Asia Frontier Capital (AFC) – February 2016 Newsletter

“The individual investor should act consistently as an investor and not as a speculator.”
– Ben Graham.

AFC Asia Frontier Fund (AAFF) USD A-shares lost -0.8% in February 2016. The fund this month underperformed the MSCI Frontier Markets Asia Index (+0.4%) and the MSCI Frontier Markets Index (+3.5%), but outperformed the MSCI World Index (−1.0%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +33.2% versus the MSCI Frontier Asia Index which is down −2.8% and the MSCI Frontier Index which is up +0.4% during the same time period.

AFC Iraq Fund Class D shares returned −4.3% in February 2016, in-line with the Rabee RSISX USD Index (RSISUSD) which returned −4.4% in USD terms. The fund has outperformed the RSISUSD by +2.6% since inception. One of the positive catalysts for the AFC Iraq Fund are the developments around the relief of the sanctions against Iran. In this newsletter we devote an article to our recent trip to Iran.

The AFC Vietnam Fund gained +3.3% in February, bringing the net return since inception to +46.4% or +18.5% annualized. By comparison, the February performances of the Ho Chi Minh City VN Index and the Hanoi VH Index were +2.3% and +2.1% respectively (in USD terms). Since inception the AFC Vietnam Fund has outperformed the VN and VH Indices by +42.4% and +37.3% respectively (in USD terms).

We have been recognized by various organizations for our achievements in fund management:

As mentioned in the previous newsletter, January was a difficult month for markets worldwide. Our AFC Vietnam Fund performed well under these difficult circumstances and closed the first month of the year with a small loss of −0.1%. As a result AFC Vietnam Fund was ranked TOP 10 in the Emerging Markets – Asia sector and in the Emerging Markets Equity – Asia sector for January 2016 by BarclayHedge.

This month, Citywire announced that Thomas Hugger was the “lone frontier manager who made money in past 12 months”. He was given this recognition for the performance of the AFC Asia Frontier Fund with total returns from January 2015-January 2016 of +1.29%.

To top it off, the AFC Asia Frontier Fund was awarded “Best Asian Emerging Markets Fund & Best Asian Frontier Fund (Since Inception): AFC Asia Frontier Fund” by Acquisition International, again underscoring the success of the strategy and dedication of the team.

From various corners of the world we continue to hear that Vietnam is the place to invest. For example, an investment professional who is part of a 5-man strong team of managers of a hedge fund that beat 98% of peers recently told Bloomberg he would recommend to “buy in Vietnam, not China”. A lead portfolio manager at another asset management firm told CNBC, “structurally, this (Vietnam) is an attractive country, led by a reform-oriented government that supports the private sector”. Bloomberg’s Giang Nguyen writes “frontier-market equity funds from Sweden to Hong Kong are ready to buy more Vietnamese stocks, attracted by cheap valuations and the fastest economic growth in almost a decade”. Furthermore, Armando Guglielmetti writes in the SonntagsZeitung of Tages Anzeiger that large Japanese investors are investing big in this growth market, and Chris Devonshire Ellis, Chairman of Business Intelligence firm Dezan Shira & Associates, comments in his latest newsletter: “our offices in both Hanoi and HCMC have seen growth in foreign investing clients into Vietnam, with many American corporations in particular starting to take the plunge and invest in the country”. Lastly, Dr. Marc Faber, also referred to as Dr. Doom, mentioned in a CNBC interview his optimism for Vietnam. (Disclosure: Mr. Faber is a shareholder of Asia Frontier Capital Limited).

With all this positive news about Vietnam, it is not surprising that we are receiving more and more enquiries regarding the country. We are bullish on Vietnam as well, and as a result our diversified AFC Frontier Fund’s number one country allocation is Vietnam. Of course, our AFC Vietnam Fund is totally focused on Vietnamese equities. Read more on the AFC Vietnam Fund further down below.

AFC in the Press

  • 08-03-2016
Thomas Hugger quoted in Institutional Investor’s article about Myanmar’s New Government
  • 08-03-2016
Nippon Wealth’s interview with Thomas Hugger (Japanese)
  • 08-03-2016
Citywire announces Thomas Hugger is the Lone Frontier Manager Who Made Money in Past 12 Months
  •  28-02-2016
Andreas Vogelsanger quoted in Bloomberg’s article “Frontier Funds to Pour Money Into Vietnam Shares on Growth”
  •  24-02-2016
Frontera interviews Ahmed Tabaqchali: Amidst Islamic State’s Evil, Love Defies in Iraq
  •  23-02-2016
Emerging Opportunities: Gavin Serkin interviews Ahmed Tabaqchali of AFC Iraq Fund

Upcoming AFC Travel

If you have an interest in meeting with our team during their travels, please contact Peter de Vries at

 Hong Kong  1st – 11th March  Andreas Vogelsanger
 Singapore  7th – 10th March  Scott Osheroff
 Phnom Penh  11th – 14th March  Scott Osheroff
 Ho Chi Minh City  14th – 18th March  Andreas Vogelsanger
 Ho Chi Minh City  14th – 18th March  Ruchir Desai
 Ho Chi Minh City  20th – 31st March  Scott Osheroff
 Zurich / Basel  22nd – 24th  March  Thomas Hugger
 London  5th – 7th  April  Thomas Hugger
 Shanghai  22nd – 23rd April  Thomas Hugger
 Toronto  27th June  Thomas Hugger
 New York  28th June – 2nd July  Thomas Hugger

AFC Asia Frontier Fund – Manager Comment February 2016

AFC Asia Frontier Fund (AAFF) USD A-shares lost -0.8% in February 2016. This month the fund underperformed the MSCI Frontier Markets Asia Index (+0.4%) and the MSCI Frontier Markets Index (+3.5%), but outperformed the MSCI World Index (−1.0%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +33.2% versus the MSCI Frontier Asia Index which is down −2.8% and the MSCI Frontier Index which is up +0.4% during the same time period.

February was relatively calmer than the volatile start to the year as markets stabilized in both frontier and emerging markets. Quarterly results of the fund’s larger holdings in Vietnam and Pakistan were good, with double digit growth rates in net income. We continue to believe that these two markets will stand out in 2016 and hence they are the fund’s biggest and second biggest holdings. In Bangladesh, the fund’s larger holdings have shown good quarterly numbers too, i.e. a pharmaceutical company and two consumer food companies. A tobacco company in Bangladesh did not declare great results but we believe this could be due to one off expenses as the first nine months were quite positive. As of writing, all of the fund’s larger holdings in Bangladesh have not declared results. We remain positive on the outlook of Bangladesh, Pakistan, and Vietnam.

In Sri Lanka, quarterly results have been a mixed bag. Cyclical companies affected by the change of government policies have declared average numbers, while most consumer focused companies the fund holds have declared good results due to the impact of low fuel prices on consumer disposable incomes as well as salary hikes for government employees in 2015.

Though consumer companies in Sri Lanka declared good quarterly results, the macro outlook for Sri Lanka is not rosy as the government has stumbled on passing through revenue raising measures in order to contain or reduce the fiscal deficit. The country also faces foreign exchange outflows in the form of upcoming debt servicing commitments. As a result of these macro negatives, Fitch downgraded Sri Lanka’s sovereign bonds from BB- to B+ with a negative outlook on 29th February 2016. This ratings downgrade is a macro negative for the country and it is possible that the Sri Lankan rupee could depreciate further given the upcoming debt servicing of USD 4 billion backed by lower foreign exchange reserves of USD 6.3 billion. There are talks of the government requesting the IMF to fund the near term balance of payment issues that the economy may face. IMF funding would mean that the government would need to take measures to contain the fiscal deficit via tax measures and reform of state owned enterprises which would be a positive. The fund has slightly reduced its exposure to Sri Lanka since December 2015 and increased its exposure to Bangladesh.

The fund underperformed its benchmark, the MSCI Frontier Markets Asia Index, primarily due to positive moves in Pakistani banks and a few oil and gas names in Vietnam. The fund does not hold any banks in Pakistan or Vietnam and has one oil & gas holding in Pakistan. Most of the fund’s exposure in these two countries is focused towards consumer and cyclical companies.

The best performing indexes in the AAFF universe in February were Vietnam (+2.6%) and Mongolia (+1.9%). The poorest performing markets were Iraq (-2.6%) and Sri Lanka (-2.3%). The top-performing portfolio stocks were a Mongolian trading company (+47.6%), followed by a Mongolian leather producer (+26.5%), a Myanmar investment company (+25.0%), and a Mongolian food producer (+22.3%).

In February, we added to existing positions in Iraq, Mongolia, Pakistan, and Vietnam. We added a Pakistani consumer food company to the portfolio. This company’s stock price has corrected by more than 30% over the past year probably due to redemption pressures from international investment funds as the company’s fundamentals remain strong. We took this is as an opportunity to enter this position as the company has built a very well established brand and product range in Pakistan.  We completely exited three Bangladeshi consumer product companies on valuation grounds, as well as an Iraqi food company and an Iraqi telecommunication company.  We reduced our holdings in a Pakistani pharmaceutical company and a Mongolian consumer product company.

As of 29th February 2016, the portfolio was invested in 101 companies, 1 fund, and held 7.2% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (5.8%) and a Pakistani pharmaceutical company (4.2%). The countries with the largest asset allocation were Vietnam (32.4%), Pakistan (17.4%), and Bangladesh (14.5%). The sectors with the largest allocation of assets were consumer goods (40.2%) and materials (14.6%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 14.24x, the estimated weighted average P/B ratio was 1.48x, and the estimated portfolio dividend yield was 3.32%.

For more information about Asia Frontier Capital’s Asia Frontier Fund please click the following links:

Factsheet AFC Asia Frontier Fund – February 2016
Factsheet AFC Asia Frontier Fund (non-US) – February 2016
AFC Asia Frontier Fund Presentation (English)
AFC Asia Frontier Fund Presentation (Chinese-Traditional)
AFC Asia Frontier Fund Presentation (Chinese-Simplified)

AFC Iraq Fund Manager Comment February 2016

AFC Iraq Fund Class D shares returned −4.3% in February 2016, in-line with the Rabee RSISX USD Index (RSISUSD) which returned −4.4% in USD terms. The fund has outperformed the RSISUSD by +2.6% since inception.

Having shadowed the oil price collapse by mid-January, the RSISUSD Index failed to match the recovery in the oil price from the January lows and the overall recovery by February’s end. This likely reflects the time lag for foreign investor perception which is still focusing on January fears which marked the worst start to a year for global markets in at least two decades.

Thomson Reuters Lipper reported mutual fund net redemptions were over USD 60 billion globally in January 2016, with the industry expecting similar out flows in February. While Iraq data is not included in these figures, investors’ actions tend to be mirrored in different asset classes. Foreign funds were net sellers for a second month in a row, reversing the December inflows and resuming a 5-month negative trend from October. Net out-flows, as measured by proxy portfolio flows, were the highest in February in at least three years with the selling side the highest in at least 3 years as the chart below illustrates.

Proxy flows

On the positive side, locals seem to have returned to the market, more than making up for any foreign selling by absorbing it with minimum price declines. This is a positive sign showing that locals see value in the market, with insider buying in some banks and retail trading in the locally favoured hotel group. However, this is not sustainable given the lack of local liquidity, highlighted in the past newsletter.

Contributing to the RSISUSD’s −4.4% decline were most constituents including United Bank (−6.3%), Bank of Baghdad (−4.9%), Iraq Middle East Bank (−4.5%), and Baghdad Soft Drinks (−4.2%). Gainers were few, and included Gulf Commercial Bank (+2.3%), Asiacell (+1.0%), and Mamoura Real Estate (+0.3%).  One notable outlier was Mosul Bank, which declined by −23.8%.

RSISUSD Index vs. total market cap

Note: the peak in market cap was due to a significant new listing in June 2015.
(Source: Rabee Securities & IS.)

Current levels continue to be exceptionally attractive, enabling us to acquire quality assets that are discounting most conceivable negatives and none of the potential positives. For instance, if we look at the banks on our shortlist, we see that most are trading at a price to book ratio of under 1x with the weighted average about 0.5x. Keep in mind that Iraqi banks are at very early stages of development since less than 20% of the population has a bank account. Bank loans are a small portion of economic activity, with credit to the private sector at about 6.8% of GDP (as of 2014) vs. a range of around 55% for the region. The main takeaway is that current low valuations are based on depressed earnings that are a function of a country in conflict and as such don’t reflect the earnings potential once the country is on the path of post-conflict recovery which is the thesis behind the launch of the fund.

The momentum for the return of stability to the region continues with two major positives: (1) The over-riding international desire to contain the Syrian conflict has led to a cessation of hostilities, that is mostly holding, irrespective of any fiery announcements or hysterical news coverage, that would ultimately lead to an agreement along the lines of the “Taif Agreement” of 1989 that ended the decade long Lebanese civil war; (2) the Iranian elections that have shown overwhelming popular support for the moderate forces which will accelerate Iran’s re-integration to the world, politically & economically, which requires Iran to play a positive role in achieving regional stability as part of its integration.

The environment is a perfect one for long term investors who can act against prevailing sentiment, have the patience to ride out the market noise in which declines are exemplified by fears, and focus on the positive long term potential.

Looking at the portfolio, as of 29th February 2016, the AFC Iraq Fund was invested in 14 shares and held 0.6% in cash. As the fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq, the countries with the largest asset allocation were Iraq (95.4%), Norway (3.7%), and the UK (0.9%). The sectors with the largest allocation of assets were financials (49.5%) and consumer staples (24.8%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 18.23x, the estimated weighted average P/B ratio was 1.16x, and the estimated portfolio dividend yield was 0.82%.

For more information about Asia Frontier Capital’s Iraq Fund, please click the following links:

Factsheet AFC Iraq Fund – February 2016
Factsheet AFC Iraq Fund (non-US) – February 2016
AFC Iraq Fund Presentation

AFC Vietnam Fund – Manager Comment February 2016

To read this month’s fund update in German please click here.

The AFC Vietnam Fund gained +3.3% in February, bringing the net return since inception to +46.4% or +18.5% annualized. By comparison, the February performances of the Ho Chi Minh City VN Index and the Hanoi VH Index were +2.3% and +2.1% respectively (in USD terms). Since inception, the AFC Vietnam Fund has outperformed the VN and VH Indices by +42.4% and +37.3% respectively (in USD terms).

Most fund managers in other countries might have a different view, but for us, February was a rather quiet month. Contrary to general expectations, emerging markets performed much better than the so-called “safe markets” in the developed world and Vietnam in turn managed to outperform within the emerging/frontier markets segment. Thanks to the heavily weighted banking stocks, Vietnam managed to make up some of the losses of the previous month, with Ho Chi Minh City +2.6% and Hanoi +2.4% (in Vietnamese Dong). Although we don’t hold any of the highly volatile banking stocks, our portfolio delivered a fairly impressive return of 3.6% (in Vietnamese Dong) in February. The Vietnamese Dong gave up part of the gains we saw in January, and hence the NAV now stands at USD 1,464.40.

For us – in the long run – the provisional year-end results of our holdings, which were published last month, are much more important than the nervous market movements of the Dow Jones and its even more volatile European counterparts like the DAX. Overall we were very satisfied, given that our internal forecasts were broadly correct. Compared to our forecasts after the 3rd quarter results, the average deviation for sales and profits was just +2.5% and -0.4% respectively. With the exception of one out of the 83 companies we invested in, all companies were operationally profitable in 2015. Only one company had a net loss because of its heavy financial investments in oil-related listed stocks. The average earnings of our holdings grew at a very respectable rate of 16.5% p.a. (exclusive of extraordinary items, unweighted) and are thus well above the overall market average. As mentioned last month, the continuation of the revaluation process of our portfolio will be one of the most important performance drivers in the future. In total, thanks to this earnings growth, the average price earnings ratio of our holdings has declined to its lowest level since the launch of fund and is currently at 6.8 x (median, unweighted).

(Source: AFC)

(Source: AFC)

The broad diversification, high average dividend yield, and favourable valuation of our portfolio are resulting in an extremely low volatility of only 10.4% since inception and hence the Sharpe ratio over this period is at about 1.4.

Of great positive significance is also the improved sentiment among domestic investors. A generally more positive consumer confidence will eventually also be reflected in greater investments in the stock market in the future. It is important to mention again that around 90% of the stock market volume is transacted by domestic, mainly retail investors, but domestic institutional funds will certainly grow and gain importance in the coming years. Regardless of the global trend, there is now finally a broad recovery in the market taking place, especially in the small- and mid-cap segment, which is for us very important. In addition to M&A fantasies in the banking sector, increased announcements by companies about raising their foreign ownership limits are probably the reasons for this improved market sentiment.

Advance-Decline Ratio Ho Chi Minh (6 months)


Advance-Decline Ratio Hanoi (6 months)


Two years of strong recovery of the stock market from the recent low in 2011 (Ho Chi Minh City) and 2012 (Hanoi) have been followed by a relatively disappointing performance since spring 2014, despite a significant recovery of the economy at the same time. As the Hungarian stock market guru André Kostolany (1906-1999) used to say, the stock market and the economy behave like a dog and his master. Sometimes the dog is running behind, then he is running in front again – but they will both go in the same direction. That is exactly how we currently see the stock market in Vietnam. The only problem is – we do not have any clue how long the leash is! During my 30 years of market experience, my single biggest mistake was to sell my positions too early because of external events and/or fears and hence I was not able to capture the biggest opportunities.

The past two months, and also the first two years since the launch of our fund have shown that Vietnam is in a very favourable and privileged economic situation and provided that no serious economic policy mistakes are made, it should benefit nicely from this over many years to come. All 2016 macroeconomic data which has been released so far, also emphasize this – data on inflation, trade balance, or consumer confidence. There are more and more signs that the 5-year bear market in the emerging markets is coming to an end, which would be extremely positive for the Vietnamese stock market.

At the end of February the fund’s largest positions were: Sam Cuong Material Electrical and Telecom Corp (3.4%) – a manufacturer of electrical and telecom equipment, Doan Xa Port JSC (2.3%) – a logistics company, Nui Nho Stone JSC (1.9%) – a stone mining company, Thuan An Wood Processing JSC (1.9%) – a wooden furniture manufacturing company, and Bao Viet Securities Co (1.9%) – a securities brokerage company.

The portfolio was invested in 83 shares and held 3.8% in cash. The sectors with the largest allocation of assets were consumer goods (37.4%) and industrials (23.6%). The fund’s estimated weighted average trailing P/E ratio was 7.75x, the estimated weighted average P/B ratio was 1.13x and the estimated portfolio dividend yield was 5.96%.

For more information about Asia Frontier Capital’s Vietnam Fund please click the following links:

Factsheet AFC Vietnam Fund – February 2016
AFC Vietnam Fund Presentation

Iran Travel Report – February 2016

In line with our process of being on the ground in the countries we invest in, Thomas Hugger (CEO and Fund Manager the AFC Asia Frontier Fund), travelled to Iran to attend a conference in Tehran.

Having waited anxiously for three hours at Dubai Airport for the final leg of my journey to Iran, I was eager to board the Emirates B-777 flight to Tehran. Espen Baardsen, an investor in our AFC funds, wrote a report of his trip to Iran for our July 2015 AFC newsletter and had compared what he saw with the popular movie “Argo”. I was looking forward to forming my own impressions of the Islamic Republic of Iran, a country rich in history, crippled by economic isolation, and now attracting the interest of foreign investors in the wake of sanctions relief.

The flight seemed no different from other routes arriving and departing from Dubai, though there was a noticeably large representation of women, the majority of whom were not wearing hijabs or headscarves. I was one of the few Westerners on board. The plane was nearly at full capacity, and I saw Russians, Italians, Chinese, Koreans, and another Swiss compatriot, but no Americans or Brits. After tasting my first delicious Persian meal (and sipping my last beer for a while), we began our descent from the 1 hour 40 minute flight, and to my surprise, there was no change in appearance of my fellow female passengers. Even after touching down at the huge Tehran International Airport, there was still no change. We arrived at the small international terminal building, and only when the airplane door opened did the women suddenly down their colourful headscarves. Many of the women barely covered half of their heads! I knew this trip was going to be very different from my previous travels to conservative Middle Eastern countries.

Prior to arriving in Iran, I had booked a VIP immigration service in Hong Kong after hearing of the frequent immigration hassles upon arrival in Tehran. However the Iran visa application took nearly three weeks and numerous trips to the Iranian Consulate in Hong Kong to complete, it certainly proved to be worth the trouble. I was pleasantly surprised upon arrival that those of us who booked the VIP service were whisked away onto a bus and taken to a special waiting room where we were served food and drinks during the one hour-long wait for our visa processing. This was a much nicer experience than that of other participants in the investor group, who opted for visas on arrival and ended up waiting for nearly four hours after arriving at 2 am in the morning!

While I was waiting, the waiter offered me a list of drinks and asked if I would like Coke, Fanta, or Sprite. I was definitely not expecting to see beverages from Coca-Cola, the American beverage giant. The real surprise, however, was that the Coke products were manufactured in Iran!

A can of Coke made in Iran

(Photo: AFC)

Similar to Espen’s experience, my luggage went missing. Thankfully, I recovered it in the main terminal and took a 90 minute, 40 kilometre taxi ride to my hotel in the city centre. Tehran’s modern highways were clogged with heavy traffic. I saw Peugeots (all produced in Iran), Japanese and Korean cars, and Iranian-produced cars. During my visit I also saw a few Mercedes and BMW’s (including dealerships), but only one American car, an extremely old Buick which still had a US number plate underneath its Iranian plate. Unfortunately, my non-English-speaking taxi driver could not find my hotel in the sprawling city of around 14 million people, and it took an additional hour and several phone calls until I finally arrived at the hotel. With the exception of a brand new Novotel and Ibis Hotel, both part of France’s Accor Group and opposite the airport, there are currently no international hotel chains in Tehran. InterContinental, Hyatt, and Hilton all had presences in Iran before 1979 but ceased operations and were nationalized after the revolution.

I arrived on Friday, in time for the end of the weekend (Friday in Islamic countries is the equivalent of Sunday in the West). My arrival also coincided with the last day for electing 285 of the 290 seats of the Islamic Consultative Assembly (5 seats are reserved for Jews, Christians, Armenians, and other ethnic minorities). The election results confirmed the strong gains that the reformist President Hassan Rouhani made in the Parliamentary elections (held every 4 years) in which he won the entire 30 seat delegation representing the capital, Tehran. This change is extremely positive for Iran’s future and the warming of relations between Iran and the outside world. President Rouhani signifies a positive shift away from the controversial politics of the previous President, Mahmoud Ahmadinejad.

Over the next few days, our host organized visits to Iranian companies from various sectors. We visited an IT company which is the major provider of broadband, data centres, and cloud services in Iran. The Founder and CEO, who was educated in Canada and returned to Iran in the late 90’s, told us about the hardship his company and business faced during the time of President Ahmadinejad who “did not like the internet” and did not allow the use of antennas. Funnily enough, in hindsight the ban on antennas turned out to be a positive, because optic fibres were used instead, which helped Iran’s telecommunications infrastructure leapfrog more basic technologies. The company is now growing very fast because it provides internet bandwidth to the largest mobile phone operator in Iran, which is state owned and interestingly also hosts most Iranian websites including those of the government. I saw Huawei (Chinese brand) and Samsung phones in abundance, but far fewer iPhones than one would see in Europe or the US.

Another company we visited was a paper factory using bagasse (sugarcane waste) as a raw material. The company prides itself as a paper company that does not cut a single tree. The current owners bought the company from the government in 2013 for USD 1 million plus 80 million USD denominated debt. Business has been so good that today the company is debt free. The company is focused on exporting bio-degradable tableware (used in Starbucks and McDonalds’s, for example) to countries like China, Germany, India, Italy, and Thailand. They certainly have a bright future ahead.

Of course we couldn’t visit Iran on an investment tour without visiting the bourse itself. Founded in 1967, the Tehran Stock Exchange (“TSE”) is one of the two bourses in Iran. The TSE has 319 listed stocks, ETF’s, and bonds. The other exchange, Fara Bourse, was founded in 2008 and hosts approximately 300 stocks and has a market cap of around USD 20 billion. With a market cap of around USD 120 billion, the TSE is similar in size to Vietnam and Pakistan’s exchanges. If Iran is to be included in any frontier index in the future, it will account for a major component (about 20 to 25%) of the index. With daily turnover on the TSE of USD 100 million (this is expected to grow to USD 200 million) and only 0.5% of the outstanding shares currently being held by foreigners, these are the bourse’s early days with significant renewed foreign investor interest in this vast, oil-rich, and strategically located country.

AFC CEO Thomas Hugger at the trading floor of TSE

(Photo: AFC)

Floor traders of the Tehran Stock Exchange

(Photo: AFC)

On the trading floor of the TSE, we had the chance to speak with the floor traders. Surprisingly, about half of the traders were women.  Iran is an innovative country, and according to the representatives of the TSE, it is expected that index futures and options will be launched in about one year (including the permission to short sell stocks), something many frontier stock exchanges do not offer. It must be also noted that all (share) trading in Iran must be Sharia compliant which is important for investors from Islamic countries.

On my last day in Tehran, I had additional visits with local banks and brokers to better understand the dynamics of business in the country as well as possible avenues for AFC to gain exposure to the opportunities that we see in Iran. I also had the chance to visit the Grand Bazaar, where I enjoyed a delicious local lunch of lamb kebab and lamb stew (the latter called Gormeh Sabzi) paired with the ubiquitous long grain basmati rice and flat bread (lavash) in a nearby Iranian style fast food restaurant. As with most countries where alcohol is banned, locals opt for teas, fruit juices (I indulged in the pomegranate juice), or doogh, which is a combination of yogurt, water, salt, and mint.

A picturesque historic building near the grand bazaar

(Photo: AFC)

One of the entrances to a bazaar street

(Photo: AFC)

Moving around in Tehran during the day can be nerve-racking due to the chaotic driving reminiscent of the millions of motorcycles vying for a piece of pavement on the streets of Ho Chi Minh, Vietnam. This results in long traffic jams causing heavy smog in this sprawling city. The smog is intensified by the altitude, which ranges from 900 meters (South Tehran) to 1,800 meters (North Tehran). At times I felt as If I were in Switzerland with the city’s backdrop of snow-covered mountains.

View over Tehran with snow covered mountains

(Photo: AFC)

Traffic jam in Tehran

(Photo: AFC)

Another similarity to Switzerland is skiing – the Tochal Ski Resort is the fifth highest ski resort in the world at 3,730 meters and also the world’s closest ski resort to a capital city. Tochal is equipped with an 8 km long gondola lift which starts at the outskirts of Tehran.

I greatly enjoyed my 4 day stay in “one of the last frontiers for investments”. The Iranian people were very friendly and particularly curious to talk to foreign visitors. I also enjoyed the great food and Iranian hospitality.

From an investment perspective, Iran is very different from most frontier markets because it already has a functional, deep, and sophisticated stock market. Iran has existing businesses in all kinds of non-petrochemical industries, comprising 57% of the economy. Iran also sits on the world’s fourth largest oil reserves and the largest natural gas reserves in the world. Despite its huge oil reserves, oil exports accounts only for 10% of GDP. From a demographic perspective, Iran is a nation of 78 million people, and its population is extremely well-educated – Iran had the third most engineering graduates in the world in 2015 (233,695), which is only 5,000 less that the US. About 73% of the population have a bank account and there are currently 103 million mobile phones in use, of which 30 million are smart phones. When I visited a local supermarket, almost all of the products were locally produced, including the international brands such as Beiersdorf, Colgate, and Nestle.

As mentioned earlier in this report, the Iranian stock market has a market capitalization of over USD 140 billion, which is huge for a frontier market. With over 600 listed equities trading at an average P/E ratio of 5.6x and a dividend yield of 12.6%, the exchange is deep and very cheap. If Iran would be included today in the MSCI Frontier Index, its index weighting would be around 20% to 25%.

With the partial removal of sanctions, the reconnection of Iranian banks to SWIFT (which will hopefully occur soon), increased exports of oil, and the release of frozen assets, the Iranian government will be able to make progress in paying its creditors and kick-starting the economy. There are certainly still considerable risks that remain and setbacks that could occur in the future, but given Asia Frontier Capital’s long term view, we believe that now is the right time to invest in Iran to capitalize on the country’s enormous potential.

I hope you have enjoyed reading this newsletter. If you would like any further information, especially about Iran, please get in touch with me.

With kind regards,

Thomas Hugger
CEO & Fund Manager

 Asia Frontier Capital Limited
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