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Asia Frontier Capital (AFC) - December 2019

“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

“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



Full Year

AFC Asia Frontier Fund USD A 1,273.54+0.9%−6.7%+27.4%
AFC Frontier Asia Adjusted Index2 +1.3%+1.7%+8.8%
AFC Iraq Fund USD D627.08+0.8%+6.7%−37.3%
Rabee RSISX Index (in USD) +2.6%−1.3%−52.5%
AFC Uzbekistan Fund F1,093.32+1.6%+9.3%4+9.3%
AFC Vietnam Fund USD C1,789.27+2.3%+0.7%+78.9%
Ho Chi Minh City VN Index (in USD) 0.9%+8.2%+72.1%
  1. The NAV given is for the main share series for the relevant master fund. Investor’s holdings may be in a different share class or series or  currency and have a different NAV. See the factsheets and/or your statement for full details.
  2. The index was adjusted on 1st June 2017. Prior to that it consisted 100% of the MSCI Frontier Markets Asia Net Total Return USD Index, and after 1st June 2017 it consists of 37% of that index and 63% of the Karachi Stock Exchange 100 Index in USD.
  3. NAV and performance figures are all net of fees.
  4. YTD since 29th March 2019


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 3rd 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 8th 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. 


(Source: International Monetary Fund)


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

(Source: Bloomberg)


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.


(Source: Bloomberg, correlations based on monthly returns since inception)


AFC Vietnam Fund's 6th anniversary

The AFC Vietnam Fund returned +2.3% in December, closing the year with a performance of +0.7%. We celebrated its 6th 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 29th April to 2nd 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 29th April 2020, with a welcome dinner at City Grill. On 30th April and 1st 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 2nd 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.



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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. .





Istanbul, Turkey   12th – 15th January   Ahmed Tabaqchali
London, UK   16th – 23rd January   Ahmed Tabaqchali
Tashkent, Uzbekistan   17th January – 29th February   Scott Osheroff
Sulaimani/Erbil/Baghdad, Iraq   24th – 26th January    Ahmed Tabaqchali
Tokyo, Japan   27th – 31st January   Ahmed Tabaqchali
Sulaimani/Erbil/Baghdad, Iraq   1st February – 1st June   Ahmed Tabaqchali
Ho Chi Minh City, Vietnam   17th – 20th March   Ruchir Desai
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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

(Source: Bloomberg)


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

(Source: Bloomberg)


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.


(Source: Bloomberg, General Statistics Office of Vietnam, Bangladesh Export Promotion Bureau)


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

(Source: Bloomberg)


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)

(Source: Audited SED financial report, AFC Research)


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)

(Source: Audited LTG financial reports, AFC Research)


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)

(Source: Audited NSC financial reports, AFC Research)


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 (%)

(Source: GSO, World Bank, AFC Research)


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)

(Source: GSO, AFC Research)


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 (%)

(Source: Ministry of Finance of Vietnam, AFC Research)


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

(Source: Bloomberg)




(Source: GSO, VCB, State Bank, AFC Research)


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%

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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 29th 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 22nd 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 6th January 2020.

AFC Uzbekistan Fund valuations as of 31st December 2019

Estimated weighted harmonic average trailing P/E (only companies with profit): 4.18x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 8.64%


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 2nd 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 20th 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

(Source: Bloomberg)


Foreign investors permitted to buy bank stocks:

On 6th 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 25th 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 23rd 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 15th 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 7th 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%.

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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 31st 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.


(Source: Asia Frontier Capital, Bloomberg)


Fundamentals of AFC Asia Frontier Fund holdings are solid

(Source: Asia Frontier Capital)


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

(Source: Bloomberg)


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.


(Source: Sri Lanka Tourism Development Authority)


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%.

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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 9th 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.



(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital)


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

(Source: Art by Yota Namir, Ra’ed Modah & Noor Namir, photo by Mohammed Ghani posted on Baghdad Projects’ Facebook page)


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)

(Source: Bloomberg, data from 30/04/2019 – 31/12/2019)


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)

(Source: Bloomberg, data from 31/12/2018 – 31/12/2019)


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.


(Source: Central Bank of Iraq, Asia Frontier Capital)


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.



(Source: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)
(Data for Oil revenues as of December 2019)


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%.

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With kind regards,
Thomas Hugger
CEO & Fund Manager

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