The AFC Uzbekistan Fund Class F shares returned +4.6% in October with a NAV of USD 2,102.50, bringing the return since inception (29th March 2019) to +110.2%, while the year-to-date return stands at +56.7%. On an annualized basis, the fund returned +33.2% p.a. with a Sharpe ratio of 2.22.
October saw the commencement of the third-quarter 2021 earnings season, where many of the fund’s core holdings reported strong growth yet again, benefitting from the accelerating growth in the economy, and whose share prices continued to rally on the back of good reports and more investor activity in the market.
AFC Uzbekistan Fund valuations as of 31st October 2021:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Presidential Election Concluded
Uzbekistan’s presidential election was held on 24th October 2021, where President Shavkat Mirziyoyev competed against four candidates. He won re-election by a landslide with 80.1% of the votes. With elections now behind us, President Mirziyoyev has five more years to continue, and hopefully accelerate, his reformation of the social and economic fabric of Uzbekistan, helping the country to gain what we believe is its rightful place as the largest and most influential economy in Central Asia. However, there is a lot yet to be done, and some of the more challenging reforms, including the government’s extensive privatisation programme, lay ahead, which we will be watching closely.
Uzbekistan is a semi-protectionist country and there’s nothing wrong with that!
The concept of free-market and open economies is an idea spawned post-WW II by the West and trumpeted by the likes of the IMF and World Bank. However, while highly efficient in theory, in practice such policies can hollow out domestic industrial sectors, as was the case with the USA in the 1990s and 2000s, where manufacturing capacity shifted to Mexico and Asia to take advantage of the labour arbitrage. At the same time, such policies can inhibit younger economies from ever developing their domestic industries as they are flooded by imports from foreign competition, which already have economies of scale.
As we are all learning today, just-in-time supply chains only work when everything runs smoothly, and there are no logistical bottlenecks. This has worked brilliantly since the 1990s when globalisation took the world by storm. Now, however, we have been gradually (and increasingly with government responses to COVID-19) witnessing a world of rising protectionism, whether food exporters banning or slowing export permissions, or more recently, China slowing export approvals for phosphate. This trend is only set to accelerate as we witness resource shortages and rising geopolitical headwinds globally.
Believing we are in the early innings of a rising tide of (i) nationalism/protectionism of domestic resources and industries and (ii) a focus on supply chain redundancies, the disinflation Europe and America benefitted from by outsourcing their supply chains to Asia will likely shift to inflationary as they seek to reconfigure their supply chains closer to home.
This scenario bodes exceptionally well for the region I have termed the “New Fertile Crescent”. This includes China, Russia, Central Asia, Iran and Turkey. The original Fertile Crescent is regarded as the cradle of modern civilisation and existed at the confluence of the Euphrates and Tigris rivers in modern-day Iraq. The “New Fertile Crescent”, however, encompasses countries with good demographics on average, large domestic resource bases, low debt to GDP, and more importantly, control over their supply chains accompanied by strong domestic manufacturing sectors. Thus, we believe this region is set to undergo a period of secular growth as it is less impacted by commodity-price inflation and rising protectionism, since it is already relatively protectionist and has focused on building strong domestic industries. Case in point: Uzbekistan.
In an increasingly fragmented and protectionist world, we look at the New Fertile Crescent region as being full of opportunities and where Uzbekistan is likely to play a big part, especially due to its domestic policies which have helped to bolster domestic industry with a focus on import substitution. During the month, I had the opportunity to visit one such beneficiary of these policies, the largest steel plant in Uzbekistan, Uzmetkombinat (TSE: UZMK).
Uzmetkombinat—one of Uzbekistan’s blue-chip companies
Uzbekistan’s business environment is evolving in the direction toward a free market but is certainly not an entirely free market, nor should it be. Having the largest industrial base of any “Soviet Satellite” during the USSR, Uzbekistan’s former and current president have been wise to focus on protecting and nurturing its domestic manufacturing sector. This certainly applies to Uzmetkombinat, currently the AFC Uzbekistan Fund’s second-largest position.