In this Issue
Global markets rebounded in June as reflected by a 4.9% increase within the MSCI World Index USD following bailouts set forth by the European Central Bank that have for the meantime assuaged fears fueled by sovereign debt crises in Portugal, Ireland, Italy, Greece and Spain (a.k.a. the PIIGS). Even though as a group frontier markets did not follow suit, Leopard Asia Frontier Fund (LAFF) was able to outperform comparative MSCI indexes. In June 2012, LAFF USD A-shares declined by only 0.3% compared to MSCI Frontier Markets Asia Index and MSCI Frontier Markets Index, which decreased by 1.3% and 0.5%, respectively.
LAFF mitigated downside risks associated with fluctuating global markets by maintaining its positions in strategic Asian frontier markets and increasing exposure in new ones. In June LAFF held its greatest exposure in Bangladesh (19% of AUM) and upheld its second-largest single stock position in a Bangladeshi generic pharmaceutical producer (4.9% of AUM). These investments reinforce the funds defensive posture by dedicating assets to an inelastic sector within a country that is negatively correlated to global markets. Bangladesh's economy further benefitted in June from lower global oil prices and increased export demand from India and China that have made up for slack demand from Europe.
The fund also adjusted its investments in Pakistan (13.8% of AUM) and Vietnam (14.6% of AUM). The fund sold its entire position within Pakistan's largest fixed line phone operator at a profit of 10.1%, and purchased shares in a dairy product company. Private consumption within Pakistan, which accounts for approximately 90% of nominal GDP, is forecasted to grow at an average rate of 5.5% through 2016. In addition, after receiving approval to trade in Vietnam, the fund reduced its holding in the Vietnam ETF and purchased two stocks option listed on the Ho Chi Minh City Stock Exchange: a distributor of liquefied petroleum gas (LPG) and an animal food and medicine manufacturing company. Vietnam's economy indicated strengthening as the country's industrial production index rose 8.0% from the previous year and retail sales increased by 19.5% in the first half of this year compared to last year. Vietnam had been underweighted versus other "larger" markets in the portfolio, particularly Bangladesh, Pakistan and Sri Lanka. Additional actions taken on behalf of the fund included exercising all available new shares from rights issues for three portfolio companies in Laos, Mongolia and Myanmar, and subscribing for placement shares of a power producer in Laos.
At the end of June, the portfolio was invested in 45 shares, 2 closed end funds, 1 ETF and 1 GDR (with 43% discount) and held 5.3% cash. The stocks were listed on the exchanges in Bangladesh, Hong Kong, Laos, London, Mongolia, New York, Pakistan, Papua New Guinea, Singapore, Sri Lanka and Vietnam. All the custody accounts in the various countries have been established and LAFF is now positioned to invest in all stock exchanges open to foreigners within its designated Asian frontier universe.
Looking forward, LAFF intends to continue seeking out attractively valued stocks and increase its exposure in small and medium-capitalized Asian frontier markets, particularly Vietnam. Furthermore, the fund intends to pivot away from companies listed on larger, more developed stock exchanges, such as in Hong Kong, New York and Singapore, which tend to be higher rated due to their greater accessibility. Lastly, in spite of global and regional forecasts, LAFF remains optimistic about the future of Asian frontier markets. Although overall GDP numbers within Asian frontier markets are expected to be negatively adjusted, they will remain well above long-term average growth rates within developed markets.
Factsheets highlighting the fund's performance as of 30 June 2012 are available here:
Every month we highlight economic developments in one country within the Leopard Asia Frontier Universe.
In May of 1992, a colleague of mine took a trip to Mongolia shortly after the new constitution was enacted there. It was not a great time for Mongolia. There was a tremendous shortage of nearly everything, especially petrol. Petrol for cars was being sold sparingly, local flights rarely operated, and horseback was a common form of transportation. Common products we take for granted were in scarce supply. Bakeries sold bread though tiny unidentifiable counters along the walls, and when they were open, there were always long lines. Supermarkets were completely devoid of products. Aside from the staff, the shops were otherwise empty. Only the butchers had meat, though certainly not enough to go around, and it appeared most of the it was traded privately as indicated by the occasional person walking down the street lugging half a pig or a cow's leg on his shoulder.
My colleague had been a devout vegetarian until he dined at the most luxurious restaurant in Ulan Bator in search of a proper vegetarian meal. He ordered what seemed to be the only veggie option on the menu; a tossed salad. Instead he was served a platter with six different cold cuts and a boiled egg; Vegetarian Mongolian style.
How things have changed since my colleague's trip. Since then, Mongolia has successful transitioned from a post-communist state to one based on market-based economic principles that is now on the verge of colossal growth. Though at first glance, it is understandable why investors would be skeptical about investing in Mongolia's stock exchange. Mongolia's economy has traditionally been based on herding and agriculture and what the country is most known for -- being the least populated country in the world -- generally does not bode well for economic development. And yet, despite these less-than-desirable metrics, Mongolia's potential is undeniable.
Mongolia has already experienced "China-like" growth over the last two years and there is no indication of it flagging. Real GDP increased by 17.3% in 2011 and is forecasted to maintain an average GDP growth of 16.5% annually in 2012-2013. Mongolia's growth is driven by the mining and export of its vast deposits of natural minerals including coal, copper, gold, tungsten, tin, nickel, zinc, silver and iron, to China and other emerging economies in the region. The most direct way to attain exposure to Mongolia's epic growth is through the Mongolian Stock Exchange (MSE).
There are plenty of reasons to be bullish about Mongolia's securities market. The bourse was the world's top-performing stock market in 2010 with stock prices rising 121%. The following year, the MSE was the second-best performer in the world with average prices increasing by almost 50%. While triple-digit growth does not appear sustainable over the long-term, there are three main reasons LAFF remains optimistic about the likelihood of sustained growth and high-returns from investing in the MSE over the next decade. For one, the MSE has entered into a strategic partnership with the London Stock Exchange (LSE) to help modernize the bourse, which currently suffers from low liquidity and international participation. In addition, an updated Mongolian securities markets law that is expected to pass in the coming year will help increase foreign investment and market liquidity. Lastly, the MSE is currently flirting with a massive pipeline of potential IPOs and secondary listings that could potentially be worth US$45 billion in market capitalization, an increase of over 3000%. These potential deals, led by the anticipated US$3 billion IPO state-run Erdenes Tavan Tolgoi, the mining company with rights to the US$10 billion coking coal deposit (expected Q3 2012) could be a watershed moment for Mongolia's securities market, and pave the way for additional IPO's and duel listings.
However, there remain reasons for cautious optimism. Last May, the MSE held its first IPO in five years of a small transportation company and only a couple dozen companies trade on a given day illustrating the overall illiquidity of the market. Furthermore, the securities regulatory regime and the physical infrastructure within the bourse are in desperate need of updating. The government will also need to address growing inflation. The combined influx of foreign investment and commodity exports will continue to place upward pressure on the local currency making exports in the agricultural and manufacturing sectors, which are crucial for economic diversification, less competitive.
Despite these shortcomings, LAFF anticipates the MSE to continue to experience sustained high growth rates for the foreseeable future. The country's mining industry will continue to spearhead growth as the MSE and its affiliated regulatory regime matures in a manner that will better facilitate more IPOs and secondary and tertiary listings. The MSE's low market capitalization as a percentage of GDP further indicates the potential for substantial growth. As these developments takes shape, LAFF will continue to explore investment opportunities in the mining sector and high-growth derivative industries such as construction, cement and consumer goods.
Discount for attendees to SuperReturn Asia 2012
Douglas Clayton, CEO and Founder of Leopard Capital, will speak at the 7th annual SuperReturn Asia conference held in Hong Kong from 24 - 27 September 2012. We have negotiated a discount of 15% to all our readers. Douglas will speak on 25 September on frontier markets under the subtitle: Understanding The Exotic Markets Of Mongolia, Cambodia & Bangladesh: How To Benefit From The Lack Of Correlation To The Rest Of The World.
Emerging Frontiers Blog
We invite you to stay updated with daily investment news and analyses within Asian frontier markets by visiting Leopard Capital's free Emerging Frontiers Blog. Emerging Frontiers now includes news and analysis from all countries within the Leopard Asia Frontier Fund universe.
This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.
The representative of the Fund in Switzerland is Hugo Fund Services SA, 6 Cours de Rive, 1204 Geneva. The distribution of Shares in Switzerland must exclusively be made to qualified investors. The place of performance and jurisdiction for Shares in the Fund distributed in Switzerland are at the registered office of the Representative.
By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.