The AFC Uzbekistan Fund Class F shares returned +0.8% in February with a NAV of USD 1,068.94, bringing the return since inception (29th March 2019) to +6.9%, while the 2019 return was +9.3%.
February brought with it the beginning of earnings season for the fourth quarter of 2019. Several of the fund’s holdings reported earnings with our largest holding, Kizilqum Cement, now trading at a P/E of 2.62x and P/B of 0.44x. Further, many of the fund’s holdings which saw profit-taking in January rebounded during the month.
AFC Uzbekistan Fund valuations as of 29th February 2020
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Government proactive on Covid-19
The Uzbek government has been proactive in avoiding having any Covid-19 cases in the country thus far. While in late January the government was already conducting temperature checks at international borders and airports, in February Uzbekistan Airways cancelled direct air travel between Uzbekistan and China and Uzbekistan and South Korea. Further, the country banned the export of face masks to ensure ample domestic supply, while sending emergency medical supplies to China. In late February Covid-19 cases were reported throughout the Middle East, namely in Iran, and after one case was reported in Afghanistan the Uzbek government considered closing its border with the country to prevent any spread of the disease. The government’s actions have thus far prevented any panic in the country aside from parents buying face masks for their children, while grocery store shelves and the bazaars are fully stocked and functioning normally.
Uzbekistan’s golden hedges
Amid the global selloff in financial markets due to the Covid-19 virus, Uzbekistan’s economy and financial markets have been well insulated from the fallout due to it having a low correlation with the global economy, which we regard as one of Uzbekistan’s “golden hedges.” This is because the country only opened in late 2016 and hasn’t had the time to thoroughly integrate with the global economy, though this will undoubtedly occur over the coming decade, just as happened in other Asian frontier markets such as Vietnam and Bangladesh.
In its early stage of growth, with the largest manufacturing and agro-industrial base in Central Asia, Uzbekistan is largely self-sufficient in many industries and is in fact a key exporter of value-added products to the region, including nuts, apples, cherries, textiles, fertilizers and etc. Therefore, the country can take its time integrating with the regional and global economy, while maintaining high growth in the process. As the pace of exports accelerates from approximately USD 14 bln in 2019, Uzbekistan’s foreign exchange reserves are likely to swell beyond their current UDS 30 bln and GDP per capita (USD 1,588 as of 2019) will be propelled higher, turbocharging the young domestic consumption story.
Uzbekistan’s second “golden hedge” is quite literally gold and its conservative fiscal policies. Being the world’s 9th largest gold producer, in February Uzbekistan reported that USD 16.59 bln of its USD 29.9 bln of foreign exchange reserves were in gold. With high debt levels in developed and emerging markets and the Covid-19 virus giving Central Banks an incentive to explore ever more extreme forms of monetary policy, such as helicopter monetary policy which is being implemented in places like Hong Kong (where on 26th February 2020 the Hong Kong government announced it would be giving HKD 10,000, or USD 1,300 equivalent, to every permanent resident over the age of 18 in order to “stimulate” the economy), gold appears to be an increasingly valuable currency.
Uzbekistan has a remarkably strong balance sheet. With GDP of USD 53.8 bln and an external debt to GDP ratio of only 40%, the country’s gold reserves at end of February stand at 33% of GDP, one of the highest such ratios in the world. As Uzbekistan continues to privatize and liberalize its economy, perhaps in time the Tashkent Stock Exchange will evolve into a safe haven of attractive asset values and high growth and dividend yields for foreign investors, something quite plausible when considering how far Uzbekistan has come from its hardline Soviet-style of rule experienced under former President Islam Karimov until 2016 when he passed away. Because Uzbekistan has transformed so greatly over the past three years, the coming three years will hopefully be as, if not more, transformative.
Navoi Mining to expand gold production
Government owned Navoi Mining is targeting an increase in annual gold production to 94 tons by 2026 with an investment of USD 4 bln. The investment will be comprised of 40 projects which will include the development of a new gold district. With proven gold reserves of 3,700 tons, and likely much more in inferred and undiscovered resource, this investment program aligns well with the government’s plan to conduct an international IPO sometime in the 2020’s.
At the end of February 2020, the fund was invested in 29 names and held 3.4% in cash. The markets with the largest asset allocation were Uzbekistan (94.0%) and Kyrgyzstan (2.6%). The sectors with the largest allocation of assets were materials (56.3%) and industrials (14.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.16x, the estimated weighted harmonic average P/B ratio was 0.70x and the estimated weighted average portfolio dividend yield was 8.43%.