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.
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 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 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.
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 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.
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.
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.