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AFC Uzbekistan Fund July 2021 Update

 

Dear Investors and Friends,

July 2021 was a quiet month on the capital markets front in Uzbekistan as the summer heat reached over 46 degrees Celsius in Tashkent and the Eid holiday saw many people depart for the cool climate of the nearby mountains to escape the heat. Nonetheless, Uzbekistan exercised its geopolitical prowess as it hosted an international Central & South Asian Forum during the month which was attended by many investors and representatives of foreign governments. The July 2021 fund NAV decreased to an estimated USD 1,953.5 (-1.9%) or +95.4% since inception on 29th March 2019.


AFC Uzbekistan Fund valuations as of 31st July 2021:

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

6.07x
 Estimated weighted harmonic average P/B: 1.43x
 Estimated weighted portfolio dividend yield: 8.02%

Uzbekistan’s economy is heating up with growth revised higher

Uzbekistan is receiving increasing recognition as a high-growth economy. GDP growth for the first half of 2021 rocketed higher by 6.2%, compared to 1.1% growth in the first half of 2020. The resilience of Uzbekistan’s economy, stemming from its significant commodity production (gold, copper, natural gas, agriculture, etc.) and increasing liberalization, has enabled the country to self-finance infrastructure and social projects which have led it to continue and accelerate its growth. The outstanding response Uzbekistan had to the COVID-19 pandemic which steadied the economy is a testament to the country being well positioned for a global climate of rising inflation and protectionism.

A result of Uzbekistan's strong growth, J.P. Morgan recently published a report forecasting GDP growth of 8.1% and 6.3% in 2021 and 2022, while the Central Bank of Uzbekistan revised higher its 2021 GDP growth estimate from a prior range of 4.5%-5.5% to 5.8%-6.8%, and its estimate for export growth has also been revised higher from 8%-10% to 20-25%. Additionally, Moody’s has given Uzbekistan a rating of B1 with a “positive” outlook; this is the first time one of the big 3 ratings agencies has rated Uzbekistan “positive”. Further, Moody’s also estimates 5.5% and 6.3% GDP growth in 2021 and 2022. 

Central & South Asia Conference puts Uzbekistan on the geopolitical map

As Uzbekistan increasingly asserts itself as a growing geopolitical force (and naturally so, being the country is located at the heart of Central Asia and hosts the largest population in the region at just under 35 mln people), in a bid to integrate itself into the regional and global economy via South Asia, on the 15th and 16th of July, Uzbekistan hosted the Central & South Asia Conference. Roughly 50 countries were represented, including Russia, China, the USA, the United Arab Emirates and Pakistan, where Pakistan’s Prime Minister, Imran Khan was a keynote speaker and signed deals worth USD 500 mln in the areas of trade, logistics, and cultural cooperation.

 

(Source: Central & South Asia Forum 2021)

 

One of the main focuses of the Uzbek government in regards to trade has been to lower the high logistics costs for the country due to its double landlocked status. In February of this year Uzbekistan advanced its assessment of building a railway from Termez in southern Uzbekistan, through Afghanistan and into Pakistan’s eastern province of Peshawar in order to connect to Pakistan’s Gwadar Port on the Arabian Sea. Uzbekistan being one of two double-landlocked countries in the world (the other Liechtenstein), cost-competitive access to sea ports is paramount for it to unlock its potential  as a regional export powerhouse, especially in the sectors of agriculture and light manufacturing.

As with most conferences, time will tell how much of the excitement surrounding it translates into tangible foreign direct investments and export opportunities, but at the very least it was beneficial as it brought many first-time investors to Uzbekistan.

One of the biggest hurdles to understanding the potential of Uzbekistan and committing to an allocation of capital, whether in the stock market, or in physical businesses, is no doubt the stigma of Uzbekistan being a “Stan” country and the general lack of familiarity investors have with the region. So, any event that brings investors to the country increases the chances of investment.

I met several groups from the Middle East, Europe and Pakistan during the conference who were impressed by how developed Tashkent is, the quality of the infrastructure and cleanliness of the city. Many were also impressed by the high speed Afrosiyob train which runs from Tashkent to Samarkand and Bukhara when they learned it was self-financed and the trains are Spanish and not Chinese. In our view, this excitement is understandable, for Thomas and I had the same eye-opening realization in May 2018 when we first visited the country.

 

Uzbekistan’s bullet train - Afrosiyob

(Source: AFC Research)

 

Afghanistan Situation

As Uzbekistan shares a 144 km long border with northern Afghanistan and has bilateral trade of roughly USD 600 mln per year, the majority of which is exports, Afghanistan has the potential to become a large regional export market for Uzbekistan. However, the situation with the U.S. withdrawal from the country is delicate and something we are watching closely. From our observations, it appears that the Taliban is seeking to fill the power vacuum and at the very least be influential in the government going forward as they have been establishing or enhancing relations with regional powers including Russia, China, and their Central Asian neighbours.

In a Sputnik news article on 22nd July 2021, a spokesman for the Taliban was quoted saying they control “approximately 90% of Afghanistan’s border with neighbouring countries” and 85% of total Afghan territory. From a thirty-thousand-foot view, we would hope to see the Taliban respect Afghanistan’s borders with neighbouring countries and foresee a potential new Afghan government facilitating increased trade with the region. This is of course a very fluid and sensitive topic and one which we will continue to monitor, as stability in Afghanistan will be a net positive for Uzbekistan as it seeks to enhance connectivity through northern Afghanistan (by road currently) via railway to Pakistan which will not only facilitate exports to the global market, but expand Uzbekistan’s access to the Afghan market which hosts a sizable population of 40 mln people.

For further viewing here are some interesting, relevant news links related to Uzbekistan:

Why Investor Jim Rogers is Poking Around Uzbekistan                                                               

Uzbekistan Conference Attracts Global Interest in Central Asia

Uzbekistan’s revolutionary transformation for good

Uzbekistan’s Central Bank increases 2021 growth estimate to 6.8% from 5.5%

Foundation stone laid for new copper processing plant

Burger King to enter Uzbekistan

AFC Uzbekistan Fund Marketing Information as of the end of June 2021

 
 

Subscriptions

The next cutoff date for subscriptions will be 25th August 2021. If you would like any assistance with the subscription process, please get in touch with us at This email address is being protected from spambots. You need JavaScript enabled to view it.

Best regards,

Scott Osheroff

CIO AFC Uzbekistan Fund