AFC Uzbekistan Fund June 2024 Update

Dear Investors and Friends,

June was a tranquil month in terms of economic and capital markets news flow. The annual "chilla", or 40 days of extreme heat, seemed to be the dominant headline in Tashkent. With temperatures already in excess of 40 Celsius, combined with school holidays, locals have left the cities for the countryside and mountains, where temperatures are more moderate. In June 2024, the fund NAV fell to an estimated USD 1,503 (-4.6%) or +50.3% since Inception on 29^th March 2019.

AFC Uzbekistan Fund valuations as of 30^th June  2024:

In June, the World Bank updated its forecast for Uzbekistan's 2024 GDP, adjusting it modestly lower, from 5.5% to 5.3%, due to continued budgetary constraints and increasing competitiveness the country faces as it advances its push to liberalize the economy, specifically in easing blanket subsidies for the population in electricity, water, and gas. This has been a key focus of the government's reforms over the past several years but was delayed due to Covid-19. Subsequently, this pushed inflation up 2.8% and 0.24% in May and June respectively, reaching 10.6% YoY. While this may be perceived as "high", it remains well within our expectations of high single-digit and low double-digit inflation and is the first uptick since January 2022 and remains a far cry from the high of the last cycle when inflation Peaked at in January 2018 at 20.1%.

We’ve written many times in past newsletters that the world is changing, transitioning into a multi-polar world where the New Fertile Crescent region and the BRICS are increasingly doing business among themselves, developing alternative payment systems to the Western SWIFT network, and are increasingly purchasing gold to offset trade imbalances among “new economic allies.” As a result of the country’s export-oriented focus, as well as its increased mining output, foreign exchange reserves are rising on the back of the high gold price, even in the face of gold sales to allocate to budget expenditures and forex intervention to support the Uzbek som. FX reserves currently stand at USD 36.6 billion or ~41% of GDP, which is a very healthy number for what appears to be an increasingly turbulent world with financial volatility in developed markets and several conflicts in Europe and the Middle East that look like they will accelerate before they conclude.

Uzbekistan being at the geographical heart of this new map being drawn, between Russia, China, the Middle East, Turkey, and Iran; the country is now benefitting from aggressive Chinese investments, rivalling historically dominant Russian investments.

With global investors seemingly blinded by the bubble in Nvidia stock, collapsing breadth in the S&P 500 gives us pause about an eventual broad tech correction, similar to the one in 2000 which risks seeing correlations of asset classes approaching “1” where anything with a bid is sold for liquidity (as we saw in 2020). This would be a positive for many frontier markets, and Uzbekistan’s capital markets and its economy in particular as Uzbekistan remains largely uncorrelated with the rest of the world due to the lack of global interconnectivity, which buffers the country. However, it also causes equity prices to languish when local investors face exhaustion, as they are currently facing, and which is allowing us to continue acquiring shares at prices and valuations we honestly didn’t think we’d see again after the market “took off” in 2020-2021.

For example, one of the fund’s industrial company holdings which was recently privatised by the government, ended June trading at a P/E of 2.37x, a P/B of 1.22x and a dividend yield of 10.93%. YoY earnings were flat, while book value surged 40%. The dividend being in line with inflation and ahead of any currency devaluation, it’s only a matter of time until Uzbek citizens realize opportunities like these, and we imagine this will unfold once the investment program for salaried employees enabling them to offset a percentage of their otherwise taxable income is launched later this year.

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

2.8m tourists visit Uzbekistan in 5m 2024

Uzbekistan and China plan to increase flights to 100 per week

Uzbekistan's construction sector may reduce emigration to Russia

Iran and Uzbekistan remove trade barriers 

AFC Uzbekistan Fund Marketing Information as of the end of May 2024

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Best regards,

AFC Uzbekistan Fund

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