The Asia Frontier Fund USD A-shares remained flat in January 2019. The fund underperformed the AFC Frontier Asia Adjusted Index (+8.2%), the MSCI Frontier Markets Asia Net Total Return USD Index (+4.2%), the MSCI Frontier Markets Net Total Return USD Index (+4.8%) and the MSCI World Net Total Return USD Index (+7.8%). The performance of the AFC Asia Frontier Fund A-shares since inception on 30th March 2012 now stands at +36.4% versus the AFC Frontier Asia Adjusted Index, which is up +15.8% during the same time period. The fund’s annualized performance since inception is +4.6% p.a. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualized volatility of 9.19%, 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.

Global markets saw a recovery this month on the back of dovish comments from the U.S. Fed, a possible trade deal between China and the U.S. (however issues between the two countries will persist) and the likelihood of further stimulus measures from China. In summary, markets gained back what they lost in December 2018.

When the markets saw a big correction in December 2018, the fund witnessed a large relative outperformance against all major indices while the fund’s performance remained flat this month as markets recovered. The performance of the fund over the last two months is a reflection of its lower correlation and volatility with global markets when there are sudden bearish or euphoric changes in global market sentiment. This is further reflected in the fund’s betas with major indices which are all less than 1. Since inception, the fund’s betas with the MSCI Emerging Markets Index, MSCI World Index, MSCI Frontier Markets Index and MSCI Frontier Markets Asia Index are 0.46, 0.53, 0.60, and 0.61 respectively. This low correlation, volatility, and beta relative to markets is due to the fund’s benchmark agnostic approach to both country and stock selection.Bangladesh led performance as there was an anticipated post-election rally with the Dhaka Stock Exchange Index gaining +8.1%, making it one of the best performing markets in Asia this month. We believe the country’s stock market is well-positioned for good performance as a stable government backed by strong GDP growth of 7% and very favourable demographics are good tailwinds for corporate earnings growth going forward. On the macro front, there are also positive developments with the current account deficit for the July-December 2018 period falling by 39% YoY due to softer import growth and a pick-up in garment exports and increasing remittances which have grown by 15.7% and 8.1% respectively in the same period. The fund’s Bangladeshi holdings are well positioned to capture future economic growth in the country with investments in consumer discretionary, financial services, and pharmaceutical companies.

Robust manufacturing growth continues in Vietnam with January 2019 growth reported at 10.1% YoY. However, the Ho Chi Minh VN Index did not track the rally in Asia due to softer exports in January 2019. Though mobile phone exports, which account for 20% of total Vietnamese exports, have been weak over the last few months, this month’s overall soft export figure could be due to the Lunar New Year holidays and we therefore expect that export growth should normalize going forward. Also, on a relative basis, Vietnam’s export growth over the past year has been exceptional compared to the rest of the region.
From a performance perspective, the fund’s Vietnamese automotive holding led returns as it declared very good quarterly and full year results for 2018 with both Toyota and Honda benefitting from increased demand for passenger cars and motorcycles. This led to a 26% rally in the company’s stock price. Earnings growth was also very strong for the fund’s other Vietnamese holdings across sectors, namely, an airport operator, a pump manufacturer, an industrial park developer, a consumer staples company, a logistics company, and a cargo handling company. However, performance in Vietnam was negated by a construction company which declared lower than expected quarterly net profits and this impacted sentiment in the stock.

Pakistan witnessed a 10.1% rally in the KSE100 Index but one should not get carried away with this as the market recovered what it lost in December 2018 when it was down 8.5% with the current index level back to where it was at the end of November 2018. Normalised earnings growth (ex-banks and oil & gas) for 2019 is expected to be around 5% given the expected slowdown in GDP growth. Talks with the IMF for a possible deal are still ongoing while the State Bank of Pakistan raised benchmark interest rates by 25 basis points with market participants expecting no change. The move by the Central Bank is not surprising to us given the large current account deficit which is yet to face the full impact of the Pakistani Rupee (PKR) depreciation while the interim budget announced by the government did not see any major revenue raising measures given the large fiscal deficit. We remain underweight Pakistan.

Uzbekistan hit the proverbial ground running in the new year when it announced that from 1st February 45 countries will be granted 30-day visa-free entry to Uzbekistan and citizens of 76 more countries (currently 101 countries) will be able to apply for E-visa’s online. This is part of the government’s initiative to make tourism a key pillar of the economy and increase the tourism sector’s contribution to GDP to 5% from the current 2.3%. Clearly the visa liberalization over the past year has worked as 2018 saw a 230% increase in arrivals, reaching 6.4 mln.

In perhaps an even bigger development, the government has announced that from 1st July 2019, legal entities and residents of Uzbekistan will be entitled to privatize land under homes and buildings as well as vacant land plots. This is part of the government’s plan to see the privatization of land throughout the country with the exception of agricultural land and is a welcome move which will bring Uzbekistan in line with many post-Soviet satellite countries, and it is expected this will further increase property rights as well as investment into the sector.

In the universe of listed companies, the government has drafted proposed legislation which could see the privatization of their holdings in the vegetable and animal fat industry. With multiple listed vegetable oil producers, this could mean a marked increase in liquidity, increase in capacity utilization (with raw material imports not taxed), as well as other tax cuts. We are optimistic on this industry as it provides direct exposure to the country’s 33 mln consumers who, with increased income, will increase their consumption of vegetable oils-namely cottonseed, sunflower, rapeseed and soybean oil.

The parliamentary saga in Mongolia continued during the month with Speaker Enkhbold Miyegombo forced to resign, having faced pressure since a no-confidence vote against the prime minister in November. The shakeup against corruption gained further steam as several other individuals were either put under investigation or detained. This went so far as for the June 2009 agreement between Turquoise Hill and the Mongolian government on the Oyu Tolgoi copper/gold project to be investigated after the previous finance minister, Bayartsogt Sangajav, was re-arrested for reportedly holding shares in either Turquoise Hill or Rio Tinto in anticipation of signing the deal. On a more upbeat note, GDP for 2018 clocked in at 7.1% due to increased exports of namely coal and copper, a robust turnaround from the past several years.

The best performing indexes in the AAFF universe in January were Cambodia (+22%), Pakistan (+10.1%), and Bangladesh (+8.1%). The poorest performing markets were Iraq (−3.1%) and Laos (−1.3%). The top-performing portfolio stocks this month were a chemical company from Uzbekistan (+55.2%), an oil and gas servicing company from Uzbekistan (+37.5%), a Mongolian junior oil & gas company (+36.6%), a cement company from Uzbekistan (+30.4%), and an engineering company from Uzbekistan (+26.3%).

In January, we added to existing positions in Mongolia, Uzbekistan, and Vietnam and added two new companies from Uzbekistan: a wine company and a cooking oil company. We exited one junior oil & gas company from Mongolia, a Pakistani household goods producer and a Pakistani insurance company. We partially sold two Mongolian companies and each one company from Pakistan and Vietnam.
As of 31st January 2019, the portfolio was invested in 109 companies, 1 fund and held 3.9% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.6%) and a pump manufacturer from Vietnam (5.5%). The countries with the largest asset allocation include Vietnam (26.2%), Bangladesh (21.3%), and Mongolia (17.5%). The sectors with the largest allocations of assets are consumer goods (30.3%) and industrials (21.7%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.39x, the estimated weighted average P/B ratio was 1.99x, and the estimated portfolio dividend yield was 4.05%.