The Asia Frontier Fund (AAFF) USD A-shares declined 0.7% in December 2018. The fund outperformed the AFC Frontier Asia Adjusted Index (7.7%), the MSCI Frontier Markets Asia Net Total Return USD Index (2.9%), the MSCI Frontier Markets Net Total Return USD Index (4.0%) and the MSCI World Net Total Return USD Index (7.6%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +36.4% versus the AFC Frontier Asia Adjusted Index, which is up +7.0% during the same time period. The fund’s annualized performance since inception is +4.7% p.a., while its 2018 performance stands at 20.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.24%, a Sharpe ratio of 0.45 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.36, all based on monthly observations since inception.

Bangladesh conducted national parliamentary elections on 30th December and, as expected, the Sheikh Hasina-led Awami League and its coalition partners posted a convincing victory, winning 288 seats out of a total of 300. We believe this is very positive as the continuity of the same government will help execute economic policies in a more stable manner. More importantly, the uncertainty and the overhang on equity markets that was persistent through most of 2018 should now abate since elections are out of the way. The market can now focus on the long-term fundamentals of the economy, which are extremely attractive with an expected annual GDP growth of 7% over the next five years. We are very positive on the consumer discretionary, financial services and pharmaceutical sectors due to Bangladesh’s large young population with increasing disposable income.

In Vietnam, the stock market continues to be impacted by global sentiment towards equities even though the country displays strong economic growth, with 4Q18 GDP growth of 7.3%. This is led by consistent manufacturing sector growth as Vietnam benefits from a transformation into a low-cost manufacturing hub and is expected to be a net beneficiary of the China – U.S. trade war.

Macro uncertainty continued in Pakistan as the government is still negotiating with the IMF for a loan program. However, foreign exchange support of USD 3 bln from the UAE this month should reduce some short-term pressure on foreign exchange reserves. In our view an IMF program would give investors more confidence in long term policy making than stop gap arrangements with the UAE and Saudi Arabia.

Sri Lankan Prime Minister Ranil Wickremesinghe was reinstated to his post by President Maithripala Sirisena which ended almost two months of political uncertainty. However, as the Prime Minister and President do not appear to be on the same page with respect to certain policies, there may not be any major pick up in political momentum. On a bottom up basis, the top three private sector banks have attractive valuations as the recent increase in non-performing loans appears to be priced in while these banks are still well capitalised with healthy RoEs.

During the month of December, Mongolia experienced continued fallout from the SME Fund Scandal, where it was reported that a material amount of the fund’s USD 255 mln loan book was allocated to companies related to members of parliament, their business associates, and families. The findings led to a faction of the ruling Mongolian People’s Party (MPP) to call a no confidence vote of the Prime Minister (which he survived), and the arrest of four managers of the fund. Perhaps the best example of the public’s outrage at continued corruption among government officials as well as at the SME Fund Scandal was a protest held in Ulaanbaatar on 27th December where an estimated 25,000 people came out to protest in minus 20-degree Celsius weather.

On a brighter note, on 31st December, Oyu Tolgoi LLC – the joint venture between the government of Mongolia and Turquoise Hill Resources (majority owned by Rio Tinto) – signed an agreement to build a 300-megawatt power plant at the Tavan Tolgoi coal mine. This is a milestone in the development of the Oyu Tolgoi copper/gold mine as last February the government cancelled a power agreement which now requires Oyu Tolgoi to source all of its approximately USD 150 mln to USD 200 mln in annual electricity consumption domestically within four years. It is estimated the four-year target will be missed, but the new powerplant is expected to begin operations by mid-2023.

Uzbekistan saw its first ever secondary offering in the shares of a majority government-owned steel fabrication company during the month. The government sold down 10% of its stake through a brokered placement which was 126% oversubscribed, likely because it was sold at a bargain price with an approximate trailing twelve-month P/E of 3.44x and P/B of 0.46x. The company’s shares subsequently closed up 45% in the first day shares became free trading. This should provide a template for future government stakes being sold off to non-strategic investors as the government is in the early stages of a significant privatization of the economy which is presenting the opportunity for portfolio and strategic investors to fill the void previously held by SOE’s.

The best performing indexes in the AAFF universe in December were Cambodia (+21%), with a year to date performance of +39.6% and probably the second-best performing stock market in the world behind Ukraine with +80% in USD, Kyrgyzstan (+10.1%) – with +36.7% in USD the third best performing stock market in 2018 globally, and Mongolia (+10%). The poorest performing markets were Pakistan (9.0%) and Vietnam (3.7%). The top-performing portfolio stocks this month were an IT company from Mongolia (+35.8%), a Vietnamese insurance company (+34.4%), a Mongolian trading company (+27.6%), an airport operator from Kyrgyzstan (+24.4%), and a cement company from Mongolia (+23%).

In December, we added to existing positions in Mongolia, Uzbekistan, and Vietnam and added two new companies from Uzbekistan: a coal mining company and an engineering company. We exited one port operator and one mining company in Cambodia, an engineering company in Vietnam, a mining company in Mongolia, and two companies from Myanmar. We partially sold 4 Mongolian companies and each one company from Bangladesh, Myanmar, and Vietnam.

As of 31st December 2018, the portfolio was invested in 110 companies, 1 fund and held 4.7% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (6.9%) and a pump manufacturer from Vietnam (5.1%). The countries with the largest asset allocation include Vietnam (26.0%), Bangladesh (19.8%), and Mongolia (17.7%). The sectors with the largest allocations of assets are consumer goods (29.8%) and industrials (21.5%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 11.91x, the estimated weighted average P/B ratio was 1.99x, and the estimated portfolio dividend yield was 4.79%.

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