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%.