Asian Frontier Capital stands firm on Bangladesh equities

Asian Frontier Capital (AFC), the investment management company behind AFC Asia Frontier Fund, expressed a bullish outlook on the Bangladesh economy and the country's blue-chip stocks the firm prefers to invest in.

The frontier investment firm has also named Bangladesh as one of its top country picks.

"Our top country picks with a 3-5 year view are Bangladesh, Kazakhstan, Uzbekistan, and Vietnam, as they all have a combination of a strong macro-economic platform, structural reforms, attractive demographics, and a growing manufacturing sector," AFC Frontier Fund said in its 25 December report to clients.

International fund managers consider countries with a least developed or developing economy and an underdeveloped financial market as frontier markets.

2021: A good year

In 2021, the Bangladesh stock market stood fifth in terms of returns till mid-December, among the Asian frontier markets the AFC fund invests in.

The Dhaka bourse with its 26% year-to-date return was only behind Mongolia, Sri Lanka, Vietnam, and Kazakhstan, ahead of Iraq, Indonesia, and of course, negative return markets such as the Philippines, China, Pakistan, and Malaysia.

DSEX, the benchmark index of the Dhaka Stock Exchange (DSE), beat the world averages of frontier markets and also emerging markets, which have developing economies and flourishing financial markets.

Investors like AFC Frontier Fund tend to invest in blue-chip companies at attractive prices.

From the fund's holdings in Bangladesh, the leading performance contributors were Bata Shoe Bangladesh, Brac Bank, and British American Tobacco Bangladesh.

In 2021, AFC Frontier Fund bought more Square Pharmaceuticals shares at its lowest ever price to earnings ratio, and Linde Bangladesh shares counted on more sales of industrial gas.

At the same time, the fund exited Bata Shoe Bangladesh shares when its stock price rebounded with the economy reopening in mid-2021.

Digital transaction take-off in the country and Softbank investment in mobile financial services provider bKash, attracted AFC analysts.

"This investment by Softbank in bKash is not only a vote of confidence for the company's growth plans but also reflects the broader confidence that foreign investors have with respect to the Bangladesh story," they said.

AFC analysts say Bangladesh has by far the soundest macroeconomic fundamentals in South Asia.

"Bangladesh has seen a swift and strong post-pandemic economic recovery and the country's debt levels are very low which has given it room to stimulate the economy through infrastructure investments," said AFC Frontier Fund.

"Bangladesh has also seen a powerful rebound in exports as the country is one of the key beneficiaries of the supply chain shift, especially in the global garment industry."

AFC also mentioned diversification efforts in Bangladesh's manufacturing sector and the fruit it is bearing.

"It is safe to say that Bangladesh has by far the soundest macroeconomic fundamentals in South Asia," AFC said.

As the government continues to offer incentives to attract foreign manufacturers and invest in improving the country's infrastructure, it would not be surprising to see Bangladesh emerge as the "Vietnam of South Asia" over the next decade.

"For the last three years, we have been seeing more foreign selling than buying. But on the eve of 2022, the optimism from AFC Frontier Fund is a welcome move," said Bangladesh Merchant Bankers Association Vice-President, Md Moniruzzaman, CFA.

"Our macroeconomic factors, attractive price levels for some good stocks, and relatively stable exchange rates may attract more foreign portfolio investments," added Moniruzzaman, also the managing director of IDLC Investments Ltd, a leading local merchant bank.

High inflation, interest rate threats, and who will stand out

AFC anticipates, globally, 2022 will be a year of transition from liquidity-fuelled stock market rallies to a potentially higher interest and higher inflation environment.

"We believe these themes will occupy the minds of investors, at least in the first half of 2022," it said.

Stock markets globally have had a rollicking run over the past 20 months and global investors are getting nervous about the pace of interest rate increases.

AFC believes fundamentally strong countries and companies will stand out in 2022.

The investment firm is considering economies with low government debt, high foreign exchange reserves, and a fundamentally strong structural GDP growth, as they should better withstand any major shift in global macroeconomic trends.

"In addition to this, we would also look to favour quality companies with sound fundamentals, strong pricing power for their products, and well-established franchises," AFC said.

"In other words, we believe large-cap stocks can do better in 2022 as 2021 has been the year of small and mid-cap stocks, especially in Bangladesh and Sri Lanka."