed a rapid recovery among local enterprises, and now, FDI enterprises are rebounding too. This has led to increased imports of materials for manufacturing exports, resulting in a recent trade deficit, which is actually a positive signal for the overall economy.

Export Growth by Month (%)

FDI Disbursement

The stock market is one of the most volatile aspects of the economy, fluctuating constantly with even minor changes. Observing the net sold value of foreign investors might lead to pessimism or concern about hidden economic risks. However, it is important to remember that the stock market represents short-term money flows, or "hot money", whereas Foreign Direct Investment (FDI) reflects a long-term trend. The steady growth of FDI in Vietnam indicates strong confidence from international investors. In June, accumulated FDI disbursement grew by 8.2% to USD 10.8 bn which is a record high in history, while FDI registration also jumped by 13.1% to USD 19.2 bn, proving the long-term growth potential for Vietnam.

FDI Disbursement by Year (USD bn)

State Budget

Since the "Doi Moi period" (a period of sweeping economic reforms) in 1986, Vietnam has achieved its first budget surplus in history. In the first six months of 2024, total state budget income hit a new record high of VND 1.02 trn (USD 40 bn), an outstanding increase of 15.7%, compared to state budget expenses of VND 803 trn (USD 31.5 bn). Consequently, the state budget surplus reached VND 217 trn (USD 8.5 bn). This improvement allows Vietnam to allocate more funds to public investment master plans to build up national infrastructure, promoting long-term economic growth. Furthermore, the improved state budget also helps lower the country's public debt ratio, generating a healthier balance sheet for the nation.

Non-life Insurance Is Attractive

In 2022, our strategic heavy weighting of the insurance sector (around 25%) helped to reduce the AFC Vietnam Fund drop to only 18.8%, about half of the VN-Index's 37% fall. However, the insurance sector, particularly life insurance, faced a significant public relations issue when a famous actor sued a life insurance company. The company opted for a soft solution by compensating the actor, which led to a sharp decline in public trust for life insurance and resulted in negative growth for the entire sector in 2023. The non-life insurance segment was also affected, though to a lesser extent.

Insurance Growth Tumbled in 2023 (%)

In the first quarter of 2024, the insurance sector's growth remained negative, although the decline was less severe than in the previous four quarters. Insurance turnover fell by 4.3% compared to the sharp fall of 11.9% in Q4 2023. Life insurance revenue continued to tumble at 10.9%, while non-life insurance experienced impressive growth of 9.8%. Despite challenges, non-life insurance is attracting foreign investors, with prominent global strategic investors becoming key shareholders in leading companies. For instance, HDI Global SE, Funderburk Lighthouse, and the International Finance Corporation (IFC) are notable shareholders in PVI, while AXA Insurance Finance Group and Firstland Company Limited hold over 20% of Bao Minh Insurance's capital. Additionally, Hyundai Marine & Fire Insurance holds currently 25% of VBI’s charter capital, and Bangkok Insurance and PICC P&C have partnered with Bao Viet since 2018. Companies like BIC, VBI, and PJICO have shown notable growth, with BIC increasing its market share from 3.8% in 2019 to 6.4% in 2023 and PJICO achieving 4,000 bn VND in original insurance revenue in 2023. Vietnam's non-life insurance market, currently valued at approximately USD 2.8 bn, is projected to grow to USD 28 bn by 2030. According to Decision 149/QD-TTg, the goal is to achieve an average insurance premium revenue of 3.5% of GDP by 2025, with plans to grow even more until 2030. Although ambitious, this target is not impossible, considering the projected GDP of Vietnam by 2030. The weighting of non-life insurance is expected to hit 4.0% by 2030, still low compared to developed countries. To achieve this growth, many non-life insurance companies have deployed investment and business expansion plans. For example, Agricultural Bank Insurance JSC (ABI), one of our initial positions since inception, opened seven new branches nationwide to expand its business. During the June AGM, ABI also decided to switch its share listing from UPCOM to the Ho Chi Minh Stock Exchange or Hanoi Stock Exchange in 2025, which will support the stock performance and business growth. Currently, ABI trades at a very low valuation with a P/E of 6.7 times and a P/B of 1.25 times, despite being one of the most profitable insurance companies with an ROE of 17%. Notably, ABI's market capitalization is below its cash level, with a market cap of USD 79 mn compared to a cash balance of USD 123 mn. We strongly believe that when ABI lists on HSX or HNX, its stock price will further increase.

Net Profit of ABI in the Last 10 Years (VND bn)

ABI from February 2023 to June 2024

At the end of June 2024, the fund’s largest positions were: Thien Long Group (7.4%) – a manufacturer of office supplies, Lam Dong Minerals and Building Materials JSC (7.3%) – a building material supplier, Agriculture Bank Insurance JSC (7.2%) – an insurance company, Minh Phu Seafood Corp (6.5%) – a seafood company, and Viet Tien Garment Corporation (5.3%) – a garment manufacturer.

The portfolio was invested in 40 names and held 3.0% in cash. The sectors with the largest allocation of assets were consumer (53.3%) and financials (16.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 12.83x, the estimated weighted harmonic average P/B ratio was 1.27x, and the estimated weighted average portfolio dividend yield was 4.93%. The fund’s portfolio carbon footprint is 3.19 tons per USD 1 mn invested.

 AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares returned +0.2% in June 2024 with a NAV of USD 1,706.59. The fund outperformed the benchmark MSCI Frontier Markets Asia Net Total Return USD Index (−1.9%), the MSCI Frontier Markets Net Total Return USD Index (0.0%) and underperformed the MSCI World Net Total Return USD Index (+2.0%). Year-to-date, the fund shows a +9.9% return versus the benchmark, which went up by 0.5%. The performance of the AFC Asia Frontier Fund A-shares since inception on 30^th March 2012 now stands at +70.7% versus the benchmark, which is down by 24.1% during the same period, showing an outperformance of +94.8% since inception. The fund’s annualized performance since inception is +4.5%. 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 0.51, all based on monthly observations since inception.

The AFC Asia Frontier Fund closed the quarter with another positive monthly return. Myanmar, Bangladesh, Vietnam, Georgia, and Pakistan were the key positive contributors to fund performance. The major negative drivers of performance in June 2024 were Uzbekistan and Iraq.

As discussed in the May 2024 manager comment – when we wrote that better-than-expected inflation numbers in Pakistan should lead to the start of an interest rate easing cycle in Pakistan - on 10^th June 2024 the State Bank of Pakistan reduced its benchmark interest rate by 150 basis points from an all-time high of 22.0%.

We believe this is the start of an interest rate easing cycle by the State Bank of Pakistan as inflation in Pakistan eases over the next few quarters. Historically, declining interest rates have been positive for stock market sentiment in Pakistan, and we believe it will be no different this time around.

Furthermore, lower interest rates should also help overall corporate profitability, which will be another boost for the KSE-100 Index, which continues to trade at a multi-year low P/E ratio of 5.0x. The fund’s allocation to Pakistan is a healthy 11.3% to take advantage of the ongoing bullish sentiment in Pakistan.

The State Bank of Pakistan Cut its Benchmark Interest Rate by 150 Basis Points Marking the Start of an Interest Rate Easing Cycle – this Should be Positive for the Pakistan Stock Market

Vietnam reported better-than-expected 2Q24 GDP growth of 6.9%, which was led by continued momentum in the manufacturing and services sector. We have been comfortable with Vietnam’s overall macro-economic stability over the last few years, and hence, our focus has been on bottom-up stock selection in Vietnam. This strategy has yielded excellent results, with the AFC Asia Frontier Fund’s Vietnam holdings gaining +21.9% year to date in 2024 and significantly outperforming the VN-Index return of +5.1% in USD terms.

Vietnam 2Q24 GDP Growth at 6.9% Was Better than Expected

AFC Asia Frontier Fund Key Holdings in Vietnam Outperforming the VN-Index and Well Leveraged to Vietnam’s Economic Growth

The best-performing indexes in the AAFF universe in June were Mongolia (+4.2%) and Pakistan (+3.3%). The poorest-performing markets were Laos (-1.9%) and Vietnam (-1.3%). The top-performing portfolio stocks this month were a diversified conglomerate from Myanmar (+44.7%), a Bangladeshi industrial gas producer (+34.3%), a stock exchange operator in Mongolia (+30.7%), a Mongolian concrete producer (+23.3%), and a Mongolian technology company (+21.0%).

In June, the fund purchased a pharmaceutical company in Bangladesh and a bank in Vietnam while exiting a bank and a technology company in Sri Lanka. During the month, the fund added to existing positions in Bangladesh, Pakistan, Mongolia, Sri Lanka, and Vietnam and also reduced its weight in existing positions in Mongolia.

At the end of June 2024, the portfolio was invested in 67 companies, 2 funds, and held 7.7% in cash. The two biggest stock positions were an information technology company in Vietnam (4.6%) and a fintech company in Kazakhstan (4.6%). The countries with the largest asset allocation were Vietnam (15.1%), Iraq (12.1%), and Pakistan (11.3%). The sectors with the largest allocation of assets were financials (30.8%) and consumer goods (21.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.03x, the estimated weighted harmonic average P/B ratio was 1.36x, and the estimated weighted average portfolio dividend yield was 2.91%. The fund’s portfolio carbon footprint is 0.48 tons per USD 1 mn invested.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned −2.1% in June 2024 with a NAV of USD 1,674.19, underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost 1.7% during the month. The fund was up 17.0% year to date versus 12.5% up for the index. Since inception, the fund has gained 67.4% while the RSISUSD index is up by 16.5%, an outperformance of 50.9%.

The market’s decline for the month is a continuation of the profit-taking seen after hitting a multi-year high in late April 2024; while there is the potential for continued profit-taking bouts especially with the onset of the slow summer months, 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

The latest annual data from the Central Bank of Iraq (CBI) on the adoption of banking support the assertion - made here most recently in “What Next After a Gangbuster Year ???” – that significant fundamental developments are underway that promise to accelerate the adoption of banking and bring about a transformation of the sector and its role in the economy. The first evidence of these fundamental developments was seen in the acceleration of the growth in net profit and equity values for the country’s top banks – four of which are among the main holdings of the AFC Iraq Fund and among the RSISX USD Index’s major constituents – which translated into a stellar 2023 for these banks as reviewed in “Banks end the Year with a Bang”.

The CBI’s data show that this acceleration in banking adoption was accompanied by significant increases in 2023 over 2022 in the number of bank account openings; issuance of bank cards (pre-paid, debit and credit) and e-wallets; and installations of point-of-sale terminals (POS) and automated teller machines (ATMs). Specifically, in 2023 the total number of bank accounts, bank cards, and e-wallets increased year-over-year by 51.1%, 21.9%, and 67.7% respectively (chart below). These increases built upon the year-over-year growth that started in 2018, as the banking sector’s recovery got under-way following the twin crisis of the ISIS conflict and the fall in oil prices in 2014-2017 that devastated the sector as discussed in “Private Sector Deposit & Loan Growth Continues”.

Number of Bank Accounts, Bank Cards, and E-wallets 2017-2023

The significance of the increases in the numbers of bank accounts, bank cards, and e-wallets lies in their performing banking transactions through the use of ATMs and crucially POS, in increasing the usage of the banking system as a means of payments instead of cash. ATMs and POS had explosive growth in 2023 over 2022 (chart below) – albeit from a very small base in the prior years in which banks played a distant second fiddle to cash in settling transactions. In 2023, the total number of ATMs increased by 80.9% as banks expanded their networks, and the total number of POS increased by 115.2% spurred by the government’s and the CBI’s initiatives and measures for the use of the banking system as means of payments in settling transactions instead of cash.

ATMs and POSs (2017-2023)

The increase in the number of bank accounts, bank cards, e-wallets, ATMs, and POS in 2023 spurred significant growth, year-over-year and month-over-month, in the monthly values of Iraqi Dinar (IQD) transactions through cards and e-wallets (chart below). These build upon the trends that started in 2018, then boosted by the changes in consumer behaviours for the preference of cashless transactions following the onset of COVID-19, as happened elsewhere in the world.

Card and E-wallet Monthly IQD Transactions

All of these positive developments are in the early stages of the transition to the use of the banking system for the payments for transactions instead of cash, and while they are from a small base, the trends are clear and mirror, with a time-lag, those that took place elsewhere in emerging and frontier economies. As such, they reflect an unfolding long-term structural economic transformation that is taking place which has lasting positive implications for the country’s banking sector – which should disproportionally benefit the top banks.

Over time, this structural economic transformation will enhance the new normal for the top banks’ growth profile that was discussed in “Banks end the Year with a Bang”, which will be marked by an increased adoption of banking and of formality, coupled with a move away from the dominance of cash and informality. Such developments that AFC Iraq Fund’s investment thesis for the banking sector would come with growth in bank lending, resulting in an expansion of the money circulating in the economy and consequently an increase in non-oil GDP. Over time, the banks’ net profits should grow substantially, and ultimately feed into higher stock market valuations driven by both net profit momentum and increases in market multiples placed upon these net profits.

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 17.0% below its 2014 peak, regains that peak and rallies further, reflecting the developments discussed above. 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 June 2024, the AFC Iraq Fund was invested in 8 names and had a cash level of 5.5%. 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 (92.9%), Norway (1.3%), and the U.K. (0.3%).

The sectors with the largest allocation of assets were financials (75.9%) and consumer staples (10.1%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.90x, the estimated weighted harmonic average P/B ratio was 1.57x, and the estimated weighted average portfolio dividend yield was 5.17%. 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 −4.3% in June 2024 with a NAV of USD 1,507.43, bringing the return since inception (29^th March 2019) to +50.7%, while the return for the year stands at −13.3%. On an annualised basis, the fund has returned +8.1% p.a. with a Sharpe ratio of 0.43.

June was a tranquil month in terms of economic and capital markets news flow. The annual "chilla", or 40 days of extreme heat, seemed to be the dominant headline in Tashkent. With temperatures already in excess of 40 Celsius, combined with school holidays, locals have left the cities for the countryside and mountains, where temperatures are more moderate. 

The World Bank updated its forecast for Uzbekistan’s 2024 GDP, adjusting it modestly lower, from 5.5% to 5.3%, due to continued budgetary constraints and increasing competitiveness the country faces as it advances its push to liberalise the economy, specifically in easing blanketed subsidies for the population in electricity, water, and gas. This has been a key pillar of the government’s reforms over the past several years but was delayed due to Covid-19. Subsequently, this pushed inflation up 2.8% and 0.24% in May and June respectively, reaching 10.6% YoY. While this may be perceived as “high”, it remains well within our expectations of high single-digit and low double-digit inflation. It is the first uptick since January 2022 and remains a far cry from the high of the last cycle, when inflation peaked at 20.1% in January 2018.

Uzbekistan CPI

We have written many times in past newsletters that the world is changing, transitioning into a multi-polar world where the New Fertile Crescent region and the BRICS are increasingly doing business among themselves, developing alternative payment systems to the Western SWIFT network, and are increasingly purchasing gold to offset trade imbalances among “new economic allies.” As a result of Uzbekistan’s export-oriented focus, as well as its increased mining output, foreign exchange reserves are rising on the back of the high gold price, even in the face of gold sales to allocate to budget expenditures and forex intervention to support the Uzbek som. FX reserves currently stand at USD 36.6 billion or ~41% of GDP, which is a very healthy number for what appears to be an increasingly turbulent world with financial volatility in developed markets and several conflicts in Europe and the Middle East that look like they will accelerate before they conclude.
 
Uzbekistan is at the geographical heart of this new map being drawn between Russia, China, the Middle East, Turkey, and Iran; the country is now benefitting from aggressive Chinese investments, rivalling historically dominant Russian investments. 

With global investors seemingly blinded by the bubble in Nvidia stock, collapsing breadth in the S&P 500 gives us a pause about an eventual broad tech correction, similar to the one in 2000 which risks seeing correlations of asset classes approaching “1” where anything with a bid is sold for liquidity (as we saw in 2020). This would be a positive for many frontier markets, and Uzbekistan’s capital markets and its economy in particular as Uzbekistan remains largely uncorrelated with the rest of the world due to the lack of global interconnectivity, which buffers the country. However, it also causes equity prices to languish when local investors face exhaustion, as they are currently facing, and which is allowing us to continue acquiring shares at prices and valuations we honestly didn’t think we’d see again after the market “took off” in 2020-2021.

For example, one of the fund’s industrial company holdings which was recently privatised by the government ended June trading at a P/E of 2.37x, a P/B of 1.22x and a dividend yield of 10.93%. YoY earnings were flat, while book value surged 40%. The dividend being in line with inflation and ahead of any currency devaluation, it is only a matter of time until Uzbek citizens realize opportunities like these, and we imagine this will unfold once the investment program for salaried employees enabling them to offset a percentage of their otherwise taxable income is launched later this year.

At the end of June 2024, the fund was invested in 24 names and held 8.0% cash. The portfolio was allocated to Uzbekistan (91.9%) and Kyrgyzstan (0.1%). The sectors with the largest allocation of assets were financials (47.4%) and materials (25.9%). 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 0.80x, and the estimated weighted average portfolio dividend yield was 4.11%.

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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