“Nearly every time I strayed from the herd, I've made a lot of money. Wandering away from the action is the way to find the new action.”

― Jim Rogers, American Financial Commentator and Co-founder of Soros Fund Management

AFC Funds Performance Summary

The entire AFC Team wishes our investors and newsletter readers a healthy and prosperous Year of the Rat.

Global market sentiment improved at the end of 2019

A possible "phase one" trade deal between China and the U.S. and less Brexit uncertainty due to a victory for Boris Johnson in the U.K. general elections led to positive sentiment across all markets with developed, emerging and frontier markets all seeing a rally. Asian frontier markets like Pakistan and Mongolia also did well and this momentum led to a positive monthly close for the year for all our four funds. 

2020 began with Iran-U.S. tensions but cooler heads ultimately prevailed

The U.S. airstrike on 3^rd January 2020 which killed the Iranian Revolutionary Guard general Qassem Solemani and the expected retaliatory missile strikes by Iran into U.S. airbases in Iraq on 8^th January 2020 led to a large amount of volatility for global stock markets while crude oil prices increased by around 4% post both these events. However, with both sides having had the opportunity to show their strength, Iran and the U.S. have for now taken a step back from any further aggression which has resulted in a rally in global stock markets while the crude oil price has dropped by close to 5% from its high. 

Though geopolitical tensions in the Middle East could continue leading to volatility in oil prices, Asian frontier markets like Bangladesh, Pakistan and Sri Lanka, which are net oil importers, are much better placed today compared to 12-18 months ago as their current account deficits have contracted since they have taken measures to control non-essential imports giving them a cushion to manage any short term increase in oil prices. Furthermore, Vietnam operates at a current account surplus. We believe that as long as crude oil prices don’t see a sudden large increase of 15-20%, Asian frontier markets should be able to manage any smaller short term spikes in oil prices. 

AFC Asia Frontier Fund 2019 Review and Outlook for 2020

We published our annual review and outlook which discusses the performance of our markets in 2019, themes we like, and also discusses the outlook for our fund universe. In brief, Asian frontier markets are now valued very attractively while fundamentals of the companies we have invested in remain sound. Furthermore, Asian frontier markets remain under-researched, thus providing opportunities to invest in companies at discounted valuations. An important chart from our review and outlook is published below which shows that the valuation discount of frontier markets relative to the S&P500 is at its widest in the past decade – with economic fundamentals stable or improving in Asian frontier markets, this valuation gap should close as earnings growth is set to improve for our fund universe.

Frontier market valuations at big discount to developed markets

Favourable demographics should continue to provide a platform for stable economic growth in Asian frontier markets while trade tensions are expected to lead to a greater number of manufacturing jobs moving to lower cost Asian frontier markets like Bangladesh, Myanmar and Vietnam. Asian frontier markets also continue to be a sound diversification tool as the correlation of the AFC Asia Frontier Fund with the MSCI World Index stands at 0.32 since inception of the fund. Pakistan is our top market pick for 2020. You can read the 2019 Review and Outlook for 2020 here.

AFC Vietnam Fund's 6^th anniversary

The AFC Vietnam Fund returned +2.3% in December, closing the year with a performance of +0.7%. We celebrated its 6^th year since inception with a healthy average annualized return of +10.1% p.a.

AFC Uzbekistan Tour 2020

Asia Frontier Capital will be hosting its second investment tour to Uzbekistan from 29^th April to 2^nd May 2020. We will be taking a small group of investors to experience this wonderful country and better understand the economic and social transformation taking place on the ground today. 

The Uzbekistan Investor Tour will start in Tashkent on 29^th April 2020, with a welcome dinner at City Grill. On 30^th April and 1^st May we will be conducting site visits and boardroom meetings with publicly listed companies in the sectors of chemicals, pharmaceuticals and financial services to understand how these businesses operate in the local capital market environment on a daily basis. For the final part of the trip, on 2^nd May we will visit the ancient Silk Road City of Samarkand for the day, taking the Afrosiab bullet train round trip. This will give us the chance to absorb the unique beauty of Uzbekistan and see one of the many wonders that will attract millions of new tourists to the country in the coming years. If you are interested to join this tour please email us at This email address is being protected from spambots. You need JavaScript enabled to view it.

Below please find the manager comments relating to each of our 4 funds for the month of December 2019.

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.

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 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 gained +2.3% in December with a NAV of USD 1,789.27, bringing the return since inception to +78.9%. This represents an annualized return of +10.1% p.a. The Ho Chi Minh City VN Index in USD lost −0.9%, while the Hanoi VH Index gained +0.1% (in USD terms) in December 2019. For the full year 2019, the fund gained +0.7%, underperforming the Ho Chi Minh City VN Index which rose +8.2% and outperforming the Hanoi VH Index which lost −1.2%. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.53%, a Sharpe ratio of 1.07, and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.

The last month of the year saw a mixed picture. While general weakness persisted during December, we saw some bright spots in the broader market where year-end window dressing led to bigger individual stock movements. In local terms, the HCMC Stock Index lost -1.0% and Hanoi was “flat” at 0.0%, with small- and mid-caps stocks weaker as well.

2019 ended with little change for most indices (small-cap +0.9%, mid-cap −0.1%, Hanoi-Index −1.7%), except for the large-cap dominated HCMC-Index which ended up +7.7%, mostly because of a single month rally in February, where only very few stocks were mainly responsible for the full year's index gain. Despite a very weak market breadth which declined even further in the second half of 2019, our portfolio managed to hold up our NAV ended the year slightly higher with a gain of +0.7%.

Market Developments

Trade tensions between China and the U.S. continued to be the major business headline for most of 2019, hurting investor sentiment towards Emerging Markets and leading to lower global economic growth which was felt in most parts of the world. 

The trade conflict between China and the U.S. seemed to get close to a solution several times over the past year only to leave investors disappointed with no agreement. With the lowest global economic growth expected for 2019 since the 2008-2009 financial crisis, the recent announcement of a phase-one trade deal, which should be signed in the coming weeks, should lead to an improved positive market sentiment for Emerging Markets going forward. Recently, we have seen some renewed strength in many Emerging Markets and hope that the sideways trend will end, which has persisted since 2010.

iShares MSCI Emerging Markets ETF – January 2003 to January 2020

International money flows show an interesting, although unlucky picture for investors like us investing into undervalued stocks in an undervalued market. With the decoupling of a historical trend in world markets in recent years, the valuation gap between the U.S. and the developing world is at its biggest in the past 10 years.

S&P 500 versus EM and Frontier Market Indices 2009-2019

Within Asian frontier markets, Vietnam has already been the main beneficiary in 2019 from a manufacturing shift out of China, despite lower global trade. Depending on future talks and possible agreements from the U.S. with its trading partners, pressure on China’s manufacturing sector will diminish, but a change in direction back into China and out of Vietnam is highly unlikely, simply because of the huge difference in labour costs.

It is nothing new that an economy and its stock market can move in different directions, but unlike a few years ago when the majority of Vietnamese stocks went up, the huge underperformance of most stocks except for the very largest was neither something we expected nor which we liked to see. The good thing about investing and the stock market is that the past is not indicative of future developments. After a prolonged time of suffering in this environment we see so much value in the stocks we own that we think the tide could turn anytime and value stocks will become everybody’s darling again. 

Vietnam Mid Cap Index – Mar. 2014 to Dec. 2019

We also made several adjustments in our portfolio in 2019. The downturn in smaller stocks was accompanied by declining volume, with the exception being when forced selling occurred, mostly driven by foreign investors. During the year we further exited 10 positions, most of them our smallest companies. This was not because we do not see any value in these stocks anymore, but many mid-cap stocks were also hit hard and now offer similar valuations as small-caps, but with much higher liquidity. For example, one of our most recent exits demonstrates the difference of valuation in small and mid-caps compared to Vietnamese large-caps.

Last week we sold a 7% stake in Phuong Nam Education (SED), a small education company we had held since the launch of our fund. This company, while small like our fund when we started, is exactly what we like to see as value investors. A strong balance sheet, decent growth and a high cash dividend yield. Although the stock held up much better than many other small caps over the past two years, the valuation is now cheaper than in 2014. The reason we sold the stock is simply that we can find similar valuations now in larger companies which also better fit the size of our fund.

SED Revenue and Net Profit over the past 5 years (VND bln)

SED distributes educational books for public schools in 26 provinces in the South of Vietnam, with a population of more than 40 mln people. SED is a subsidiary of Vietnam Publishing House, a 100% state owned company.

One example of a company in the mid-cap segment we added in the last quarter of 2019 was Loc Troi Group (LTG), the largest pesticide company in Vietnam. They are located in the Mekong Delta, the largest rice region in Vietnam with 70% of total rice production. The total market cap of LTG is VND 1,692 bln (USD 72.8 mln) and its trailing PER is at 3.5, PBR of 0.6 and it has a dividend yield of 7.9%.

LTG Revenue and Net Profit (VND bln)

Another undervalued stock in the agriculture sector is Vinaseed (NSC). The company is the largest agricultural seed researcher and provider in Vietnam. With a domestic market share of more than 40%, NSC became one of the most important companies in the agriculture sector, mainly due to its research capacity, with a team of more than 200 experts who are developing new seeds. NSC is trading at a PER of 7 and PBR of 1.4 with a total market cap of VND 1,560 bln (USD 67.1 mln)

NSC Revenue and Net Profit (VND bln)

These are just two examples to demonstrate what kind of exceptional value one can currently find in the Vietnamese mid-cap segment.

Vietnam’s economy had another successful year

According to the General Statistics Office of Vietnam (GSO), the Vietnamese economy clocked growth of 7.02% in 2019, one of the highest growth rates in the region.

Vietnam GDP growth – Forecast by World Bank (%)

In 2019, total exports grew at 8.1% to reach USD 263.5 bln compared to imports of USD 253.5 bln, hence the trade surplus reached a record high of around USD 10 bln. 

Vietnam trade value by year (USD bln)

Another positive signal of Vietnam’s economy is steadily declining public debt. According to an estimate from the World Bank, Vietnam successfully reduced its public debt over the last few years from 63.7% in 2016 to 56.1% in 2019.

Public debt per GDP (%)

Another convincing sign of the state of the economy is the very stable currency. Unlike every forecast at the beginning of the year, the VND kept pretty stable against the USD with little volatility (just 1% up and down during the year) – unlike many major currencies of the developed world.

Stable Vietnamese Dong in 2019

Economy

At the end of December 2019, the fund’s largest positions were: Agriculture Bank Insurance JSC (6.6%) – an insurance company, Vietnam Container Shipping JSC (4.1%) – a container port management company, Phu Tai JSC (3.9%) – a home and office furnishings company, Sametel Corporation (3.4%) – a manufacturer of electrical and telecom equipment, and Idico Urban and House Development JSC (3.4%) – an energy, construction, and real estate business.

The portfolio was invested in 59 names and held 5.2% in cash. The sectors with the largest allocation of assets were industrials (32.5%) and consumer goods (30.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.00x, the estimated weighted harmonic average P/B ratio was 1.00x and the estimated weighted average portfolio dividend yield was 7.84%

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned +1.6% in December with a NAV of USD 1,093.32, bringing the return since inception (29th March 2019) to +9.3%.

2019 was an exciting year with the launch of the AFC Uzbekistan Fund on 29^th March 2019 and the fund more than doubling in assets under management in its first nine-months. In the face of the Central Bank free-floating the Uzbek Som, which saw the currency depreciate by 13.1% in 2019 and 13.3% since the launch of the fund, the fund nonetheless returned positive performance of +9.3%. 

December saw the government privatize a further 5% tranche of listed glass producer Kvarts (TSE: KVTS), which was 101.4% subscribed for. This was an encouraging sign to us that domestic interest in the stock market is increasing, since during the company’s IPO in April 2018 when the first 5% of the company was sold, the IPO was only 54% subscribed for.

Furthermore, on 22^nd December Parliamentary elections were held and with 71.1% voter turnout 125 deputies of the 150 seat lower house of the Oliy Majlis (Uzbek Parliament) were elected. The second round of elections were held on 6^th January 2020.

AFC Uzbekistan Fund valuations as of 31^st December 2019

2019 Highlights:

2019 may best be characterized as the year of significant policy announcements, helping Uzbekistan to earn the title of the nation which improved the most in 2019, according to The Economist magazine (link here). 2020 should therefore be the year these announced policies are implemented and strength-tested.

Currency liberalization opens the Uzbek market to foreign investment:

On 2^nd March 2019 capital controls for foreign investors were formally lifted, with Asia Frontier Capital being the first foreign investor to successfully repatriate capital back to Hong Kong. This move was followed by the lifting of capital controls for Uzbek nationals on 20^th August, 2019; the same date also saw the Central Bank announce that it was transitioning the Uzbek Som from having a managed free-float to being free-floating. Leading up to the announcement, the Som had lost several hundred basis points versus the USD, causing the Uzbek Som to end 2019 down 13.1%. The floating of the currency having been a one-off event, we anticipate Som depreciation versus the USD in 2020 to be significantly lower, likely in the 4% to 7% range.

USD/UZS Exchange Rate for 2019

Foreign investors permitted to buy bank stocks:

On 6^th September 2019, the Central Bank lifted a ban on foreign ownership of banking stocks, which was in place since 2008. This was a milestone for the development of the capital markets where listed banks represent approximately 83% of the market capitalization of the Tashkent Stock Exchange, helping to increase liquidity and provide an alternative financing mechanism for banks to raise capital. Uzbek banks are amongst the best avenues to gain exposure to the under-leveraged consumer and SME’s, with private credit to GDP estimated at roughly 15% of GDP.

Following this change in legislation during September, on 25^th November Uzpromstroy Bank (TSE: SQBN), the “Industrial and Construction Bank,” issued a USD 300 mln 5-year Eurobond with a YTM of 5.75% (initial expectations were for 6.5%) which was 4x oversubscribed. SQBN’s credit profile is rated as BB- with a Stable outlook by S&P. On the equity front, on 23^rd December Hamkor Bank announced plans to issue 2.6% new equity through the stock exchange, a sign that banking sector activity is heating up.

Presidential support of capital markets reform and a conference bonanza:

2019 proved to be a busy year for conferences on Uzbekistan with the country receiving increased attention at two conferences in Georgia, one in London, several government forums in USA, and on 15^th November a conference in Tashkent which was hosted by the Capital Markets Development Agency (CMDA) with roughly 200 attendees, approximately 30% of whom were foreign investors, bankers and consultants.

Following a meeting on 7^th October 2019 where President Mirziyoyev met the CDMA and Agency for State Asset Management, he directed them to “consolidate all relevant laws, acts and decrees into a single, simple and flexible capital markets code by the end of 2020.” With the President’s endorsement to advance the development of the capital markets, after the investor conference in November, the CDMA announced there will be at least 4 IPO’s/SPO’s of state-owned enterprises in 2020, including the Uzbek Commodities Exchange (TSE: URTS) and Jizzakh Plastics (TSE: JIPL), an indication that momentum for capital markets reform and state privatizations is increasing.

At the end of December 2019, the AFC Uzbekistan Fund was invested in 29 names and held 4.0% in cash. The markets with the largest asset allocation were Uzbekistan (93.3%) and Kyrgyzstan (2.7%). The sectors with the largest allocation of assets were materials (54.1%) and industrials (14.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.18x, the estimated weighted harmonic average P/B ratio was 0.69x and the estimated weighted average portfolio dividend yield was 8.64%.

AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares increased by +0.9% in December 2019 with a NAV of USD 1,273.54. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (-3.2%) but underperformed the AFC Frontier Asia Adjusted Index (+1.3%), the MSCI Frontier Markets Net Total Return USD Index (+4.3%), and the MSCI World Net Total Return USD Index (+3.0%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31^st March 2012 now stands at +27.4% versus the AFC Frontier Asia Adjusted Index, which is up by +8.8% during the same time period. The fund’s annualized performance since inception is +3.2%, while its 2019 performance stood at -6.7%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.82%, a Sharpe ratio of 0.28 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.32, all based on monthly observations since inception.

It was another month of positive performance for the fund as the momentum continued in Pakistan while Mongolia had a good rebound. The recovery in some Asian frontier markets over the past few months is not surprising as valuations within our universe and for the fund remain very attractive while fundamentals are also strong, as shown below. To read more on this as well as about our fund universe, you can read our 2019 Review and Outlook for 2020 here.

Fundamentals of AFC Asia Frontier Fund holdings are solid

The Ho Chi Minh VN Index was weak this month despite fourth quarter 2019 GDP growth coming in at a robust 7%. One concern for the market was rising inflation due to higher pork prices as December’s inflation number came in at 5.2%, the highest since January 2014. Foreign direct investment (FDI) for 2019 grew by 6.7% to USD 20.4 billion with most of this going towards the manufacturing sector, a reflection of Vietnam’s attraction as a low-cost manufacturing destination especially in light of trade tensions. Despite the VN Index decreasing by 1% this month, the fund’s Vietnamese holdings remained flat.

The rally in Pakistan’s KSE100 Index continued as the IMF provided a relatively positive report on the country’s economy after completing its first review of the USD 6 bln loan program. The positive completion of this review has led to the disbursement of USD 453 mln taking the total disbursements to USD 1.4 bln. On the negative side, the government has proposed another large increase in gas prices by 32% and this could impact inflation over the next few months which could delay the Central Bank’s plans to cut interest rate to the latter part of the first half of 2020. However, these reforms are much needed and the recent run up in the stock market should have more legs as valuations are attractive while earnings growth should see a recovery in the second half of 2020.

Pakistan’s KSE100 still cheap and has room to increase further

After witnessing two strong months, the Colombo All Share Index in Sri Lanka corrected by -1.3% but for no specific reason. The Central Bank passed new capital adequacy rules for the banking sector which provides some capital cushion for the sector. From the fund’s bank holdings, this new rule is positive for Hatton National Bank and neutral for Commercial Bank of Ceylon. Positive sentiment from the change in government is being reflected in business sentiment as the Sri Lankan LMD-Nielsen Business Confidence Index saw its highest value since September 2015. Furthermore, the decline in tourist arrivals is also beginning to bottom as December 2019 arrivals decreased by only 4.5% while the sector sees a recovery from the Easter Sunday attacks which took place in April 2019.

During the month, Fitch downgraded Sri Lanka’s outlook to negative due to the recent tax cuts which could impact the country’s fiscal deficit and overall debt sustainability. However, with the new government in power just for over a month and the new budget not yet passed, there is a likelihood that such tax breaks could see some changes over the next few months. Overall, we expect much better economic growth in 2020 for Sri Lanka after a challenging 2019.

The Dhaka Stock Exchange Broad Index (DSEX Index) corrected by 5.9% during the month as regulatory concerns surrounding Grameenphone continue while the government is still pushing the banking sector to reduce their net interest margins which is leading to a large amount of uncertainty in the sector as well as amongst investors. The fund does not hold Grameenphone and has only one bank position which is BRAC Bank.

Despite the weakness in the market, the fund’s Bangladeshi portfolio had a positive month due to a positive move in Beximco Pharmaceuticals which is the fund’s largest position. The stock remains attractively valued at a P/E of 7.2x its 2020 earnings. The fund holds the London-listed GDR which currently trades at a 24% discount to the local listing. 

Mongolia contributed the most to performance this month as the Mongolian Stock Exchange Top 20 Index rallied by 4.5%, its biggest monthly gain in 2019. Attractive valuations and a continued economic recovery in Mongolia led to a broad-based rally. Oyu Tolgoi, a copper/gold mine, is now back on track, which improved investor sentiment and likely also helped to dive stocks higher.

The best performing indexes in the AAFF universe in December were Laos (+8.4%), Mongolia (+4.5%), and Pakistan (+3.7%). The poorest performing markets were Bangladesh (−5.9%) and Kyrgyzstan (−2.3%). The top-performing portfolio stocks this month were a Mongolian leather producer (+37.1%), a Mongolian trading company (+34.4%), a Mongolian junior copper miner (+28.6%), a Mongolian real estate company (+28.2%), and a Papua New Guinean drug store chain (+24.6%).

In December, the fund partially exited one Mongolian holding and two Vietnamese holdings and added to existing holdings in Mongolia and Vietnam.

At the end of December 2019, the portfolio was invested in 76 companies, 2 funds and held 5.7% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (9.7%) and a pump manufacturer from Vietnam (8.3%). The countries with the largest asset allocation were Vietnam (22.6%), Mongolia (17.2%), and Bangladesh (16.5%). The sectors with the largest allocation of assets were consumer goods (24.0%) and industrials (18.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.09x, the estimated weighted harmonic average P/B ratio was 0.78x and the estimated weighted average portfolio dividend yield was 4.21%.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned +0.8% in December with a NAV of USD 627.08 which is an underperformance versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned +2.6% for the month. In 2019 the RSISUSD was down −1.3% while the fund was up +6.7% YTD.

Stop the Press: Just as this newsletter was being readied for publication, the news came of a US strike in Baghdad that targeted a car carrying Iran’s top general and a senior commander of Iraq’s Paramilitarily Units (PMU). The attack raised the often-discussed spectre of a US-Iran proxy war fought in Iraq. While this is a real possibility, and events are extremely fluid, there a few points that should be taken into account amidst the ongoing media coverage:

• Angry rhetoric from Iran promising fire and brimstone is a given, however, irrespective of all the bluster, Iran cannot afford a direct or indirect full confrontation with the US given the severe weakness of its economy.
• Iran’s false reading of the US’s hesitation to order a full strike a few months ago led it to push the envelope assuming the US would not retaliate. This attack, demonstrating the extreme extent to which the US will go to defend its interests, will force Iran to re-calculate especially given that the US will be in the midst of an election campaign that will likely see the re-election of the current administration.
• The dilemma for Iran is the need to retaliate to save face, but without crossing the now abundantly clear US red line, or for that matter starting a wider conflict in the region that it can ill-afford to wage. The Iranian missile attack fits a resolution of this dilemma, a significant symbolic attack that domestically satisfies the need to retaliate, and regionally establishes its ability to hit back with force, but without damage to the US.
• Iraqi politicians, especially some with sympathies to Iran will, after expressing their perquisite outrage over the violations of sovereignty and threats of revenge, realize that being placed in the same position as that of sanctioned Iran is not advantageous to them, to Iraq, or to Iran.
• The recent decision by the Iraqi parliament regarding foreign military presence supports the argument made here, in that it’s high on theatrics, but low on substance. It was not a decision to end US military presence, but a typical Iraqi fudge. In essence, it’s a resolution asking the government to do five things, of which two are worth noting: (1) Cancel the request for global coalition support made in 2014; and (2) for the government to work towards ending the presence of all foreign troops. Crucially, the request for global coalition support in 2014 was made by the then government, without parliamentary oversight, and as such could have been cancelled directly by the government, yet it chose to pass the buck to parliament using the excuse of being a caretaker government, but parliament then passed it back. The next steps would involve a lot of noise and bluster, but most likely the resolution would be watered down to an aspiration once the uproar subsides.
• Finally, within Iran, the government finds itself for the first time in a position to conduct a rational foreign policy, unlike the shadowy operations that were Iran’s effective de-facto foreign policy in the region. This will likely manifest through back channel diplomacy once the dust settles over the next few months.
• However, the next few weeks are to be marked by a lot of noise and come with spurious threats and counter threats that are reminiscent of the fire and fury that marked the exchanges between the US and North Korea a few years ago, but this time taking place in the most volatile region in the world.

While these events are being played out, it’s worthwhile to look at the Iraq investment story purely on its own merit, especially as the stock market was up +1.5% in local currency terms for the year as of Thursday 9^th January 2020 and was building on the trends discussed below. Crucially the market price of the US versus the Iraqi Dinar has only moved up by about +2.5% above the levels for most of the last 20 months. After stabilising in early 2018, it has traded briefly at current elevated levels before the elections in May 2018, during the tanker hits during the summer, and finally, the recent attacks on Saudi oil installations.

The outlook for the Iraqi equity market for 2020 will be shaped by the three events that marked 2019:

• The equity market’s bottoming following a multi-year bear market
• The increasing signs, at both a macro and company level, of an economic recovery
• The repercussions of a youth led protest movement that is bringing with it profound changes (mostly positive) to the Iraq story culturally, politically and economically

Protest movement art in Baghdad’s Tahrir Square

The Iraqi equity market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), ended December up +2.6% and down –1.3% for the year, while the AFC Iraq fund under-performed in the month, up +0.8%, but out-performed for the year, up  +6.7%. This was the second year the fund ended on a positive note, unlike its benchmark. In 2018 the fund was up +3.6% while the benchmark was down –15.0%.

2019’s decline of –1.3% by the Rabee Securities RSISX USD Index (RSISUSD) comes on the back of declines of –15.0% in 2018, –11.8% in 2017, –17.3% in 2016, –22.7% in 2015, and –25.4% in 2014. The small scale of the 2019 decline, the improved market dynamics and the bottoming in trading turnover all point to a bottoming market formation after a brutal bear market that saw the index decline by –66.1% from the peak in early 2014 to the end of 2019.

The first of the market’s improved dynamics is its discriminating nature in evidence throughout the bank rally that started in May 2019, which at the time was led by a stunning rise in Iraq’s leading bank, the Bank of Baghdad (BBOB), which was  up +62.5% in May on hopes it would resume dividend payments for the year. These expectations led to other leading banks such as the National Bank of Iraq (BNOI), Mansour Bank (BMNS) and Commercial Bank of Iraq (BCOI) to join the rally. Subsequently, BBOB’s quarterly earnings results confirmed expectations that it is following through with the recovery in its fortunes that began in 2018 as part of the overall conditions in place for the sector’s future revival. Nevertheless, BBOB did not resume dividend payments for 2018’s earnings. However, unlike in prior years, BBOB declined from the May 2019 peak, yet did not lose all the gains– and more importantly while it pulled the other leading banks up with it in May, it did not drag them lower in the following months. By year end all of the leading banks were meaningfully higher than their pre-May rally lows.

Indexed performance: Bank of Baghdad - BBOB (black), Commercial Bank of Iraq – BCOI (purple), Mansour Bank – BMNS (blue), National Bank of Iraq - BNOI (green)

The second aspect of the improved market dynamics is the broadening of breadth and the market’s focus on the hopes of an earnings recovery for some of the industrial stocks even before any signs of such recovery can be detected in their earnings report during 2019. This dynamic was evident in small industrial companies and in healthcare providers classified under the industrial sector on the Iraq Stock Exchange (ISX), as discussed here in the last few months. The chart below shows the price action of Al-Mansour Pharmaceuticals Industries (IMAP), Al-Kindi of Veterinary Vaccines Drugs (IKLV), National Chemical & Plastic (INCP), and Metallic & Bicycles Industries (IMIB).

Indexed performance: Al-Mansour Pharmaceuticals Industries- IMAP (green), Al-Kindi of Veterinary Vaccines Drugs- IKLV (black), National Chemical & Plastic – INCP (purple), Metallic & Bicycles Industries -IMIB (blue)

Normally, cyclical stocks outperform defensive or growth stocks at the start of economic recoveries even though their earnings do not support this outperformance – at least initially. It can be argued that similar dynamics are taking place through the action of cyclicals on the ISX in 2019 such as the banks, mentioned earlier, versus those of market stalwart growth stocks – Pepsi bottler Baghdad Soft Drinks (IBSD) which was down –8% for the year, or for mobile telecom operator Asiacell (TASC) which straddles the cyclical and defensive sectors due to the specifics of its earnings drivers since 2014, which was up +12% in 2019. In contrast, in 2018 both were up +34% and +47% respectively, but the banks were down, such as BBOB –52%, BMNS ­–20%, BNOI –28%, BCOI –4%. Even though the analysis of cyclicals versus growth stocks can only go so far on the ISX, given its illiquidity and limited diversification, the logic of an economic recovery driving cyclical earnings is applicable.

This economic recovery was initially driven by the revival in government spending on goods and services and on wages, the evidence of which was seen in: (1) the upturn of the country’s exports and in new vehicle sales as reported here in September; and (2) the continued growth of broad money, or M2, as a proxy for economic activity as reported here in November.

Data from the Central Bank of Iraq (CBI) on private sector deposits and credit to the private sector support the above trends. These show private sector deposit growth of +12% for the year by end of September 2019 after a few years of no change, while credit to the private sector was up +3% for the period but should accelerate as the economy continues to recover.

The above chart is based on aggregate data for the private sector with the banking system as a whole – both for state banks, and commercial sector banks which accounted in 2018 for 36% of total credit to the private sector and 37% of private sector deposits – and thus do not show the performances of specific commercial banks listed on the ISX.

Drilling down to the company level within the commercial banking sector, the earnings profile of the National Bank of Iraq (BNOI) for the first nine months of 2019 (9M/2019) demonstrates the above macro trends. For BNOI private sector deposits were up +54% in 9M/2019, while credit to the private sector was up +116% for the same period. Its pre-tax earnings for 9M/2019 hold promise for strong full year earnings – a long way to go before recovering to pre-crises levels– but supporting management’s bullish expectations for the year. While it’s not possible to extrapolate much from these results, or to generalize for the sector as a whole from them, they support in any case the argument that the conditions are in place for the sector’s recovery in 2020.

The macro and the micro trends discussed so far are affected by the youth protest movement that dominated all events in Iraq from the 25th of October 2019 after the initial wave of protests in early October. The protest movement forced the political elite to implement reforms that would threaten their interests – contrary to earlier expectations of the opposite. Parliament approved electoral reforms that if made into law would be a meaningful departure from the prior ones that largely allowed the political elite to maintain their oversized influence on successive government formations.

If the hoped-for early elections in 2020 are to be conducted under these electoral reforms they will most likely lead to the formation of the next government with a majority in parliament and parliamentary opposition, as opposed to the case since 2003 in which successive governments were composed of all parties in parliament. This was the root cause of the failures of the past to implement the reconstruction of the country, as each party pursued its own program within its own sphere of influence within an all-inclusive government.

These developments have yet to be played out and a lot of uncertainties remain, yet the near-term effect on the economy would be that the current caretaker government, while unable to act on capital spending plans, will follow up with implementing the current spending element of the 2019 expansionary budget. Moreover, it will continue to implement this budget in 2020 through the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The government has plenty of firepower to fund this spending in the form of a 33-month cumulative surplus of about USD 28.9 bln that will increase in a firmer oil price environment. The most important consequence of this is the sustainable continuation of the consumer led economic recovery discussed in earlier paragraphs.

The stock market continues to look through the political developments to the upcoming economic recovery, and while it’s in the early process of forming a base it is worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy). This divergence is still at the widest it has been for the last few years and it is showing tentative signs of narrowing this divergence as the above chart shows.

As of the end of December 2019, the AFC Iraq Fund was invested in 14 names and held 1.3% in cash. 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 (95.7%), Norway (2.3%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (50.0%) and consumer (20.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 14.65x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 5.55%.

I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
CEO & Fund Manager

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AFC Asia Frontier Fund: 2019 Review and Outlook for 2020
 

Please find below our “2019 Review and Outlook for 2020” for the AFC Asia Frontier Fund.

2019 was a challenging year for Asian frontier markets with a number of headwinds such as the ongoing China-U.S. trade war, domestic policy issues, geopolitical uncertainties and soft investor sentiment towards frontier equity markets. Despite the global and domestic uncertainties in our fund universe, the economic growth and macro environment in a large part of our universe is still very healthy while markets like Pakistan and Sri Lanka have seen a significant improvement in their economic and political situation which is not yet fully reflected in their stock markets.  More importantly, the demographics in our fund universe with a large young population is why we continue to be extremely positive on the long term outlook for Asian frontier markets with Bangladesh, Pakistan and Vietnam having some very good consumption focused themes. Furthermore, the ongoing trade tensions as well as the search for lower cost manufacturing destinations is leading to an increase in foreign direct investments into Bangladesh, Myanmar and Vietnam which is having a positive impact on economic growth, employment and consumption. Economic reforms also continue in Asian frontier markets with Uzbekistan standing out in this area as it goes through a wave of market oriented reforms.

As we enter 2020, we expect global economic growth to have tailwinds through dovish central bank policies and an incremental improvement in trade and geopolitical uncertainties which should lead to better sentiment towards frontier markets. Furthermore, taking a three to five year view, Asian frontier markets are still expected to have amongst the highest economic growth rates relative to other regions which should benefit their stock markets as the negative investor sentiment in frontier markets has made valuations across our fund universe extremely attractive with our AFC Asia Frontier Fund trading at a P/E of 8.1x, its lowest multiple since inception.

In addition to this, Asian frontier markets are under-researched and the negative sentiment has led to more companies being ignored by investors which has also made valuations very attractive. Despite the negative market sentiment, correlations and volatility for the fund have held up with the correlation of the AFC Asia Frontier Fund with the MSCI World Index at 0.32 since inception while annualized volatility since inception stands at only 8.9%, lower than last year’s levels of 0.37 and 9.3% respectively -  this makes the fund a sound diversification tool for investors. Therefore, we believe that attractive valuations, stable to improving earnings growth and a change in sentiment towards frontier markets should lead to a rebound in Asian frontier markets in 2020. We expect the stock market rebounds in Pakistan and Sri Lanka to continue in 2020 while equity markets in  Kazakhstan, Uzbekistan and Vietnam should generate healthy returns next year.

We hope you find the "2019 Review and Outlook for 2020" useful and thank you for your investment and your interest in our monthly newsletters and travel reports. Please let us know if you have any questions about this report or on any of our markets.

2019 Review

Trade tensions between China and the U.S. and geopolitical uncertainties in the Middle East continued to consume most of the headlines in 2019 which hurt investor sentiment, while worries not only about slower global economic growth but also the economic slowdowns in larger emerging markets, like China and India, dampened investor sentiment towards emerging and frontier markets in general.

The trade conflict between China and the U.S. continued with both ups and downs with market participants expecting a partial trade agreement on multiple occasions only to be disappointed with no agreements and at times an escalation between both parties. However, the workings of a phase one trade deal were announced on 13^th December 2019 which should lead to more positive market sentiment going forward. The tensions between the U.S. and its trading partners were the major factor for the International Monetary Fund reducing its global economic growth forecast to 3.0%, a 30 basis point reduction from its April 2019 outlook, the lowest global economic growth since the 2008-2009 financial crisis.

In addition to trade and geopolitical tensions, many countries across frontier and emerging markets had domestic policy issues to contend with which were unrelated to trade or geopolitical uncertainties. Asian frontier economies like Bangladesh, Pakistan and Sri Lanka and emerging one’s like China and India all had domestic related issues as well, impacting economic growth and investor sentiment in 2019. However, in some markets like Pakistan and Sri Lanka, the tide is turning for the better and we will discuss this further below and in our 2020 outlook.

After increasing interest rates aggressively in 2018, 2019 saw central banks globally go on a loosening spree as worries over economic growth surfaced. The U.S. Fed cut interest rates three times by 25 basis points each, with all three cuts happening in the second half of 2019. Asia also saw almost all major central banks cut rates as the chart below shows.

From an overall macro environment though, Asian frontier countries are either in a strong position or are seeing a big improvement as the higher interest rates and currency weakness of 2018 lowered unnecessary imports and helped to improve current account balances. Bangladesh, Pakistan and Sri Lanka, all of which suffered from widening current account deficits in 2018, witnessed a reduction in their current account deficits – a much needed boost to macroeconomic stability. Vietnam on the other hand continues to post a current account surplus thanks to rising exports.

GDP growth in Asian frontier markets is also expected to be bottoming out for countries like Pakistan and Sri Lanka, while economic growth rates remain robust in Bangladesh, Kazakhstan, Mongolia, Myanmar, Uzbekistan and Vietnam. However, despite stable to improving macro-economic indicators, investor sentiment towards frontier and emerging markets was extremely weak in 2019 due to the factors mentioned above, i.e. trade tensions and their impact on global economic growth rates.

This is an important point as frontier and emerging equity markets, despite having a stable to improving macro environment and/or stable to improving GDP growth rates, have been underperforming developed stock market indices i.e. the U.S. As the chart below shows, the S&P 500 Index has outperformed frontier and emerging markets by a large margin over the past decade while valuations in frontier markets, and more specifically in Asian frontier markets, have become very attractive relative to expected growth rates. The AFC Asia Frontier Fund now trades at its lowest ever P/E multiple while many of the fund’s markets, as well as stocks, are trading at a big discount to historical valuations.

The S&P 500 has outperformed frontier and emerging markets over the past decade

While the valuation gap between frontier and emerging markets versus the S&500 has increased

Attractive valuations and stable to improving GDP growth rates in Asian frontier markets are backed by extremely favourable demographics with our universe hosting some of the most populous countries globally. Despite uncertainties about trade, most of the countries in our universe are domestically driven and hence consumption by a large, young population is a stronger longer-term trend relative to ongoing trade tensions. Bangladesh, Kazakhstan, Myanmar, Pakistan, Sri Lanka and Uzbekistan at present do not have a large percentage of their GDP exposed to trade.

Within our universe, Vietnam is the major economy which is highly exposed to global trade with total trade accounting for almost 200% of GDP. But even here, Vietnam is actually benefitting from the trade tensions between China and the U.S. as it sees an increase in foreign direct investments and exports. This is also an important trend in Asian frontier markets as not only Vietnam but also countries such as Bangladesh, Cambodia and Myanmar are expected to gain with wages in China increasing and Asian frontier markets offering lower cost alternatives which are also geographically well positioned.

Despite Asian frontier markets having had a tough year in 2019, correlations of Asian frontier markets with the MSCI World Index sustained their low attractive levels with some markets such as Bangladesh continuing to have a negative correlation with the MSCI World Index. This reflects the sound diversification opportunity that Asian frontier markets offer. Furthermore, the fund’s benchmark agnostic strategy has sustained its low volatility with the annualised volatility of the AFC Asia Frontier Fund at 8.9%, much lower than most indices as shown below.

Importantly, Asian frontier markets remain under-researched and this trend is continuing given the soft sentiment towards frontier markets. The table below shows the number of sell side analysts covering well-established blue-chip companies within our universe relative to larger emerging markets. In the current environment, many of these companies besides being under-researched are also now being ignored by a large set of investors due to the current sentiment towards frontier markets. The result is that there are a number of bargains available. Furthermore, in line with our policy of being on the ground for research, our team conducted visits in 2019 to Bangladesh, Cambodia, Iraq, Jordan, Kazakhstan, Mongolia, Myanmar, Oman, Pakistan, Sri Lanka, Uzbekistan, and Vietnam. Through this, our team carried out close to 200 one-to-one meetings with company management teams.

Asian frontier companies are currently under-researched and ignored

(Source: Bloomberg)

Below we discuss the 2019 performance for our key markets, the stocks we like and the long term trends we observe. The 2019 overview is according to country weights of the fund.

(Source: Asia Frontier Capital)

Vietnam

The macro-economic story of Vietnam remains one of the most superior in frontier markets as it benefits from the trade tension between China and the U.S. This is reflected in rising foreign direct investments (FDI), not only from traditional investors like Japan and South Korea but also from China as manufacturers look to shift production to Vietnam to escape uncertainties over tariffs and higher costs. Exports, manufacturing growth and retail sales were robust in 2019, while tourism arrivals grew strongly as well.

From a stock market perspective, the VN Index gained +7.0% in 2019 but a large part of this performance has come from a few stocks, namely the Vingroup companies, a handful of banks and Petrovietnam Gas JSC (GAS). The strength in the market has not been broad-based across market cap ranges which one usually sees when an economy is doing as strongly as Vietnam’s is. Though the fund does not hold some of these large cap names since it follows a benchmark agnostic approach, and in certain cases cannot buy these names because the foreign ownership limit is full, it has exposure to companies across small, mid and large cap names. Amongst large cap names, the fund owns Airports Corporation of Vietnam (ACV), Vincom Retail (VRE) and Vietnam Engine & Agricultural Machinery Corporation (VEA).

VN Index performance was led by a few large cap names – broader market did not increase as much - VN30 Index and VN70 Midcap Index underperformed the VN Index

In last year’s review we wrote that we like the tourism sector in Vietnam because the growth of low-cost carriers in the region is making it cheaper to travel while spending time as a tourist in Vietnam is also very economical. International tourist arrivals have grown by 15.4% in 2019 with the growth being led by Asian tourists which increased by 18.2%. This momentum in international arrivals has helped ACV not only improve its growth rates but also its margins since international passengers provide higher margins. Revenues and net profits in the first nine months of 2019 have grown by 13.0% and 19.3% respectively while gross margins have improved by 110 basis points YoY to 51.8%. Furthermore, higher margin non-aeronautical revenues which also consist of duty-free revenues have grown by 13.4% so far in 2019. At an EV/EBITDA of 11.5x based on 2020 earnings, the stock remains attractively valued against other Asian peers like Airports of Thailand and Shanghai International Airport which trade at an EV/EBITDA of 24.7x and 18.6x respectively.

Most Asian airports have generated superior returns in the long run

In last year’s review & outlook we also mentioned that we like the auto and modern retail sector. The fund’s auto holding, VEA, which has equity stakes in the local operations of Honda, Toyota and Ford has witnessed a 6% growth in net profits so far in 2019, slightly lower than expected due to certain one-off expenses. However, passenger car and commercial vehicle sales of Honda, Toyota and Ford grew by 36%, 39% and 59% respectively in the first nine months of 2019. With passenger car penetration in Vietnam remaining very low compared to other regional countries, VEA’s growth rates should improve going forward as consumers upgrade from motorbikes to passenger cars. The stock remains very cheap at a trailing 12 months P/E of 9.3x and a dividend yield of 7.8%. The stock is up 24% year to date.

In the modern retail sector we initiated a position in Vincom Retail (VRE), the leading mall operator in Vietnam as we believe it is a good proxy to rising consumerism, disposable income and urbanisation. We believe VRE has a strong business model due to its access to a large land bank, anchor tenants and scale which therefore attracts international brands like H&M, Uniqlo and Zara to set up shop in VRE malls. In the first nine months of 2019, its leasing revenues and net profits have grown by 26.2% and 14.7% respectively while expansion plans remain in place to tap the underpenetrated modern retail segment.

We also like the industrial park segment due to increasing FDI coming into the manufacturing sector which has led to more demand for industrial land in manufacturing hubs outside of Hanoi and Ho Chi Minh City. The fund owns Kinh Bac City, one of the leading industrial park developers in Vietnam, whose industrial land sales have increased by 36% this year while net profits have grown by 22%. Furthermore, selling prices per square meter in some of their industrial parks have increased by 34−40% YoY due to greater demand. The stock is up +16% year to date.

We also wrote in last year’s review that we like the logistics segment due to greater industrialisation in Vietnam. The fund’s holding, Petrovietnam Transport has grown its net profits by 32.2% in the first nine months of 2019 on the back of increased transportation volumes of crude oil, refined petroleum products and gas. The stock currently trades at a trailing 12 months P/E of 6.5x with a dividend yield of 6%.

During the year the fund sold its other logistics related holding, Saigon Cargo Services as it could be facing near term headwinds from slower global air freight volumes. The other major holding the fund exited was Masan Group which was sold in March 2019 due to worries over the African Swine Flu impacting its animal feed business while its consumer business was also witnessing slower than expected growth rates.

Mongolia

The main event in 2019 was the conflict surrounding the “Dubai Agreement” signed by Rio Tinto and the Government of Mongolia in 2015 regarding the execution of phase II (the underground portion) of the gigantic Oyu Tolgoi copper and gold mine. During 2019 the agreement’s legitimacy was contested in the Mongolian Parliament and it became a serious concern among foreign investors as to whether the agreement would be nullified, thereby causing a significant drop in investor confidence and therefore hurting the stock market’s performance. The weakness of the Mongolian stock market has created some great value opportunities, such as the opportunity to buy the local producer of Heineken Beer at a valuation of 11x 2019 earnings.

While in late November 2019 the Government of Mongolia determined the agreement would not be nullified, it still caused a marked decrease in sentiment for foreign investors. Assuming the project can get back on track, with the second mine shaft completed in December 2019, Turquoise Hill Resources and Entrée Resources (two listed companies involved in the project) should undergo a revaluation in their share prices, while broader investor sentiment should improve. Further, it would not be a surprise to see the government eventually swap its 34% equity stake in the project for a royalty, enabling near term revenue generation from the project for the country. Mongolia’s negative market sentiment was the biggest detractor to fund performance in 2019.

Mongolia had a tough year but valuations now attractive

Bangladesh

There were two main reasons why the Dhaka Stock Exchange Broad Index (DSEX) witnessed a weak 2019 despite the overall macro situation in Bangladesh remaining broadly stable. (1) Grameemphone, the biggest weight in the DSEX with around 14% is currently going through a major legal battle with the telecom regulator regarding disputed taxes. This issue is not new but has heated up in 2019 again which has led to weakness, not only in Grameenphone’s stock price, but also impacted broader investor sentiment. (2) The other dampener on investor sentiment in Bangladesh has been the banking sector which accounts for almost 18% of the index. The government over the past year or so has made decisions which have impacted the funding costs of the banking sector, leading to pressure on net interest margins as well as loan growth. Furthermore, with worries of rising non-performing loans within state run banks, fear and uncertainty has spread across the banking sector which has led to a drop in private sector credit growth. With Grameenphone and the banking sector together accounting for 32% of the index weight, weakness in these names has led to negative sentiment across the market.

The Dhaka Stock Exchange Broad Index (DSEX) was held down by high weights Grameenphone and banking/financial service companies

With regulatory concerns expected to be an overhang for Grameenphone, the fund exited the stock in January 2019, while we continue to hold BRAC Bank which has seen a correction in its stock price but stands out in terms of management quality and operating metrics amongst the private sector banks in Bangladesh.

However, despite these roadblocks in the telecom and banking sectors, consumption and GDP growth have remained robust in Bangladesh as consumer and pharmaceutical companies have declared strong earnings growth so far in 2019 and GDP growth is expected to remain in the 7% range. The themes which we like in Bangladesh, consumer appliances and pharmaceuticals, have both delivered good results. Singer Bangladesh, one of the leading consumer appliance company in the country has delivered revenue and net profit growth of 14.6% and 13.2% in the first nine months of 2019 thanks to increased demand for air conditioners, refrigerators and televisions as penetration of such products remain extremely low in Bangladesh. The company was acquired by Turkey’s Arcelik in March 2019 and this should help Singer Bangladesh to launch new products as well as to reduce sourcing costs due to Arcelik’s scale and reach in the region.

In the pharmaceutical space, the fund owns Beximco Pharmaceuticals whose FY19 net profits grew by 20% while its 1QFY20 (September 2019) net profits increased by 15.4% YoY. These growth rates over the past year have been better than its larger competitors while the stock continues to trade at a very attractive P/E of 8.0x based on FY20 earnings. The fund holds the London listed GDR of Beximco Pharmaceuticals which currently trades at a 30% discount to the local listing.

Beximco Pharmaceuticals outperforming larger competitors and trades at a much lower valuation

(Source: Bloomberg, Tellimer)

Despite the DSEX Index correcting by 17.4% in 2019, the fund’s Bangladeshi exposure remained flat due to positive moves in Beximco Pharmaceuticals and British American Tobacco Bangladesh (BAT). This was possible thanks to our sale of Grameenphone early in the year, while the exposure to the problematic banking sector was only via BRAC Bank. In addition to this, the fund also exited its position in Square Pharmaceuticals due to its growth rate lagging that of its peers – this also helped with relative performance against the DSEX Index as Square Pharmaceuticals stock price is down 23% this year.

Broadly, besides the issues with Grameenphone and the banking sector, the macro environment in Bangladesh remains stable relative to other markets. Total debt to GDP as well as external debt to GDP remain low, foreign exchange reserves cover close to 7 months of imports while the current account deficit is expected to contract to 2.0% of GDP in 2019 from 2.7% in 2018. Furthermore, the government remains focussed on infrastructure development which can help improve overall economic growth rates going forward.  

Uzbekistan

Uzbekistan’s GDP is projected to have grown by 5.5% in 2019 according to the International Monetary Fund, continuing the trend of robust growth experienced over the past several years. Inflation reached 15.6% as of November 2019 and is expected to decelerate towards the single digits into late 2020 as the Central Bank shifts to an inflation-targeting regime from 1st January 2020. As the government works to lower inflation, it is simultaneously eliminating blanketed subsidies. For example, in October bread flour prices were floated and instead of blanketed subsidies the Ministry of Finance issued targeted subsidies to the most vulnerable part of the population.

With inflation falling and subsidies being eliminated, competition is rising in multiple sectors as the country continues its transformation towards a free-market economy. With credit being a key driver of continued economic growth, on 25th November 2019 state-owned Uzpromstroy Bank issued a USD 300 mln Eurobond. The Eurobond is expected to be followed by several other banks looking to raise capital in order to service the high demand for credit as current consumer credit to GDP currently stands at a low 15%. This reform momentum led to positive stock market sentiment which resulted in the AFC Uzbekistan Fund gaining +7.6% so far in 2019 (the AFC Asia Frontier Fund is invested in the AFC Uzbekistan Fund).

Sri Lanka

Sri Lanka began 2019 with political uncertainties due to the instability that was caused in the last quarter of 2018 when former President, Maithripala Sirisena tried to dissolve parliament and dismiss former Prime Minister Ranil Wickremesinghe. As if things could not get worse, the tragic Easter Sunday attacks in April 2019 further hurt the economy since the tourism sector accounts for 5% of GDP and is the third highest foreign exchange earner for the country. These events and the following stock market weakness made valuations in Sri Lanka very attractive with some companies trading at multiples last seen in 2009 during the civil war.

A divided coalition and question marks over security gave further momentum to the opposition prior to the presidential elections which took place in November 2019. As a result, the opposition, namely the Rajapaksa led Sri Lanka Podujana Peramuna Party (SLPP) witnessed a decisive win for their candidate, Gotabaya Rajapaksa. Due to a high probability of impending political change and very attractive valuations, the fund began increasing its exposure to Sri Lanka in the second half of 2019.

In the second half of 2019, the fund bought the conglomerate John Keells Holdings, two consumer staple names – Ceylon Tobacco and Nestle Lanka – and two banks – Hatton National Bank and Commercial Bank of Ceylon. The Colombo All Share Index has had a much better second half than first half of 2019 with the index gaining 12.7% since the end of June 2019. In the same time period, the fund’s Sri Lankan holdings have returned 27.9% due to not only a broad-based rally but also a 40% gain in Dialog Axiata, the telecom company the fund holds in Sri Lanka.

Sri Lanka is still valued attractively relative to history
With a stable government in power the market can re-rate further

Dialog Axiata – the fund’s biggest position in Sri Lanka – Significant outperformance versus the Colombo All Share Index in 2019

Pakistan

Sentiment towards Pakistan remained negative for most of 2019 and the fund rightly had a low weight to the country for most of the year. The Pakistan KSE100 Index had lost −29.5% in USD terms until the end of August 2019. However, this draw down had factored in most of the negatives such as the currency depreciation, higher interest rates and slower economic growth. With the International Monetary Fund (IMF) deal coming through in the summer, sentiment began to change as it gave investors more confidence on anticipated reforms while the weakened currency and high interest rates brought down imports significantly, helping to lead to a large reduction in the current account deficit. In addition to this, on the fiscal side as well the government was able to reduce its primary deficit and the State Bank of Pakistan kept interest rates unchanged in its policy meetings in September and November 2019 after raising rates aggressively since the beginning of 2018.

With an improving macro environment, the fund began increasing its weight to Pakistan from October 2019 onwards as we believe that earnings for most sectors are close to bottoming, if they haven’t already, and the State Bank of Pakistan could begin cutting interest rates from the second quarter of 2020. We therefore believe that cyclical stocks in the auto and cement sectors can do well over the next year as their valuations have corrected significantly over the past two years while their profit margins are also bottoming. The fund has increased its exposure to Pakistani auto and cement companies and this has already helped with performance as the KSE100 Index has rallied by 29% since the end of September 2019 making Pakistan one of the best performing markets globally in the past three months. The fund’s Pakistani holdings have returned 31% in the same time period.

The important point to remember is Pakistan has a population of 200 mln people with very favourable demographics while the stock exchange offers a number of well-established consumption focused names in the auto, consumer staples and pharmaceutical space and more importantly valuations remain very attractive despite the recent run up in the market.

Pakistan’s stock market is still cheap and has lot of room to increase despite the recent rally

Pakistani cyclical names in the auto and cement sectors have outperformed the index and banks in the recent rally – The fund has exposure to both auto and cement companies

Myanmar

Despite negative publicity due to the refugee crises, Myanmar is slowly but surely moving in the right direction as the insurance sector has been opened up to foreign investors and foreign banks are now allowed to lend to local businesses. Furthermore, foreign direct investment (FDI) commitments grew by 77% in the first half of 2019 to USD 2.3 bln with most of these investments being committed to the infrastructure and manufacturing sectors.

The biggest event of the year in the country was the 20% stake sale by Yoma Strategic Holdings (Yoma) to Ayala Corporation, a leading conglomerate from the Philippines. This is a big vote of confidence for Yoma’s core businesses in the food & beverage, financial services, real estate and auto sectors as all these industries remain untapped in Myanmar. During the year Yoma also increased its stake in Wave Money to 44%, the leading mobile financial services platform in Myanmar which is a joint venture with Telenor. We believe Yoma offers the best available exposure to Myanmar due to its focus on key growth areas which are all linked to growing consumption in the country.

Laos

Performance of the fund’s holding in EDL-Generation, the listed company owning hydropower assets of the Laotian government, saw sizable losses due to growing debt service payments from its bonds issued in 2018 in Thai Baht which continue to drag the company’s profitability. Low water levels in the company’s dams (especially in the Mekong River) exacerbated the issue with less than estimated electricity production. 

Kazakhstan

In Kazakhstan the fund owns one name, Halyk Bank, and this position has done exceptionally well in 2019 with a total return of +40.6%. Halyk Bank’s earnings increased by 53.3% in the first nine months of 2019 due to loan recoveries and lower provision expenses as the benefits of its acquisition of Kazkommertsbank came through. Fundamentals remain solid with a RoE of 29.7% and a capital adequacy ratio of 23.4%. Based on this, it would not be surprising if the bank increases its dividend pay-out, which it has already guided to in June 2019. Relative to fundamentals and earnings prospects, the stock is valued very attractively at a price to book ratio of 1.2x and a dividend yield of 8.3%.

Another tailwind for Halyk Bank has been the stable macro environment in Kazakhstan. In the first nine months of 2019 GDP growth was 4.3%, the third year of more than 4% growth after the economic slowdown of 2015/16. Growth has been led by the construction sector which grew by 13.5% while industrial production and retail sales increased by 3.3% and 5.5% respectively.

Halyk Bank in Kazakhstan outperformed the Kazakh Index as well as most other leading banks in our universe

2020 Outlook for AFC Asia Frontier Fund Universe

As we move into the New Year, broader concerns remain similar to the start of 2019, namely slower global economic growth, trade tensions and geopolitical uncertainties. Though concerns about slower global economic growth remain, the big difference between the start of 2020 and that of 2019 is that most central banks globally have cut interest rates to support growth compared to the beginning of 2019 when interest rates had yet to reverse their hawkish trend. This leaves equity markets in a more comfortable position relative to the start of 2019.

Furthermore, though trade relations between China and the U.S. may remain fickle, the signing of a phase one trade deal between the two parties would give global markets some relief as we begin 2020. In addition to this, the decisive victory for Boris Johnson and the Tories in the recent U.K. general elections reduces market tensions over the Brexit drama. An unknown can be how the geopolitical issues in the Middle East play out, but from recent moves that we have seen, it appears both the U.S. and Saudi Arabia want to avoid a severe escalation of conflict.

In 2020, the U.S. will also see the start of a new presidential election cycle which could create some uncertainties in investors’ minds but it seems the current administration would want a strong economy and this is expected to be positive for global investor sentiment.

So how does this impact the outlook for Asian frontier markets in 2020 and beyond?

As mentioned above, the macro and geopolitical uncertainties which took up most of the headlines in 2019 are beginning to ease which is a big positive for investor sentiment. Furthermore, with central banks in Asia becoming more dovish, stable economic growth in most of our markets will be supported by accommodating central bank policies. More importantly, the shift of manufacturing activities from high cost locations into lower cost Asian frontier markets like Bangladesh, Cambodia, Myanmar and Vietnam will likely continue given rising wages in China as well as uncertainties over future tariffs.

Keeping the above factors in mind and frontier market sentiment having been severely impacted in 2019, frontier markets look ripe for a re-rating as lack of investor interest has made valuations extremely attractive going into 2020 while fundamentals remain broadly stable.

Negative sentiment has made AFC Asia Frontier Fund valuations
attractive while fundamentals are solid

(Source: Asia Frontier Capital)

Below is the 2020 outlook for our fund universe

Bangladesh

Improving market sentiment in Bangladesh requires some very simple decisions but is there the political will? GDP growth and overall macro metrics remain stable but until the authorities can resolve the Grameenphone and banking sector issues, which together account for 32% of the index, overall sentiment may remain soft. However, on a bottom up basis we expect pharmaceutical and consumer discretionary companies to do well as consumption demand should remain strong due to under-penetrated markets. More specifically, we expect good earnings growth from Beximco Pharmaceuticals and Singer Bangladesh.

With export growth weakening in the last few months of 2019, we believe that the Bangladeshi Taka (BDT) will depreciate moderately in 2020 to support export growth. However, with monthly import cover of 7 months, we do not expect a sudden devaluation, but a more gradual 3−5% depreciation going forward.

The current negative sentiment has made overall valuations very attractive with the MSCI Bangladesh IMI Index trading at a trailing 12 months P/E of 10.5x. Any positive moves on the policy front regarding Grameenphone or the banking sector can lead to a big re-rating in Bangladesh as the macro fundamentals and earnings growth remain stable.

Cambodia

2020 will be a decisive year for Cambodia as the country has benefited from the “Everything But Arms Agreement” with the European Union which has given Cambodian exporters duty-free access to the EU market, worth nearly USD 6 bln. Due to the Cambodian government’s poor human rights record and hosting what was widely regarded as an unfair presidential election in 2018, the EU is undergoing a process of review, whereby in February 2020 the EU may decide to rescind Cambodia’s access to its market on a duty-free basis. This could cause a significant slowdown in the country’s robust 7% odd GDP growth in recent years.

Iraq

As 2019 draws to a close, the Iraqi equity market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), is likely to end the year down −2.5%, which could mark the end of a brutal multi-year bear market that saw declines of −15.0% in 2018, −11.8% in 2017, −17.3% in 2016, −22.7% in 2015, and −25.4% in 2014.

Banks, being the most leveraged sector to an economic recovery, exhibited signs of a bottoming of fortunes in 2018 as seen from their full year earnings for the year, with some resuming growth in loans and deposits in 2019. Lending support to expectations for an economic recovery were upward revisions to non-Oil GDP by the IMF for 2019/2020 from earlier estimates of +3.0% and +3.9% to +5.4% and +5.0% respectively. Much of this was confirmed by other macro figures which showed a strong recovery in imports in 2018 to satisfy increasing demands for consumer goods, as well as continued growth of broad money, or M2, as a proxy for economic activity.

The current demonstrations pose risks to an economic recovery as the government scrambles to meet the demands of an increasingly skeptical youth movement, and many political developments have yet to happen. The likely near-term effect on the economy would be that the current caretaker government will follow up with implementing the current spending element of the 2019 expansionary budget in the near term extending well into 2020. The most important consequence of this would be the sustainable continuation of the consumer led economic recovery, however lot of uncertainties remain.

Kazakhstan

Kazakhstan should be able to continue posting steady GDP growth of close to 4.0% and we do not expect any nearterm pressures since the macro-economic metrics of the country remain stable and the government continues to spend on infrastructure. With Uzbekistan opening up, we expect the fund’s Kazakh bank holding, Halyk Bank to take advantage of these growth opportunities as it has already begun operations in Uzbekistan. We expect to continue holding our investment in Halyk Bank.

Kyrgyzstan

Kyrgyzstan is projected to grow its GDP by 3.4% in 2020 according to the International Monetary Fund, While the Kumtor gold mine (generating roughly 10% of Kyrgyz GDP) halted production due to two workers having gone missing after a rock fall, the Kyrgyz government has since stated that the mine  will produce 18.2 tons of gold in 2019, beating its initial forecast of 16.6−17.6 tons. Kyrgyzstan faces several structural issues due to its lack of competition in most sectors, while also facing a high debt burden to China, courtesy of the previous president’s administration which is hindering growth now. 

Laos

In 2020 the two items to watch will be the development of the USD 7 bln railway linking Kunming, China to Vientiane, Laos as it is scheduled for completion in 2021. The impact of this infrastructure project on the Laotian government’s debt service is expected to grow and could impact the peg of the currency, the Laotian Kip. Further, persistent low water levels in the Mekong is expected to lead to under-utilization of the country’s large dam capacity (the country’s largest source of foreign exchange) which could impact the country’s finances.

Mongolia

Mongolia should see significant future upside in the value of copper exports as the commodity is already in a global deficit which is only expected to worsen into the 2020’s. While the outlook for copper is bright, coal exports continue to be restrained by China reaching its import quota for the year. Mongolia’s largest bulk commodity export, coal, is a key contributor of GDP. However, as Mongolia and China have grown increasingly close during the current presidency of Kh. Battulga, it would not be unreasonable to see China continuing to buy Mongolian coal as long as Mongolia remains politically correct in its dealings with China. Being the lowest cost foreign supplier of coal to China, excluding North Korea, it makes sense for Mongolia to maintain good relations with its southern neighbor in order to continue boosting its exports, approximately 90% of which are to China. Furthermore, the listing of state owned coal mine, Erdenes Tavan Tolgoi “ETT” on the Hong Kong Stock Exchange can be a big trigger for an improvement in overall investor sentiment towards Mongolian equities.

Myanmar

The Myanmar government may be distracted by the ongoing investigations into the refugee crises but on the ground, similar to previous years, Myanmar is expected to continue posting 6%+ GDP growth in 2020.  Though western governments could put more pressure on the Myanmar government, we believe support from China, India and Japan would help Myanmar balance off some of this pressure. On the policy front, we could expect some more policy moves to attract foreign capital such as opening up the stock market to foreign investors (finally). From a company perspective, we expect Yoma Strategic Holdings to continue investing into its core businesses by leveraging its recent partnership with Ayala Corporation and we remain positive on the consumption related opportunities in Myanmar.

Pakistan

A deal with the International Monetary Fund (IMF), a devalued currency, peaking interest rates, a contracting current account deficit and more importantly attractive valuations have all led to a rally in the KSE100 Index since the end of August 2019 – and we expect this positive sentiment to continue as (1) the KSE100 Index is still close to 50% below its May 2017 high in USD terms (2) Valuations are still attractive with the KSE100 Index trading at a trailing 12 months P/E of 9.6x (3) The State Bank of Pakistan (SBP) is expected to cut interest rates in 2020 (4) Profitability for cyclical companies is close to the bottom with earnings expected to see a rebound from the second half of 2020.

We therefore like cyclical companies in the auto and cement sectors as their valuations and profitability have contracted significantly over the last two years and are well positioned for a rebound once interest rates ease and economic growth recovers. Though, one caveat to the SBP cutting interest rates would be higher than expected food inflation, which has picked up of late but is anticipated to ease going forward. Given the battering the Pakistani stock market has taken over the past two years and with improving fundamentals, Pakistan can be a standout performer in 2020.

Papua New Guinea

Papua New Guinea could post GDP growth of 3−4% in 2020 and this could increase once further investments in LNG and mining projects kick in. There are plans to double LNG production and develop new gold, copper and silver reserves. The government is also trying to diversify its resource focused economy but this a longer-term theme. The fund’s current exposure to Papua New Guinea is through one holding in the consumer space.

Sri Lanka

Gotabaya Rajapaksa’s win in the presidential election in November 2019 was a big positive for investor sentiment and the political momentum for his party, the Sri Lanka Podujana Peramuna (SLPP), making it likely that it could win the parliamentary elections in April 2020. In 2020, greater political cohesion will not only be positive for investor sentiment but also for policy-making which should lead to a pick-up in economic growth rates from a low base in 2019. Greater policy certainty should also lead to a much needed increase in foreign direct investments (FDI) to build out the country’s infrastructure.

The tax breaks announced in the form of personal income tax concessions and lower value added taxes are expected to boost consumption as well as help consumer companies improve their volumes. Lower effective tax rates for the banking sector should improve the sector’s return on equity while lower taxes on voice telecom services should lead to better revenue growth rates for telecom companies. Overall, these moves should lead to higher earnings growth in 2020.

The upcoming budget in April/May 2020 may introduce some tweaks to these tax breaks given the country’s fiscal deficit. In the longer term, the government would also need to contend with their debt repayments as well as debt to GDP which currently stands at 83%.

On balance though, 2020 should be a better year for Sri Lankan equities due to higher earnings growth from the recent tax cuts, a pick-up in GDP growth and much better business sentiment due to political stability. Consumer companies and banks can do well in 2020 as both of these sectors are expected to see improved earnings for the above reasons.

Uzbekistan

Market oriented reforms should lead to Uzbekistan posting GDP growth rates of 6.0% over the next five years. Speaking of reforms, in October the Capital Markets Development Agency met with the president and Agency for State Asset Management (focused on privatizations) and discussed the formulation of a capital markets strategy through the early 2020’s. Shortly thereafter this group announced it expects at least 4 IPO’s/SPO’s of state-owned enterprises in 2020 which will help to increase liquidity and the attractiveness of the Tashkent Stock Exchange. The stock market ended November with a USD 4.8 bln market capitalization and 112 companies listed. While there were significant rallies in certain listed companies (+100% to +200%) for the year, valuations still remain highly attractive with dividends in the high single digit to low double-digit range.

Vietnam

Attaining GDP growth of 6.5−7% in 2020 for Vietnam is realistic due to continued foreign direct investments (FDI) in the manufacturing sector, growth in exports and tourism and robust consumption. Whether China and U.S. stick to their phase one trade deal or not, Vietnam has positioned itself nicely as a manufacturing hub offering relatively lower wages, improving infrastructure and political stability.

With respect to near term uncertainties though, Vietnam has outperformed the region in export growth in 2019 but the soft numbers for October and November 2019 could become a concern if such softness in export growth sustains. We believe export growth of less than 6−7% in 2020 will be viewed slightly negatively by the market due to the role exports play not only in macro stability but also in job creation and consumption. The African Swine Flu has also led to higher inflation in the past few months and though the November 2019 inflation number of 3.5% is still below the Central Bank’s 4.0% target, any move towards 4.0% or higher would make the State Bank of Vietnam edgy and this could lead to a pull-back in loan growth, similar to what we saw in the summer of 2018. However, as of now the overall macro situation remains stable.

On the policy front, we do not expect any major decisions in 2020 regarding the foreign ownership rules as the government machinery moves into planning for the change of power in 2021. So far Vietnam has proved that it is a net beneficiary of trade tensions as reflected in the export and FDI numbers and we believe 2020 should be another year of stable growth. As a result, we continue to remain invested in companies linked to consumer discretionary, industrial parks, logistics and tourism which we believe are structural growth themes in Vietnam.

To conclude, the fund could see an increase in its weights to Pakistan and Sri Lanka in 2020 due to improving fundamentals and consumer/business sentiment in both of these markets. Our top market picks for 2020 are: Pakistan, Sri Lanka, Uzbekistan, Bangladesh, Mongolia and Vietnam.

For your further information, please find below a 2019 recap of some of the top news links on Asian frontier markets:

Bangladesh

• Bloomberg: Vietnam And Bangladesh Offer Good Opportunities (Interview with Ruchir Desai)
• Bloomberg: Asia Frontier Markets Including Vietnam, Bangladesh 'Stand Out', Analyst Says (video) - Interview with Ruchir Desai”
• South China Morning Post: Move over, ‘Made in China’. It’s the ‘Made in Bangladesh’ era now

Myanmar

• Forbes: Philippine Billionaire Ayala Doubles Down On Myanmar Through Yoma Strategic

Pakistan

• Bloomberg: Moody’s Raises Pakistan’s Outlook to Stable After IMF Program

Sri Lanka

• Bloomberg Radio - Ruchir Desai discusses outlook for Pakistan and Sri Lanka on Bloomberg Radio

Uzbekistan

• The Economist’s country of the year - Which nation improved the most in 2019?
• bne IntelliNews - AFC Capital: Uzbekistan’s capital markets at tipping point

Vietnam

• Nikkei Asian Review: Uniqlo enters Vietnam, Southeast Asia's growth engine
• Bloomberg: Vietnam Tops List of Biggest Winners From U.S.-China Trade War

I hope you have enjoyed reading this annual review and outlook for the coming year. If you would like any further information, please get in touch with me or my colleagues.

The AFC Team wishes you and your family all the best for the upcoming Festive Season and a very successful 2020.

With kind regards,
Thomas Hugger
CEO & Fund Manager

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Disclaimer:

This Newsletter is not intended as an offer or solicitation with respect to the purchase or sale of any security. No such offer or solicitation will be made prior to the delivery of the Offering Documents. Before making an investment decision, potential investors should review the Offering Documents and inform themselves as to the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares, and any foreign exchange restrictions that may be relevant thereto. This newsletter is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law and regulation, and is intended solely for the use of the person to whom it is intended. The information and opinions contained in this Newsletter have been compiled from or arrived at in good faith from sources deemed reliable. Opinions expressed are current as of the date appearing in this Newsletter only. Neither Asia Frontier Capital Ltd (AFCL), nor any of its subsidiaries or affiliates will make any representation or warranty to the accuracy or completeness of the information contained herein. Certain information contained herein constitutes “forward-looking statements”, which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of Funds managed by AFCL or its subsidiaries and affiliates may differ materially from those reflected or contemplated in such forward-looking statements. Past performance is not necessarily indicative of future results.

The representative of the Funds in Switzerland is ACOLIN Fund Services AG, succursale Geneve, 6 Cours de Rive, 1204 Geneva. NPB Neue Privat Bank AG, Limmatquai 1 / am Bellevue, CH – 8024 Zürich, Switzerland is the Swiss Paying Agent. In Switzerland, shares shall be distributed exclusively to qualified investors.  The fund offering documents, articles of association and audited financial statements can be obtained free of charge from the Representative. The place of performance with respect to shares distributed in or from Switzerland is the registered office of the Representative.

AFC Asia Frontier Fund is registered for sale to qualified/professional investors in Japan, Singapore, Switzerland, the United Kingdom, and the United States. AFC Iraq Fund and AFC Uzbekistan Fund in Singapore, Switzerland, the United Kingdom, and the United States. AFC Vietnam Fund in Japan, Singapore, Switzerland, and the United Kingdom. 

By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.

© Asia Frontier Capital Ltd. All rights reserved.

“The most important quality for an investor is temperament, not intellect.”

― Warren Buffett 

AFC Funds Performance Summary

Asian frontier markets continue to rebound led by Pakistan and Sri Lanka

Pakistan and Sri Lanka led Asian frontier markets once again this month with a strong rally as the Pakistan KSE100 Index rallied by +14.9% while Sri Lanka witnessed a gain of +3.7%. Continued macro stability and anticipation of interest rates cuts in Pakistan led to improving investor sentiment while the positive outcome of the presidential elections and tax cuts in Sri Lanka are expected to have a positive impact on consumer and business sentiment. In a further sign of an improving macro environment in Pakistan, Moody’s upgraded the country’s outlook from negative to stable on 2^nd December – this should support positive investor sentiment.

Pakistan and Sri Lanka have outperformed frontier and emerging market peers significantly over the past six months but valuations remain attractive with the Pakistan KSE100 Index and Colombo All Share Index trading at a P/E of 9.2x and 11.9x respectively – a large discount to other frontier and emerging markets.

Keep an eye out for our upcoming Pakistan and Bangladesh travel reports as Thomas travelled to Islamabad, Lahore and Karachi and Ruchir visited Dhaka in December.

Big outperformance by Pakistan and Sri Lanka versus frontier and
emerging market peers in the past six months

AFC presents at the Hong Kong Society of Financial Analysts (HKSFA)

AFC Asia Frontier Fund co-manager Ruchir Desai presented on the opportunities in Asian frontier markets to a full house at the HKSFA on 27th November 2019. The discussion centred on the perception, potential and risks of investing in Asian frontier markets. Click here to view the presentation.

AFC presents at the HKSFA

AFC Uzbekistan Tour 2020

Asia Frontier Capital will be hosting its second AFC Uzbekistan Investor Tour from 29^th April to 2^nd May 2020. We will be taking a small group of investors to experience this wonderful country and better understand the economic and social transformation taking place on the ground today.

The Uzbekistan Investor Tour will start in Tashkent on 29^th April 2020 with a welcome dinner. On 30^th April and 1^st May we will be conducting site and boardroom meetings with publicly listed companies in the sectors of chemicals, pharmaceuticals and financial services to understand how these businesses operate in the local capital market environment on a daily basis. For the final part of the trip, on 2^nd May 2020 we will visit the ancient Silk Road City of Samarkand for the day, taking the Afrosiab bullet train round trip. This will give us the chance to absorb the unique beauty of Uzbekistan and see one of the many wonders that will attract millions of new tourists to the country in the coming years. If you are interested in joining this tour please email us at This email address is being protected from spambots. You need JavaScript enabled to view it.

Below please find the manager comments relating to each of our 4 funds for the month of November 2019. Later this month we will share with you our review of 2019r, and provide an outlook for Asian frontier markets for 2020.

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. .

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 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 Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares increased by +1.8% in November 2019 with a NAV of USD 1,262.23. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−1.3%) and the MSCI Frontier Markets Net Total Return USD Index (+1.4%) but underperformed the AFC Frontier Asia Adjusted Index (+9.0%) and the MSCI World Net Total Return USD Index (+2.8%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31^st March 2012 now stands at +26.2% versus the AFC Frontier Asia Adjusted Index, which is up by +7.4% during the same time period. The fund’s annualized performance since inception is +3.1%, while its 2019 performance stands at −7.5%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.87%, a Sharpe ratio of 0.27 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.32, all based on monthly observations since inception.

Asian frontier markets continue to rebound and this saw another month with strong rallies in both Pakistan and Sri Lanka, while Bangladesh witnessed a recovery as well. Pakistan and Sri Lanka have outperformed their frontier and emerging market peers over the past six months due to greater macro stability and political improvements respectively, while valuations for both of these markets continue to remain attractive. The AFC Asia Frontier Fund reflects this with a very attractive P/E ratio of 8.1x. 

Positive investor sentiment in Pakistan continued this month with a tremendous rally of +14.9% which was broad based, but cyclical sectors like autos did much better than the overall market. Investors expect the State Bank of Pakistan to start cutting interest rates from the first quarter of 2020 which has resulted in cyclical stocks doing well over the past month. As we discussed in the October 2019 manager comment, cyclical stocks in the auto and cement sectors have seen valuations correcting significantly while margins are close to bottoming out. As a result, the fund has been increasing its weight to the auto and cement sectors which has played out well with a passenger car manufacturer seeing its stock price rally by 53.6% this month while the market capitalisation of this company remains at a paltry USD 127 mln. This company is a bargain given its strong brand and manufacturing capacity. In further affirmation of an improving macro environment, Moody’s raised the country’s outlook from negative to stable on 2nd December and this should also add to positive investor sentiment going forward.

The higher exposure to Sri Lanka added to this month’s performance with the Colombo All Share Index witnessing another month of good gains on the back of Gotabaya Rajapaksa’s strong win in the Presidential elections which took place on 16th November (you can read our Sri Lanka election update here). Furthermore, the new government is planning to pass a number of tax cuts and tax breaks which are expected to significantly boost both consumer and business sentiment.

Pakistan and Sri Lanka have outperformed frontier and emerging market peers in second half of 2019

Disposable incomes should see a large increase as the tax free income threshold has been doubled together with the reduction of value added tax from 15% to 8% which will act as another tailwind for consumption, leading to improving volumes for consumer companies. The banking sector, which has seen its effective tax rate in some cases rise to as high as 60%, is set to see its tax rate come down with the removal of the debt repayment levy and nation building tax. This should lead not only to improved earnings for the banks but also an improvement in their return on equity. The telecom sector, besides benefitting from reduced value added tax, will also gain from a reduction in government levies on the voice related business which should lead to an increase in revenues for telecom companies as well.

Overall, these tax measures are expected to add to earnings growth and the fund has exposure to the Sri Lankan consumer, banking and telecom sectors. However, we must add that given the fiscal situation of the country there could be some tweaking to these new tax policies when the new annual budget is announced in April or May 2020. These tax announcements, however, are a much-needed boost to investor sentiment in the near term.

In light of greater political stability in Sri Lanka and extremely cheap valuations for the banking sector, the fund further increased its weight in Sri Lanka through the purchase of Commercial Bank of Ceylon, the largest private sector bank in the country in terms of assets, trading at a price/book ratio of 0.8x.

Bangladesh helped performance this month as well, as the Dhaka Stock Exchange Broad Index rebounded by 1.0%. Beximco Pharmaceuticals, the fund’s largest position whose GDR the fund holds, rallied by +13.8% on the back of excellent quarterly results with net profits increasing by 15.4% YoY. The GDR continues to trade at a large 38% discount to the local listing. Furthermore, with the stock trading at a P/E of 10.9x, its valuation remains extremely attractive, especially in light of robust earnings growth expectations.

The fund’s only bank holding in Bangladesh, BRAC Bank, also had a good rebound of +14.6% this month as loan growth is expected to improve on the back of improving liquidity in the banking sector. Though continued marketing and technology investments in its mobile app bKash are hurting short term profitability, the app continues to gain market share while management quality of the bank stands out.

In Myanmar, the fund’s holding Yoma Strategic Holdings (Yoma) announced a series of positive developments. The company continues to look to allocate capital to its core businesses which has led to the divestment of its telecom tower business while investing more in its mobile financial services joint venture with Telenor, Wave Money. Yoma will now have a 44% holding in Wave Money, which is the leading mobile financial services platform in Myanmar with a large prospective market as the country has a smartphone penetration of 80%, but very low banking penetration.

More importantly, Ayala Corporation, the leading Philippine conglomerate, will be investing in Yoma for a 20% equity stake with a valuation for Yoma shares at a 37.7% premium to the closing price of 12^th November. This is a big show of confidence in Yoma’s core businesses which focus on food & beverage, real estate, financial services and automotive – all potentially high growth areas. Yoma’s stock price ended the month with a +12.7% gain which also helped the fund’s performance.

The Vietnamese market was weak this month as the Ho Chi Minh VN Index was down by -2.8% in November. However, the fund’s Vietnamese exposure ended the month flat due to positive moves in an industrial park developer, a modern retail mall operator and a transportation company. Vietnam’s November industrial production growth was weaker than earlier months but this could be due to certain one-offs while the country’s tourism industry sees a continued boom with November arrivals growing by 39% YoY, the highest ever monthly number for Vietnam. This growth in tourist arrivals will be positive for the fund’s airport holding, Airports Corporation of Vietnam (ACV).

The best performing indexes in the AAFF universe in November were Pakistan (+14.9%), Sri Lanka (+3.7%), and Mongolia (+3.4%). The poorest performing markets were Vietnam (−2.8%) and Laos (−2.7%). The top-performing portfolio stocks this month were a Pakistani automotive battery company (+94.8%), a Pakistani truck manufacturer (+72.0%), a Pakistani passenger car manufacturer (+53.6%), a Mongolian property holding company (+50.9%), and a Pakistani paint company (+38.8%).

In November, the fund exited a cargo handling company and an insurance company in Vietnam and bought a passenger car manufacturer and a cement company in Pakistan, while also adding to an existing Pakistani car manufacturer and a cement company that the fund already holds. The fund further added to existing holdings in Mongolia and Vietnam.

As of the end of November 2019, the portfolio was invested in 76 companies, 2 funds and held 5.8% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (9.4%) and a pump manufacturer from Vietnam (8.5%). The countries with the largest asset allocation are Vietnam (23.7%), Mongolia (16.7%), and Bangladesh (16.2%). The sectors with the largest allocation of assets are consumer goods (23.7%) and industrials (18.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.07x, the estimated weighted harmonic average P/B ratio was 0.80x and the estimated weighted average portfolio dividend yield was 3.88%.

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned +1.1% in November with a NAV of USD 1,076.05, bringing the return since inception (29th March 2019) to +7.6%.

During November a spotlight was cast on Uzbekistan’s capital markets when on 15th November the Capital Markets Development Agency (CMDA) organized an investor conference in Tashkent which brought together over 300 participants to discuss the future outlook for the industry. Another important milestone that occurred mid-month was the AFC Uzbekistan Fund making its first investment into banking stocks. We gained exposure to Uzbekistan’s largest private bank, Hamkor Bank, which trades at a P/E of 2.24x and a P/B of 0.61, and had year over year equity growth of 42%.

AFC Uzbekistan Fund valuations as of 30^th November 2019

Privatizations set to accelerate:

During November the CMDA announced it will be short-listing 20 companies for IPO/SPO through the Tashkent Stock Exchange, with the official list to be published by February 2020. It has already been publicised that 12% of the Uzbek Commodities Exchange (TSE: URTS) and 5% of glass producer Kvarts (TSE: KVTS) are slated for near term privatization (the privatization of KVTS is ongoing and that of URTS should occur within the coming months). Following these two companies, Jizzakh Plastics, a plastics producer, is preparing to conduct a secondary offering where it will issue 20% new equity to be used for expansion. Future listings and privatizations will likely include Navoi Metallurgical Mining Company (NMMC), Uzmet Kombinati (TSE: UZMK), oil & gas producer Uzbekneftegaz and the national airline, Uzbek Airways, among others.

While most of these privatizations should occur in a single transaction, others will occur in stages—for example the government aims to privatise 20% of Kvarts through the stock exchange in tranches of 5% so as to ensure the issues are fully taken up by investors. Privatizing millions of dollars of state shares at once through the stock exchange would likely be ineffective at present as local investors are active, but not active enough to absorb tens of millions of dollars in new shares, while foreign institutional investors are only just beginning to enter the market, with AFC having led the pack. A slow but steady privatization of companies in our view is better as it gives local investors the opportunity to understand the value in some of these privatizations and also prevents single investors from gaining control of state assets, often at quite attractive prices.

Uzpromstroy Bank issues USD 300 mln 5-year Eurobond:

On 25th November Uzpromstroy Bank (TSE: SQBN), the “Construction and Industrial Bank” issued a USD 300 mln 5-year Eurobond with a YTM of 5.75% (initial expectations were for 6.5%) which was 4x oversubscribed. SQBN’s credit profile is rated as BB- with a Stable outlook by S&P.

As local banks face capital constraints due to high credit growth and largely being financed by loans from international financial institutions (“IFI’s”), Uzpromstroy bank’s bond issuance is expected to bolster its balance sheet and allow it to more sustainably grow its business, easing off of the reliance on IFI’s. Further, Uzpromstroy is only the first of several state-owned banks expected to come to the market through debt offerings, with more expected in the coming several months. Certainly, these offerings will help in attracting investor attention to the investment opportunities available today in Uzbekistan.

On a non-investment related note, winter has arrived in Uzbekistan and having experienced Tashkent’s first snow, below is a picture I took of the Amir Temur Museum located in the City Centre, blanketed in snow.

Amir Temur Museum blanketed in fresh snow

At the end of November 2019, the AFC Uzbekistan Fund was invested in 29 names and held 7.0% in cash. The markets with the largest asset allocation were Uzbekistan (90.3%) and Kyrgyzstan (2.8%). The sectors with the largest allocation of assets were materials (57.5%) and industrials (13.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.04x, the estimated weighted harmonic average P/B ratio was 0.68x and the estimated weighted average portfolio dividend yield was 8.74%.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned +0.8% in November with a NAV of USD 622.25 which is an outperformance versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned −1.5% for the month. Year to date the RSISUSD is down −3.8% while the fund is up +5.9% YTD.

The demonstrations which resumed in the last week of October persisted into November and seem likely to continue for some time yet, in contrast to earlier expectations that they would run out of steam due to a combination of carrot, stick and fatigue, none of which, alone or in combination, dented the spirt of an increasingly sceptical youth movement.

The first to fail were the bundle of carrots in the form of successively enlarged government handouts over the course of the last few weeks. The sticks, in the form of excessive government crackdown, failed too - even though the cumulative casualty list increased considerably to over 450 people dead and nearly 20,000 wounded, the bulk of whom were demonstrators. The expected fatigue turned out instead to be an explosion of art as the protest movement, acquired its own symbolic art form expressed through large street murals, public performances, music and in particular the movement’s version of calligraffiti- a hybrid of calligraphy, typography, and graffiti.

Calligraffiti in Baghdad’s Tahrir Square

The sheer number of casualties among the country’s youth, while not sufficient to shake the political class into action, caused an expression of extreme anger by the leading religious authorities that led to the resignation of the prime minister by end of the month. Consequently, there is an intense political manoeuvring among the political elite over the choice and form of a new government that would undertake the needed electoral reform, to be followed by early elections in 2020. Complicating matters is the extent of the compromises by the political elite to ensure that these elections would be a meaningful departure from the prior ones that largely allowed them to maintain their oversized influence on successive government formations.

While it is unlikely that the political elite will implement reforms that would threaten their interests, a consensus is emerging for making enough changes that would lead to the formation of future governments with a majority in parliament and parliamentary opposition, as opposed to the case since 2003 in which successive governments were composed of all parties in parliament, with no defined government programme, and with no real opposition in parliament. This was the root cause of the failures of the past to implement the reconstruction of the country, as each party pursued its own program within its own sphere of influence within an all-inclusive government.

These developments have yet to be played out, and a lot of uncertainties remain, yet the near-term effect on the economy would be that the current caretaker government, while unable to act on capital spending plans, will follow up with implementing the current spending element of the 2019 expansionary budget. Moreover, it will continue to implement this budget in 2020 through the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The most important consequence of this is the sustainable continuation of the consumer led economic recovery that first manifested itself through the growth of Iraq’s imports, as discussed here in August 2019, to satisfy consumer demands.

The fuel for this consumer spending can be seen through return of liquidity to the real economy expressed through the continued growth of broad money, or M2 as a proxy for economic activity, due to its sensitivity to oil revenues (chart below). The healing effects of a benign oil pricing environment, in which the trailing twelve-month average Brent crude price is about USD 63/bbl, provided the wherewithal for the government to implement its expansionary budget for 2019, and probably into 2020.

The growth in M2, as reported here earlier in the year, first accelerated in May 2018 with a pick-up in year-over-year change every month as can be seen from the above chart. However, the current figures for M2 are stronger than discussed here earlier, as the Central Bank of Iraq (CBI) upwardly revised the figures for M2 for each month for the last few- as outlined in the summer release of its “Annual Statistical Bulletin for 2018”. The upshot is that M2’s recovery, while slightly less in year-over-year growth, is taking place from a higher base, and thus the amount of liquidity in the economy is larger than believed earlier.

Some of the effects of this liquidity were seen in the return of construction activity in Baghdad as reported here in AFC’s Iraq travel report in the summer. While this would be overshadowed by the demonstrations in Baghdad and the south of the country, this construction activity continues at an accelerated pace in the semi-autonomous Kurdistan Region of Iraq (KRI), which has not seen any demonstrations. While a far cry from pre-crisis boom, the return of such activity is remarkable and promising for the region’s economy. Moreover, it should have positive implications for banks’ non-performing loans (NPL’s) given the size of construction related loans.

The stock market continues to look through the political developments, and is probably beginning to take note of the return of this liquidity to the economy, as it spent most of the month, as measured by the Rabee Securities RSISX USD Index (RSISUSD), at between –2.0% and –1.0% of the close of the previous month, to end the month down –1.5%, and down –3.8% for the year. The AFC Iraq Fund, on the other hand, recovered from its prior underperformance in October, and ended up +0.8% for the month, and up +5.9% for the year.

Encouragingly, the stock market’s dynamics followed through with the improvement discussed here over the last few months, as its breadth continued to broaden with a number of small industrial companies experiencing meaningful year-to-date gains. Like the healthcare providers covered in this report last month, small industrial companies experienced the best gains in the last few months in which the overall market began to stabilize. This dynamic can be seen in the performance of National Chemical & Plastic (INCP), Metallic & Bicycles Industries (IMIB) and Modern Sewing (IMOS), up +95.6%, +34.3% and +62.9% respectively for the year by end of November.

Year to date indexed performance: National Chemical & Plastic – INCP (green), Metallic & Bicycles Industries -IMIB (dark brown) and Modern Sewing - IMOS (blue)

Moreover, like the healthcare providers, the stock market is focusing on a revival in earnings for these companies even though the earning results for them show no evidence of such an earnings recovery. It should be noted that the stock prices of these companies benefit from their illiquidity- in particular IMIB did not trade between early August 2018 and early March 2019, and the +34.3% YTD change used is based on the last traded price of the stock in 2018.

A broadening market breadth as well as its increasingly discriminating nature, add to signs that it is bottoming after a brutal bear market in which the current YTD decline of –3.8% is on the back of –15.0% decline in 2018, –11.8% in 2017, –17.3% in 2016, –22.7% in 2015, and –25.4% in 2014. A recovery following this bottom formation could see the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), claw back some of the −67.0% decline from the peak in early 2014 to November 2019 closing levels.

As of the end of November 2019, the AFC Iraq Fund was invested in 14 names and held 8.9% in cash. 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 are Iraq (88.5%), Norway (1.9%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (46.1%) and consumer (19.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 13.44x, the estimated weighted harmonic average P/B ratio was 0.64x and the estimated weighted average portfolio dividend yield was 5.81%.

AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund declined by −2.2% in November with a NAV of USD 1,748.46, bringing the return since inception to +74.8%. This represents an annualized return of +9.9% p.a.

The downtrend continued in November despite a one-day spike by the heavily weighted Vingroup-stocks. After surging 3% in the first few trading days, the index lost nearly 6% for the month. Negative sentiment among foreigners was seen both in blue chips and smaller names, with indices down across the board. In November 2019, the indices in HCMC and Hanoi were down −2.8% in HCMC and −2.6% Hanoi respectively (in USD terms) while losses in small- and mid-caps occurred at the beginning of the month, affecting the performance of the fund. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.57%, a Sharpe ratio of 1.03, and a low correlation of the fund versus the MSCI World Index USD of 0.24, all based on monthly observations.

Market Developments

2019 will be another success story for the Vietnamese economy, although we have seen a few mixed economic signals in recent weeks. We have to keep in mind that this year Vietnam, like every other country in the region, was confronted with several headwinds. A worldwide economic slowdown following lower trade, after an intensifying trade war between the USA and China, led to sharply reduced growth for most Asian economies, with Vietnam being one of the few outstanding exceptions. On the domestic front, the delayed issuance of licensing permits for many construction projects lowered the potential of even higher GDP growth. However, other indicators like FDI still confirm the strong underlying growth we see in Vietnam.

FDI disbursement 2018-2019 (Cumulative in USD bln)

Both negative factors could potentially fade out in 2020, so any weakness in underlying growth should be compensated and supported by either a recovery in world trade on a US-Chinese trade pact or higher approval rates in domestic construction projects, or both. Unfortunately, the stock market did not factor in any of the many positive developments in 2019 such as compelling GDP growth numbers or rising foreign direct investments, and any rally attempt was cut short. A handful of stocks pushed the index up in October, but on the first trading day of November Vingroup stocks once again pushed the index up strongly while the majority of stocks fell. On that day alone Vingroup and bank stocks led to an outperformance of the HSX "benchmark" index of 2% against the small cap index (+1.68% versus -0.30%). In the following weeks the gain in the HSX Index reversed into an overall monthly loss, so the only difference is - once again – higher volatility in the so-called safer blue chips.

Those unfortunate short-term swings are neither helpful, nor are they easily explainable with Vietnam’s atypical market structure (index weightings and foreign ownership limits), especially for non-professional investors.

Since the launch of the AFC Vietnam Fund back in December 2013, we have always focused on the long-term potential of Vietnam and also many of our investors told us that they don’t need bi-monthly updates. We therefore have decided to stop publishing an interim report by the end of this year, but are always happy to answer our client’s questions whenever they arise.

VN Index, August 2019 - November 2019

The positive news is that the HSX Index has now turned from an overbought to an oversold level which we have not seen since the lows at the beginning of the year.

Vietnam’s internet economy is booming!

According to an economic internet report issued by Google and Temasek in 2019, the internet economy in Vietnam will grow to USD 43 bln by 2025, up from just USD 3 bln in 2015, with E-commerce contributing USD 23 bln or more than half of this increase. Vietnam, with almost 100 mln inhabitants, is becoming one of the fastest growing internet economies in the world.

Vietnam internet economy value (USD bln)

(Source: Temasek & Google Report, AFC Research)

A lot of international E-commerce players, such as Lazada, Shopee, Tiki and Sendo, have dipped their toes into Vietnam in order to explore this promising market. The booming E-commerce market also helped another industry to flourish - the delivery business. Many companies and investors are investing heavily in this sector in order to capture the enormous growth. Currently some of the key players are:

The two traditional delivery companies, VNpost and Viettel, which were set up in 1997 and 2005 respectively, have built a wide delivery network in 63 provinces in Vietnam, including in very rural mountainous and forested regions. However, their disadvantages are low technology penetration and long delivery times. If a client wants to deliver something, he/she has to go to his/her closest office instead of somebody picking up the client’s goods at home. Therefore, most of the clients are offline business retailers. Recently, VNpost and Viettel started to work with E-commerce platforms such as Lazada, Shopee, Sendo or Tiki, but the volume is still small, mainly due to unreliable customer care services.

The modern delivery companies are mostly new startups such as GHN, GHTK, Kerry, Ninjavan. Most of them started their businesses along with the E-commerce boom. GHN and GHTK are the two largest key players in this segment with more than 70% market share. They offer a full range of services from pick up, delivery, COD services and insurance. Their superior technologies allow them to capture this fast-growing business segment better. Barcode scanning, online tracking, compensation claims and fast delivery customer care services are high-level services well appreciated by retailers and E-commerce platforms. With their currently limited network, these two delivery companies (GHN and GHTK) are expanding quickly to cover all 63 provinces.

Technology companies, such as Grab and Goviet, are ride hailing apps. Based on their client data, they have started offering fast delivery, within an hour, but only inside major cities. Obviously, the fee is comparably high and is calculated based on distance.

Among the three business segments, only traditional ones are making some profit. The two other segments are burning money aggressively in favour of fast expansion and they are also reducing fees in order gain market share. According to an expert in this sector, it is impossible to make a profit with the current delivery fee structure. GHN and GHTK are charging VND 15,000 including VAT (US cents 64) for delivery within Ho Chi Minh City. This means that revenue before VAT is only VND 13,600 per item. Meanwhile, GHN pays VND 3,800 per item for pick up and VND 3,800 per item for successful delivery. Total cost for the shipper is therefore VND 7,600 per item. These companies get less than VND 6,000 per item for delivery within Ho Chi Minh City. In other words, 4 delivered goods are necessary to make one dollar before all other costs!

Cost structure for delivering an item within Ho Chi Minh City

Of course, this amount is unable to cover all of their expenses. In order to reduce operational costs, most delivery companies do not sign labour contracts with shippers (delivery men) to avoid social contributions and other unexpected costs. Furthermore, they also do not need to invest in typical delivery vehicles such as motorbikes. Instead, shippers have to use their own motorbikes to apply for a job.

Delivery in Ho Chi Minh City versus Europe

    DHL in Paris

GHTK in Ho Chi Minh City

Besides high expansion and operational costs, these companies strongly depend on the growth of E-commerce platforms. For example, nearly 90% of the GHN’s total deliveries come from E-commerce platforms. In other words, if E-commerce companies face difficulties, these delivery companies will get into trouble as well. Furthermore, E-commerce companies such as Lazada or Tiki also want to reduce the influence of these delivery companies on their business. A successful order strongly depends on the – sometimes questionable - attitude of a shipper who does not have a committed labour contract with the logistics company. Consequently, E-commerce companies have to build their own delivery companies. Lazada has Lazada Express Logistic (LEL), Tiki has Tiki Express. Besides reducing the influence of delivery companies, E-commerce platforms also want to speed up delivery to within 2-4 hours. If a customer in Ho Chi Minh City buys a product on Tiki.vn, Tiki will deliver it within 2 hours with TikiNow service and Lazada within 4 hours with their new express delivery service.

TikiNow versus Lazada Express Delivery

TikiNOW

Lazada Vietnam CEO

Regardless of losing money in these delivery companies, venture investors are still investing aggressively as they are making investments into technology start-ups. Recently, GHN successfully raised around USD 100 mln from Temasek, a wholly owned investment company of the Singapore Government. With new injected capital, GHN will increase its appearance in all provinces, including remote mountainous areas. This fast expansion is burning a lot of money at the moment, but if they succeed, they will become “golden unicorns” in Vietnam. If they fail it will just be an adventure for them. However, Temasek’s investment into GHN shows that they want to be a part of this promising business in Vietnam.

Economy

At the end of November 2019, the fund’s largest positions were: Agriculture Bank Insurance JSC (6.5%) – an insurance company, Phu Tai JSC (4.2%) – a home and office furnishings company, Vietnam Container Shipping JSC (3.7%) – a container port management company, Sametel Corporation (3.5%) – a manufacturer of electrical and telecom equipment, and Idico Urban and House Development JSC (3.4%) – an energy, construction, and real estate business. The portfolio was invested in 62 names and held 3.3% in cash. The sectors with the largest allocation of assets were industrials (33.3%) and consumer goods (30.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.60x, the estimated weighted harmonic average P/B ratio was 0.99x and the estimated weighted average portfolio dividend yield was 7.58%.

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. .

The entire AFC Team wishes our investors and newsletter readers a peaceful 2019 Holiday Season and a Happy New Year!

With kind regards,
Thomas Hugger
CEO & Fund Manager

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Sri Lanka - Presidential Election Update

Sri Lanka held its much anticipated presidential elections on 16^th November 2019, and though there were a record number of 35 candidates, the race was down to Gotabaya Rajapaksa of the Sri Lanka Podujana Peramuna (SLPP) and Sajith Premadasa of the New Democratic Front (NDF). With vote counting complete, the SLPP’s Gotabaya Rajapaksa has emerged as the winner with a decisive victory, having garnered 52.3% of total votes, while NDF’s Sajith Premadasa won 41.9%. The margin of victory (1.3 million votes) for Gotabaya Rajapaksa was more than expected and this points to a decisive win for him.

Gotabaya Rajapaksa and the SLPP gained a lot of political momentum over the past year, especially after the political crises in the fourth quarter of 2018 and the Easter Sunday attack of April 2019. Gotabaya Rajapaksa campaigned on the platform of greater security for the country from extreme elements as well as more stable and decisive policymaking which may have swayed voters towards the SLPP due to the lack of direction for the economy over the past few years. 

Who is Gotabaya Rajapaksa?

Incoming President Gotabaya Rajapaksa is the younger brother of the former President, Mahinda Rajapaksa. Under the previous administration of Mahinda Rajapaksa, he served as the Secretary to the Ministry of Defence and Ministry of Urban Development from 2005-2015.

Gotabaya Rajapaksa – Incoming President of Sri Lanka

What can we expect from Gotabaya Rajapaksa?

Gotabaya Rajapaksa’s campaign was run on the platform of greater security for the country and more stable and decisive economic policies. Hence, once a new government is in power investor expectations will tilt towards seeing more economic reforms, stable and consistent tax policies and greater support for promoting the tourism industry and the infrastructure sector. Stable policy making can also lead to an increase in foreign direct investments which can further build up the country’s foreign exchange reserves. From a foreign policy perspective though, former President Mahinda Rajapaksa built close relations with China, and we believe the incoming President will adopt a more balanced foreign policy given the changing nature of geopolitics in the region. 

Impact on the stock market and economy

With a decisive win and change of guard in the country and expectations of stable and consistent policy making, Sri Lanka could witness the beginning of a positive trend as investors would now expect the economy to get back on track.

At a trailing twelve months P/E of 11.3x, the Colombo All Share Index has been trading at a discount to the region while the performance of the index over the last few years has been below average. This election victory is a key trigger for the stock market and we expect equities to rally in the near term as investor sentiment will see a big improvement. The AFC Asia Frontier Fund is well positioned to take advantage of this as it has increased its weight to Sri Lanka to more than 5% by buying blue chip companies in the banking and consumer sectors. 

Election win expected to boost soft stock market performance

Business and consumer sentiment are also expected to improve as spending decisions were being delayed in light of the elections. With a clear majority for Gotabaya Rajapaksa we can expect a more vibrant business and consumer sentiment to trickle down to the overall economy which should have a positive impact on economic growth in 2020.

Next steps for the country

The presidential election is one of two electoral processes that are now complete and the next step is the upcoming parliamentary elections. The President has the power to dissolve parliament six months before its tenure ends in August 2020. Hence, we expect Gotabaya Rajapaksa will dissolve parliament in February 2020 and call for parliamentary elections in March 2020. As political momentum is now with the SLPP it would not be surprising to see it gain a majority in parliament as well, which would be another big positive for Sri Lanka.

With the incumbent government having a weaker than expected show in the presidential elections it is unlikely they would support a call for early elections before March 2020. Hence, the SLPP will form a minority government at present with Mahinda Rajapaksa expected to be sworn in as the new Prime Minister of Sri Lanka.

Outlook

Weak business and stock market sentiment have been an issue for Sri Lanka over the past few years, but this election result can be a major positive turning point for the country. With expectations of one power centre in both the President’s and Prime Minister’s Office, and a high probability to the end of coalition politics, Sri Lanka looks like an attractive story with a three to five year view as attractive valuations, stable policy making and a recovery in economic and earnings growth can all propel the Colombo All Share Index to higher levels. However, investors will also continue to watch the country’s fiscal deficit and debt levels as they are expected to stay at elevated levels of 5.7% and 83% of 2019 GDP respectively as per IMF estimates. Any measures to bring this number down will be viewed positively by investors.

For further reading below are some important links related to Sri Lanka:

• Sri Lanka elects new president in first vote since deadly bombings
• AFC Asia Frontier Fund - Sri Lanka - at the bottom of the cycle?

For information about the AFC Asia Frontier Fund click one of the following links:

I hope you have enjoyed reading this update. If you would like any further information about the AFC Asia Frontier Fund, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
Fund Manager

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“Billions of Asians growing up in the past two decades have experienced geopolitical stability, rapidly expanding prosperity, and surging national pride. The world they know is one not of Western dominance but of Asian ascendance”.

― Parag Khanna, The Future is Asian: Commerce,
Conflict and Culture in the 21^st Century

AFC Funds Performance Summary

Market sentiments continue to improve in Pakistan and Sri Lanka

This month witnessed a significant improvement in sentiment in both Pakistan and Sri Lanka as each country moves towards macro and political stability respectively. The Pakistan KSE100 Index rallied by +6.6% on the back of a contracting current account deficit and declining bond yields, while upcoming Presidential elections in Sri Lanka are anticipated to bring positive political change, which resulted in the Sri Lanka Colombo All Share Index rallying by +4.4%.

Both countries have a number of well-run blue-chip companies trading at very attractive valuations, with the Pakistan KSE100 Index and Sri Lanka Colombo All Share Index valued at a P/E of 8.1x and 12.1x respectively – a big discount to peers in the region. Both markets now look good with a three to five-year perspective and as a result, the AFC Asia Frontier Fund has been increasing its weight to Sri Lanka over the last few months and has also increased its weight to Pakistan this month (read more about this in the AFC Asia Frontier Fund manager comment below).

Valuations continue to be extremely attractive in Asian frontier markets

The soft sentiment surrounding frontier markets is continuing to provide long term opportunities in our country universe with the AFC Asia Frontier Fund, AFC Uzbekistan Fund and AFC Vietnam Fund trading at very attractive valuations relative to the region as the chart below shows.

Join our discussion on Asian frontier markets on 27^th November 2019

Later this month on 27^th November, Ruchir Desai, Co-Manager of the AFC Asia Frontier Fund will be speaking at the Hong Kong Society of Financial Analysts event titled “Asian Frontier Markets – The Future Growth Drivers”. The talk will be focussed on the perception, opportunities and risks while investing in Asian frontier markets. Readers in Hong Kong interested to join the event can register here: registration page. There are discounts for HKSFA members and CFA candidates.

AFC Uzbekistan Tour 2020

Asia Frontier Capital will be hosting its second AFC Uzbekistan investment tour from 29^th April to 2^nd May 2020. We will be taking a small group of investors to experience this wonderful country and better understand the economic and social transformation taking place on the ground today.

The Uzbekistan Investor Tour will start in Tashkent on 29^th April 2020 with a welcome dinner. On 30th April and 1^st May we will be conducting site and boardroom meetings with publicly listed companies in the sectors of chemicals, pharmaceuticals and financial services to understand how these businesses operate in the local capital market environment on a daily basis. For the final part of the trip, on 2^nd May 2020 we will visit the ancient Silk Road City of Samarkand for the day, taking the Afrosiab bullet train around trip. This will give us the chance to absorb the unique beauty of Uzbekistan and see one of the many wonders that will attract millions of new tourists to the country in the coming years. If you are interested to join this tour please email us This email address is being protected from spambots. You need JavaScript enabled to view it.

The AFC Iraq Fund CIO Ahmed Tabaqchali will take part in a roundtable organized by Chatham House’s Middle East and North Africa Programme called “Modernising the Public Sector in Iraq“ on 27^th November 2019.

Below please find the manager comments relating to each of our 4 funds for the month of October 2019. Later this month we will share with you a travel report from CEO and fund manager Thomas Hugger providing an update of his experiences in Mongolia.

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.

Upcoming AFC Travel

Thomas Hugger, Ruchir Desai, and Peter de Vries are based in Hong Kong, while Andreas Vogelsanger is based in Bangkok 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 Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned +0.7% in October with a NAV of USD 1,064.01, bringing the return since inception (29^th March 2019) to +6.4%.

During October the government finally took notice of the need to develop Uzbekistan’s capital markets in order to ensure its opening of the economy is both transformative and sustainable. This was a highly encouraging development for the stock exchange, in particular, and this news coincided with the start of the road show for the government’s sell down of a 5% stake in a listed glass manufacturer.

AFC Uzbekistan Fund valuations as of 31^st October 2019