What's new archive - 2002

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16 Dec 02:
The fund is above its high water mark - only just, and this would not normally be worth mentioning intra-month, but this is the first new high for some time. And some really excellent news: one of the finest corporate analysts in Asia, Masya Spek, is joining Apollo Investment Management on a part-time basis at the beginning of January. Welcome, Masya!

9 Dec 02:
David Webb's Devoted to Failure is essential reading, even for those who normally prefer not to know about voting procedures and other day-to-day mechanics of stock exchanges - because Hong Kong's voting system is mind-bogglingly bad, to an extent which might be considered funny - were it not for stakes which include our money, and the quality of capital allocation in the territory.

4 Dec 02:
"At current levels the two trillion dollar money market fund industry is in jeopardy of breaking the buck simply by yielding negative after expense returns. 75 basis points of yield minus 75 basis points of average expenses yields nothing." A good point made by Bill Gross on www.pimco.com. Thus, money market funds may start to decline even before taking account of the markdowns and writeoffs which must now be looming. Many holders will be shocked, which may lead to outflows - which in turn may lead to shifts in duration, the sale of liquid securities leading to a concentration in the less liquid, price declines, and, to cut a long scenario short, "open-ended fund risk".

3 Dec 02:
The NAV of the Apollo Asia Fund rose 2.4% in November to US$172.09 - so we have now been hopping on the spot for six months. The month-end high was $174.63 in May, but that was the end of an exuberant run which had left me decidedly twitchy about its speed. (Charts here.) Overall, despite a deteriorating international backdrop, I now feel more comfortable about Asian market prices (which is not to say that they cannot drop sharply), the valuation of our portfolio, and the choice of reasonable investment ideas.

22 Nov 02:
Those aware of the history of funds-of-funds and the overall track record of hedge funds may sigh at the latest development: hedge fund indices, and funds-of-hedge-funds designed to track them. Retail investors, watch out for your wallets.

While on warnings: the old maxim that "more money has been lost reaching for yield than at the point of a gun" is highly relevant as nominal interest rates fall and systemic risks rise - exactly the time to emphasize return of capital, which should clearly take precedence over the return on capital. Do please remember that money market funds can go down just as much as equity funds (ie, 100%). They can also be suspended for long periods pending liquidation; they are not 'cash equivalents', although disconcertingly, I have just discovered that big-4 auditors have been signing off on that description. Meanwhile, Asian central banks continue to pour their citizens' savings into US agency paper, behaviour aptly described by Chris Wood last week as 'moronic'. Our companies tend to be cash-generative, and many hold significant cash reserves - in some cases appropriately, given the inflexibility of Asian banks and their predilection for lending only to bad borrowers and to those who don't need the money; most have a good record of paying out excess cash in dividends. I should make a point of discussing these poorly-recognised financial risks during my visits to cash-rich companies, especially those in Hong Kong which have US$ operations or may consider the HK$ & US$ interchangeable.

I intended to write about my observations at CLSA's recent conferences in Bangkok and KL, but have been overtaken by quarterly results and other priorities and must leave that for another occasion, as I am off tomorrow to Sri Lanka... Despite the foregoing paragraphs, I am relatively sanguine about the investment merits of our companies, as they are financially strong, operationally flexible, and valuations are reasonable. Moreover, I again find myself being forced to make difficult choices between competing ideas, all attractive. The fund is again close to being fully invested.

7 Nov 02:
'Computer haiku' have been in circulation for a while, but a batch just received seem particularly apposite. Having pontificated only recently about Microsoft and the open source movement as an economic factor, this is my tenuous excuse for posting them here. Thanks to Catherine Tan for relaying... and do please forward any financial poetry & doggerel encountered.

4 Nov 02:
The NAV of the Apollo Asia Fund fell 0.1% in October to US$168.10; charts here.

24 Oct 02:
The relative strength of Asian balance sheets has been helpfully quantified by Markus Rosgen. For their universe of more than 400 companies in Asia-ex-Japan, ING estimates that net-debt-to-equity will be 35% at the end of 2002, compared to 70% for Europe and 160% for the S&P 500 ex-financials.

I am increasingly convinced that Microsoft has overplayed its hand and alienated too many of its customers, and that open-source is gathering momentum. Of the 3 PCs I use personally, one runs Windows only, one runs Linux only, and one is dual-boot. Having spent a significant part of the last six months struggling as a novice user of Linux, (a) I think the effort was worthwhile, (b) much of the software, once set up and stable, is a joy to use compared to Microsoft equivalents, (c) it is still too difficult to set up for the average home or office user without in-house tech support, but (d) the pace of improvement is astonishing, and I would guess that I may be recommending the switch to more people within the next one or two years. (This may also help the recovery of Apple, currently the most user-friendly option but based on stable Unix code.)

If I were taking decisions for a school or university, or for any student with some interest, I would definitely opt for Linux now. Using Microsoft products leads to unwanted expertise in tips, workrounds and patches; knowledge gained using Linux is not invalidated by forced upgrades, and while widespread adoption will come when users need not learn the language, current users must do so and this is, in my view, a much better educational experience.

US anti-piracy demands have always played rather badly with the Asian public, since official software is sometimes a multiple of the US price in $ terms, let alone relative to local purchasing power, with service support poor or non-existent. I suspect Microsoft in particular has played a very cynical game, tacitly supporting piracy for individuals in order to build market share while offering ever-more-aggressive inducements to employees to sneak on their current or former bosses. Now the pips are beginning to squeak - amusingly, also in US schools, where it now seems that multiple-copy practice may have been as prevalent as in Asia. (The big corporations are now hastening to increase educational subsidies to lock in their young customers.) Rare admiration overcame me when Malaysia's newly tough crackdown on pirated software in offices was followed within days by official encouragement for Linux in schools, universities and government. Malaysian friends assume this must have been coincidence, but a number of governments in Europe and South America are moving in a similar direction. So is China. This is an enormously virtuous circle: away from the proprietary, patented, and expensive, to the affordable and educational. All lower-income countries benefit, but Asia stands to gain enormously due to its deep pool of knowledge workers.

22 Oct 02:
The remaining 7-digit (Maxis) telephone numbers for the office will change to 8 digits on 9th November, with the addition of a '2' in front (switchboard tel +60 3 2381 1660, fax 2381 1770): the existing 8-digit (Telekom) numbers will not change.

17 Oct 02:
The third quarter report has been posted; apologies for the delay.

14 Oct 02:
I realised as soon as I had posted the comment 27 Sept about the possibility of significant weakness in Asia that I should have added "other things being equal", a caveat, and "be careful what you wish for" - but decided that our readers would understand the point I was intending - which was merely that we prefer to buy low and that temporary declines in price are therefore an opportunity, particularly helpful at a time of cash inflows. However, the bomb blast in Bali is a tragedy which could have serious consequences for South-East Asia. The first news reports suggest that Indonesia's leaders are rising to the occasion, and one can only hope that Australian and western governments will tread very carefully in their reaction.

Hong Kong visits were a very mixed bag. Some companies report a significant deterioration in business in the last few months (including Cafe de Coral, which with hindsight I should have topsliced further at HK$7, but now seems fairly valued); others say that business is very difficult but better than last year. My overall impression is of danger-plus-opportunity. I am now in London, and will try to post the delayed 3rd-quarter report within the next couple of days.

6 Oct 02:
NAV of the Apollo Asia Fund fell 3% in September, to US$168.26. I am in Hong Kong visiting companies, and will be back in KL on Wednesday for a couple of days only, so the quarterly report will be posted later.

27 Sept 02:
As a change from the relentless grind of international news, Chris Wood reminds us of the strong case for investing in Asia:

[The CLSA report 'Asia's Billion Boomers' argues that] Asia will be the prime driver of global growth for the next ten to 20 years and therefore be the world's premier equity investment story during this period. This argument rests on four main pillars... positive demographics, high savings rates, rising incomes per capita, and last but not least, a cultural change in the attitude to spending and indeed pursuit of lifestyle where a younger emerging generation in Asia will prove to be much less conservative than their frugal parents. This will not just be a question of spending more on existing goods and services but also being prepared to buy a far wider range of goods and services.

The exciting point about this story is that it means that Asia has a growth dynamic not driven primarily by American demand cycles. At present most investors, be they Asians themselves or professional fund managers, be they based inside or outside the region, do not really believe this story. Such a belief will take time to take hold when investors are operating in an environment of growing risk aversion globally and as owners of capital wake up increasingly to the investment implications of deflation's spread throughout the OECD. Conviction will probably only come when the American economy is seen to have stalled - by which is meant consumption falling at a time when capital spending has not yet recovered - and Asian economic growth does not collapse along with it. In the meantime investors in Asian equities are paid more to wait than their counterparts in other equity classes because they are receiving worthwhile income streams on their investments in terms of dividend yields.

September has been an interesting month in Asian markets. Some share prices have plunged, including a number of our Hong Kong holdings, making it much easier to find de-frothed investments. Some of our other holdings, notably in Thailand, have been resilient or better - generally for good reason, so while we may not immediately add to these when panic rules elsewhere, we are happy to hold. In Malaysia, partial progress with the Land & General restructuring and the subsequent privatisation offer for Bumi Armada have helped to limit the portfolio decline in NAV to around 2% month-to-date (estimated NAV is currently US$169), and mean that we have some 30% of the portfolio in cash or likely to be encashed in the next few months, and therefore available for reinvestment - so if you see significant weakness in Asian markets in the months ahead, expect me to be unusually cheerful.

David Webb wrote this week that "investors should not be forced to choose between a privatisation offer and holding unlisted stock. That is not a real choice, and allows the offeror to name its price." David was writing about Sing Tao and the failure of HK authorities to react to even the most egregious abuses, but unfortunately we have a parallel case with Bumi Armada. The chairman and his new partner increased their stake to 69% by purchases from Malaysian banks at RM7. These banks appear to value companies only with reference to the quoted market price (regardless of the volume of trading) and not to any parameters of the business - which we think is worth significantly more. (We were not sellers at RM8 in early 2002, when there was turnover, and EPS have grown by a third since then.) A general offer is fine, one can take it or leave it - and 69% is a long way from the 90% required for compulsory acquisition - but apparently Malaysian rules permit delisting if owners of 75% vote in favour (unless 10% vote against, but a 10% active turnout is harder to achieve than a 10% passive rejection, especially from non-confrontational Asian institutions). In current market conditions, 75% seems very likely to be achieved, and the directors have stated their intention to delist. We have considered the case for protesting oppression of the minorities. The rules should be reviewed.

Meanwhile however, my recent trip to Singapore and Jakarta found investible companies in both places - and next week I am in Hong Kong, so in the event I shall probably vote with my feet and concentrate on the opportunities elsewhere.

The Hong Kong schedule means that the end-Sept valuation will be posted a few days later than usual, and in combination with market volatility (= opportunity!) and an even-greater-than-usual research backlog, that the quarterly report may be delayed by anything up to a few weeks. Please bear with us. Pun intended.

5 Sept 02:
An internal administrative change: I resigned yesterday as chief investment officer of AIMS Asset Management, but remain a fund manager at AIMS with responsibility for the Apollo Asia Fund only. There are no changes at Apollo Investment Management, and the fund is not affected.

Meanwhile, a cash offer has been made for our largest holding, Bumi Armada. The offer is not generous (details may be found on the KLSE website), but is at a premium to the recent market price, so will tend to increase the fund's NAV.

3 Sept 02:
The NAV of the Apollo Asia Fund rose 1% in August, to US$172.75; charts etc. Although Asian markets in general have started Sept rather dismally, one or two of our shares have bucked the trend, so the NAV at the close today would be fairly similar.

2 Sept 02:
Andy Xie, in "No More Easy Life", comments on ASEAN's outdated economic model and lacklustre prospects. Chinese policymaking does indeed appear dynamic by comparison, but when Asian leaders take the credit for all past growth it does not prove that it was due. Asian economies have sometimes prospered despite their governments. One saving grace which I underestimated in the mid-80's was that the role of government remained relatively small (which may still be the case despite lamentable upward tendencies). I cannot muster much current enthusiasm for the macroeconomic prospects, but find cherry-picking good businesses less depressing.

Any complacency on the destructive potential of bad leadership would be dispelled by 'Burma: Grace under Pressure', a superbly-executed photo-essay for the web. For armchair travel, when you have half an hour and a decent phone line, find it on www.hillerphoto.com.

31 Aug 02:
The Knight of the Bubble Expansion has told us that bubbles may be recognised only in hindsight, and now asserts that in any case nothing could have been done. This latest Greenspan twaddle is demolished succinctly at the end of Friday's Prudent Bear market report, and point-by-point by Doug Noland in the latest Credit Bubble Bulletin.

For those interested in crony capitalism, US style, www.dailyenron.com provides a useful summary of some very interesting questions, not just on Enron but also on Harken, Halliburton, Harvard, Alliance, etc.

Meanwhile, a random sampling of Malaysian annual reports made depressing reading. They were full of bureaucratic detail - dates and even times of board meetings, attendance records of individual directors, etc - but few gave a good account of strategic development and key business issues. By several accounts, red-tape regulation is now so onerous that good directors are resigning. If they persevere, days must be devoted to courses at the Securities Commission - by which time participants probably feel they have complied with so much detail that their duty is done. I write this not to pick on Malaysia: the desire to regulate against corruption is now on the agenda of politicians and bureaucrats worldwide, and can be as counter-productive as war on terrorism. Good governance cannot be ensured by regulation, but only encouraged by nurturing a culture.

28 Aug 02:
Marshall Auerback's admirably punchy column this week notes that "private financial markets now resist investing in emerging countries that are able to outgrow their external debts and seek to invest in a mature country like the US that cannot". Good point. We will continue to do the opposite.

7 Aug 02:
Andy Xie's latest article discusses Asia's limited current ability to stimulate demand by currency depreciation, interest rates, or increased deficits, but ends with this more optimistic comment: "Nevertheless, the region would fare better during the next downturn than before... [because] the region's vulnerabilities have been progressively flushed out of the system in previous downturns. The 1998 crisis removed foreign debt as a multiplier on export contraction. The 2001 downturn flushed out the high margins in the IT sector. While the region may not be able to sustain high growth during the next global recession, its resilience could surprise."

5 Aug 02:
Tne NAV of the Apollo Asia Fund rose 1% in July, to US$171.47; charts etc.

31 Jul 02:
There is a curious article on Bloomberg about Land & General, which contains a number of inaccuracies. Foreign bondholders voted against the last resolution because the wording was ludicrous, the documentation shoddy and inconsistent, and no consideration had been given to practicality of implementation for foreigners. Azmi does not control AIMS, nor does he control L&G as implied, and he did not lead the opposition, but he did give us a proxy over some of his bonds - firstly, because he was travelling in the runup to the vote, and we hoped until the eleventh hour that the company might address some of our concerns without forcing a confrontation, and secondly, it might have been odd for a shareholder of AIMS to vote against the interests of the funds which it manages. I think this is now academic as the company has belatedly addressed some of the key problems - not because of the reported threat that a fire sale will start if we don't "fall in line by Aug.13", as the company should have started selling assets 4 years ago. It remains true to say that the process has been most unsatisfactory, and we were not at all impressed by the CDRC's cavalier attitude to the foreign bondholders.

Andy Xie's latest overview of East Asian markets is worth reading - 'Asia Pacific: recoupling?'

29 Jul 02:
The latest fiasco from Hong Kong left me lost for words. Jake van der Kamp has come to the rescue with his SCMP column today. (The SCMP is now on subscription, but it is worth paying for Jake alone; meanwhile, extracts below.) One wonders which Hong Kong businessmen floated this idea in the first place; and whether anyone had early warning of the proposal's withdrawal to profit from the potential rebound - but some corporate insiders will have made a quick killing anyway, although not this time of the largest golden goose.

The big appeal to listing on the market if you are a salivating wolf who owns a small company (most of them who want listings actually) is an instant one. You cash in right away. The punters pay you immediately, you work the share price for a few months to get some more before the stock dies, and it all lands in your hands.

However, you then also get the nuisance of publishing annual reports, reporting to the stock exchange and having to hide questionable dealings between your private companies and your public one. What better solution could possibly offer itself than that the stock exchange should de-list your company after you have fully achieved your purpose of bleeding the public dry with it?

So it was not only penny stocks that the punters fled on Friday but all stocks that could become penny stocks on the reasoning that if the wolves in control of them can make them penny stocks and thus remove the nuisance of their public obligations with an easy de-listing, they will.

It is so easy to do as well. Instead of making full provisions for known losses in one year, spread them over three years and you are out. Convert all your assets to cash and you are out. Manipulate your price down below 50 cents or your market capitalisation below HK$50 million for 30 days and you are out.

And it is so wonderfully convenient. If your small shareholders complain you just hold out your hands and blame the stock exchange. You got all your money on the way in, they lose all on the way out and the stock exchange did it all for you without a prompt.

Praised be the name of exchange chief executive Kwong Ki-chi. What a man. Give him a bauhinia.

For commentary on the US market, I recommend John Hussman's recent notes. Other essential reading for us currently includes PrudentBear (see, especially, Doug Noland's Credit Bubble Bulletin), Richard Russell's dowtheoryletters.com (subscription), and Morgan Stanley's daily Global Economic Forum.

26 Jul 02:
Enzio von Pfeil of Commercial Economics Asia tells us that the Apollo Asia Fund comes out top of their risk-reward league table, which is nice to hear - and now back to the immediate problem of how to avoid falling into the monsoon drain, and the more practical pleasure of analysing good companies for the future. For those wondering how we are faring so far: we estimate today's closing NAV to be US$167.80, which is down only a little over 1% month-to-date, but with market jitters appearing to intensify today. Recent steadiness may be no guide to the future (see 1998 roller-coaster) - but our portfolio has better-quantified underpinnings than most, which should give some confidence.

24 Jul 02:
Amidst weightier international news and revelations that Hong Kong's disastrous Disney investment was even worse than we thought, today's SCMP reports that 'mainland mistresses are increasingly finding themselves dumped by their Hong Kong "husbands" who can no longer afford the luxury of a second wife'... and goes on to document the extent of deflation for those interested in countercyclical acquisition. Jock Miller-Sterling reports that no such trend is noticeable in Thailand, even though the market has been quite successful in decoupling.

19 Jul 02:
The indices for Hong Kong & Singapore, like those for Japan, the UK, and Nasdaq, are now below their ten-year moving averages; the major US indices are not - yet. The accounting practices of Asian tech companies have been receiving belated attention: a useful new report by Deutsche Bank estimates that options and free shares account for around 41% of this year's forecast earnings for the sector, with some Taiwanese companies much worse. I had not appreciated this particular Taiwan phenomenon until recently, but it does tend to vindicate my suspicions of both Taiwanese opacity and the dangers of relying on database summaries. We own none of the culprits (& no tech, for the time being). The NAV of the fund is temporarily at a new high, thanks in part to retail exuberance in Thailand. The cash position is also relatively high, at just over 10%, following some sales on apparently-excessive runups, but following a mixed bag of results from our Hong Kong companies the portfolio is still on an estimated current-year PE of 8.

14 Jul 02:
Visiting the Indonesian tobacco companies, I was struck by the organisation of HM Sampoerna's clove warehouse (right) - with 60kg bags stacked into tall pyramids on the backs of Madurese workers climbing ramps. I imagine a Dutch East India Company warehouse of the 17th century, such as the Maritime Museum at Galle, might have looked very similar. Plenty of modern machinery and expenditure was in evidence elsewhere; this is just a historian's note.

Having noted last week the relative absence of hidden pension liabilities in Southeast Asia, I promptly found some - albeit minor - in Indonesia. New legislation has forced companies to make provision for pensions, and companies are typically assuming wage inflation of 10% and a significantly higher discount rate, so that the net present value of the liability is understated. In the long run, there are serious social issues in providing for the first generation of office and factory workers, who may have no land or rural survival skills, in an era of largescale mobility (ie there may be no family or community to provide). However, few Indonesian employees are likely to put much faith in such schemes until proven, and the crystallisation of liabilities is distant. On the long list of concerns for portfolio investors in Indonesia, this is not the most critical.

8 Jul 02:
The 2Q report is here, and I am off to East Java and Jakarta visiting companies for the rest of the week.

More than five weeks has elapsed since the Land & General bondholder meeting. So far the company has produced another homemade draft which addresses some but not all of the issues, while introducing some new inaccuracies and at least one new goalpost move (some of the new problems may be small). It assures us frequently that international lawyers will be appointed to represent the bondholders, but never quite makes the appointment. Meanwhile company officials seem to be devoting most energy to lobbying individual bondholders to change sides, supposedly at the behest of the institutions hailed as reform-leaders of the New Malaysia.

4 Jul 02:
The NAV of the Apollo Asia Fund fell 3% in June, to US$169.76; charts and comments updated, quarterly report to follow.

28 Jun 02:
While we try not to be too distracted by macroeconomics, finding corporate analysis more rewarding, Morgan Stanley's daily Global Economic Forum remains excellent reading, improved by the occasional constructive disagreement. Stephen Roach's article 'The trees or the forest?' is a must-read antidote to current wishful thinking. More cheerful reading for investors in Asia has been provided by Andy Xie, examining the impact on Asia of the falling US$. With appropriate caveats about how difficult it is to tell, he thinks Asia may ride the storm more smoothly than Japan and Europe, with Korea, Taiwan and Singapore adversely affected, and the debtor TIP countries benefitting from a lower burden of $-debt, plus export-complementarity with $-linked China and Malaysia. The Apollo Asia Fund has no exposure to the big-loser economies, and our companies operate mostly in China/Hong Kong, Thailand, Malaysia, and Indonesia - the deemed beneficiaries. Comforting if correct.

19 Jun 02:
David's Phoenix Gold Fund featured at the head of a 1-year performance league attributed to Lipper in yesterday's Asian Wall Street Journal - which is great, but makes us wonder how they source their data and choose their universe. All of their top ten were gold funds, which seems entirely plausible, but as it happens the performance of Apollo Asia Fund would have slotted it into the number 7 or 8 ranking - so the exercise is meaningless, as we have no idea which other funds have been missed out. These two funds are managed under the same roof, with similar structure and size, and monthly valuations which are available on the web... anyway, time for the standard wealth warning, past performance is no guide to the future!

13 Jun 02:
Mike Gibbs-Harris has written from Western Samoa to describe my recent scribblings here as 'rational inuberance'...

Recent press commentary on the return of international investors impressed by Malaysia's restructuring leaves us bemused. According to the AWSJ, Danaharta has sold Tajudin's 45% of Naluri to a company owned by his brother and associates. Minorities are concerned, there is as yet no word of a general offer, which should surely be required, and the only suggestion of the new 'Minority Shareholder Watchdog Group' is that minorities should vote to change the directors. The percentage turnout required was similar for the overseas bondholders of Land & General, almost 100% of whom voted last week and succeeded in blocking a shoddily drafted resolution to approve a restructuring on any terms to be agreed with the majority lenders. Equally notable was that every Malaysian institution appears to have voted in favour, with some acknowledging its deficiencies but electing to vote for a Malaysian muddle-through sponsored by the CDRC (Corporate Debt Restructuring Committee). We assume that the proposal is now being reworked. Having sold these bonds last August with relief, we repurchased later when it seemed that a deal was finally in sight. While we expect a restructuring deal to be struck sometime this year, the magnitude of creditor-value destruction by prevarication and incompetence has been decidedly educational.

Many Asian countries would benefit from a more developed, liquid market for government and corporate bonds. Savers in many places have inadequate alternatives to low interest rates on deposit, while for many small and medium companies, bank finance remains expensive, and its availability unreliable. Asian bond market development has been discussed for decades, but waning enthusiasm for US$ securities makes it more desirable than ever. Every time we have anything to do with the international bond market, its deficiencies (information flow, price transparency, liquidity, settlement...) make me long for regional progress. If Singapore fails to seize the obvious opportunity and develop a better bond market, maybe China will eventually step into the breach?

5 Jun 02:
NAV of the Apollo Asia Fund rose 7.6% in May, to US$174.63. We suggest that investors do, this month, look at the chart page, as the fund has risen quite steeply, buoyed by unusually frothy activity in small and medium sized companies. A sharp setback is therefore a definite possibility, particularly if the US stockmarket and currency downturn accelerates. We would expect this to lead to a weak US economy, and a reduction in US consumer spending, unhelpful to the Asian export machine; the domestic growth story, while very positive, could not possibly compensate in the short term for a serious US downturn.

The impact on Asian stockmarkets is much harder to call. The recent run has been driven by foreign investors seeking a relatively-safe haven, belatedly recognising attractive valuations in markets from which excess was relatively recently wrung out. Domestic investors preceded foreigners in buying stocks for yield in Thailand; elsewhere there has been some dividend-driven investment, but local investors have remained relatively cautious, despite low interest rates. Central banks and other Asian institutions may not always wish to increase their holdings of US$ securities. Meanwhile, many Asian governments will be reluctant to see their currencies rise too rapidly against the US$. Liquidity-driven markets are not readily constrained, even by deteriorating fundamentals, as history has repeatedly shown. Some market participants, as nervous as we are about unravelling US markets, are looking forward to the return of go-go markets in Asia. Remember 1993?

The other factor which affects our small and mid-cap securities is that they are only gradually coming back onto the radar screens - or more usually the Bloomberg screens - of big-booted institutional investors. Having become accustomed to truffle-hunting at a leisurely pace, undisturbed by other potential buyers, the speed of this change came as a surprise. It is entertaining to watch a stock rise sixfold, monitored by one analyst or none, only for a big US firm to 'initiate coverage' with a buy recommendation - especially if the pages-to-market-cap ratio is high (frequent), and especially if we own it (less frequent; sod's law dictates that this most often happens to the ideas we rejected). However, the stock may then move over a particular market-capitalisation threshold, which means that it will qualify for attention... we used to watch out for a double-whammy of growth-plus-rerating at US$100m, but now the more relevant levels are at US$500m and US$1bn.

Stockmarket performance so far has carried most of our holdings from indisputable-bargain territory (fractions of net asset value, or sometimes of cash, or ultra-high yields) to closer to fair value, but not in most cases beyond. We have trimmed some holdings on over-exuberance, and reinvested in shares which appeared better value, but in general have sought to consider the level at which the 'reasonable man' (an endangered species?) would value the whole business, were it to be unlisted. Estimates of 'intrinsic value' can of course differ wildly, depending on the assumptions made, but the whole portfolio as at end-May is on a current-year PE of 8.2, with a dividend yield of 5.3% after Asian taxes. We think this still remains clearly attractive - taking account of the quality of the business franchises, management, accounting, etc. By 'current-year', as usual, we mean 'for the next full financial year to be reported'; almost 20% of the current-year earnings are for the year to last March, and therefore to some extent 'in the bag', and of course we are already well into the financial year of several others. Global risk makes profit forecasting tricky, but for what it is worth we are still thinking of 10% per-share growth in earnings and dividends for the year ahead, and our forecasts probably tend to err on the side of conservatism (at least compared to those brokers 'initiating coverage'.) Cashflows, as always, are very important to us at the individual company level, but lend themselves less well to aggregation.

To return to one of our regular examples, Cafe de Coral (which we topsliced prematurely, but is still one of our largest holdings): at HK$6.45, we reckon this is on a PE of less than 12 for the year under way (to March 2003), and a dividend yield of 4%. This is one of the highest PEs in the portfolio, and the valuation is high by its own historical standards; on the other hand it does not appear unreasonable in absolute terms, especially at present low interest rates, and the company has considerably strengthened its competitive and strategic position in recent years. Apart from the greater vertical integration of its core Hong Kong operations, it is no longer just 'a Hong Kong fast food company' but one of the few companies worldwide to which one would wish to talk about operating Chinese food chains in the west or, for a western incomer, about franchising restaurants in Asia. To a global investor working to different valuation yardsticks, these figures are still in the bargain basement - and there is still 11% to go before it reaches a market capitalisation of US$500m.

The price charts of the last few months remind me that the decisions of big banks about their Asian broking operations again provided a wonderful contrarian indicator. By the end of last year we were struggling to open brokerage accounts fast enough to compensate for the closures, and worrying about execution capability in certain markets. It is doubtless unfair to single out HSBC, but the decision of a pan-Asian banking giant to close down equity coverage in Indonesia did seem the most bizarre of all.

3 May 02:
NAV of the Apollo Asia Fund on 30 April was US$162.31; charts.

30 Apr 02:
A recent trip in China took me to an unusual number of small towns, primarily in Henan, Zhejiang and Fujian provinces. Within 3 minutes' walk of each hotel, and sometimes much less, I found an internet cafe, with a largely teenage customer base. The going rate, once beyond hotel business centres, was 2 yuan (US$0.24) per hour - always including tea, and sometimes with broadband. The BBC site was always inaccessible (plenty of other news sites are available), as was just one site which I routinely access, an innocuous US market commentary. Some servers apparently block access to ISPs from specific countries, and Chinese e-mail users are complaining that some foreign ISPs block all e-mail from Chinese accounts. This does not affect users of international webmail services logging on in China, but is most unhelpful to Chinese individuals and businesses. GSM phones (including data service) work almost everywhere - unlike the English countryside, and to the continued astonishment of US companions. Local museums multiply and improve. The museums are increasingly helpful in providing English translations, but are mostly for the benefit of local people - many of whom take great interest in China's history and the wealth of new archaeological discoveries.

Visible progress at ground level continues to impress, although reading the national news will quickly dispel any illusions that the picture is entirely rosy (gang warfare amongst oil majors, planned developments at Nansha, details of the Serthar monastery destruction and the audit shocks at Guangdong Kelon come randomly to mind from recent days). In practical terms, we remain optimistic about overall political and economic direction, and very interested in China as Asia's largest economic engine and the operating base of many of our companies, while continuing to invest mainly through proven companies headquartered elsewhere.

In Hong Kong, I came away from every one of my company visits encouraged that they were investible to some degree (although many of the best small company shares have appreciated substantially). This is in encouraging contrast to the depression induced by the government and regulatory authorities. Hong Kong optimists should Think Micro.

Those unable to avert their eyes from the US horror movie may wish to read the May article on Contrary Investor.com, which has some interesting long-term charts supporting a sceptical view on the strength of that economy.

4 Apr 02:
NAV of the Apollo Asia Fund at 28 March was US$159.52; first-quarter report, charts.

3 Apr 02:
'When central bankers become asset managers': Marshall Auerback on last week's extraordinary reports that the Fed has been contemplating 'unconventional measures' and that the Bundesbank is considering 'converting its gold to equities' (further fuelling rumours that its physical gold is already gone). We live in interesting times. 'Asia awakes', an FT article by John Thornhill, is an excellent overview of the remarkable changes in Asian consumption (not only in Korea). Whatever the difficulties of managing changes such as an explosion in consumer credit, Asia has little choice but to try: to lessen dependence on the US growth engine, and to raise the living standards of Asian voters. There is little advantage for Asians in allowing their governments to accumulate ever-larger holdings of US government and agency securities.

31 Mar 02:
Rare, hopeful tidings emanate from Sri Lanka. The peace has held since December, island-wide travel is possible for the first time since the early 1980s, and the government is doing some commendable things (quite apart from forming a maritime archaeology unit). The latest budget proposes the abolition of capital gains tax and a phased reduction in personal tax to a top rate of 20% by 2004. Double taxation of dividends has been introduced, at 10%, so progress is not unmitigated, but cautious optimism seems in order.

30 Mar 02:
Asian markets are awash with liquidity, and the Fund has risen for the sixth month in a row (outperformed, usually, by David's Phoenix Gold Fund). The NAV and quarterly report will be posted next week. Investors, before sending any money, henceforth please contact us and check first whether we are in a position to accept your subscription. (The more notice you wish to give us, the better.)

Andy Xie, in the Morgan Stanley Global Economic Forum of 28 Mar, cautions that some of the current growth in North Asia is cyclical rather than secular, and identifies one possibility, only tentatively under way as yet, which could lead to a secular bull market in Asia: the economic integration of Japan and China...

George Soros on globalization, his newest book, is short, clear, and concise. It draws on Soros' practical experience of emerging economies, aid, and finance to propose constructive improvements in the international order - such as a programme of SDR donation. Worth reading, and supporting.

Prudent Bear, where the Credit Bubble Bulletin remains essential reading, pointed us this week to another interesting US market website, www.cross-currents.net. A useful site for those interested in gold, recently discovered, is www.321gold.com.

8 Mar 02:
The bizarre behaviour of big banks does occasionally have advantages: my former colleague Lyn Kam is joining AIMS as office manager on 1st April (her choice of date...), and I am looking forward to working together after a gap of sixteen years. I am pleased to hear that WICO's Malaysian research library has been redeployed by another of the alumni.

4 Mar 02:
NAV of the Apollo Asia Fund rose a little over 4% in Feb, to US$147.81; charts etc.

26 Feb 02:
I spent the weekend after Chinese New Year in Guangzhou, which now has excellent museums, art galleries, restaurants and shopping, and is only an hour and a half from Hong Kong by comfortable express train. Air quality is horrible, but at least this is now recognised China-wide as a problem. One Hong Kong company which started with a number of factories in Guangdong and is developing a second cluster around Shanghai told me that they find the latter more orderly and less corrupt, but nevertheless their experience continues to be of rapid 'normalisation' in both places. Huge problems remain, of course. One is regulatory consistency between various government authorities. Ching Hong Kong Photo, the Fuji distributor, complains that new customs duties effective 1 Jan were very different from their WTO-led expectation for change on that date. However, with perhaps five steps forward and four steps back, and caveats on the limits of investor knowledge (exacerbated to an extent by the places and organisations which investors tend to visit), the overall direction seems to me clearly positive - for what this is worth, which may not be a great deal, but I mention it because of some fairly extreme and divergent views aired recently in major newspapers.

Meanwhile, Hong Kong is in the deepest recession I have seen in twenty years. This may have been unavoidable after the long-running property bubble popped, but the psychology is intriguing. Hong Kong people are normally impressively quick to adapt to changed circumstances and financial losses and to focus on the next opportunity. Many are doing so now, in many cases recognising that their best career prospects include other cities in China. The staff of well-run companies may be cautious, but they see opportunities and are optimistic. The difference made by good management is striking. Good political leadership would also make a difference. Instead we have incompetent tinkering and expensive mega-projects, which are undoubtedly contributing to community depression, with the psychological impact as important as the fiscal damage. Nevertheless, Hong Kong still has considerable advantages as a place to live and do business, and many of the companies headquartered there will continue to prosper.

Thai small-cap shares have raced skywards. This is understandable, since a remarkable number had been trading at fractions of fair value, after significantly streamlining their operations and balance sheets in the four-plus years since the onset of crisis. Many will be in a position to resume annual dividends in the next few months. The most explosive part of the rally must now be over, but reasonable value can still be found among the smaller companies. The companies we hold have been doing well, and we have added to some existing positions, but have bought no new names so far this year. This inevitably means some missed opportunities (closer to the bone when in shares we considered than in situations less familiar), but buying the merely-undervalued for rerating is a tricky game in terms of timing. Instead, we attempt to identify good companies in which we are happy to invest long-term, and to buy these when the price is fair or better. New ideas have therefore to be benchmarked by the standards of the existing portfolio.

12 Feb 02:
Morgan Stanley's Global Economic Forum of 11 Feb is a good read - and ends with a call by Andy Xie that East Asia is the Next Big Thing. I agree with part of the analysis, but the rhetoric (from this firm...) evokes the bullish insanity of 1993. Tighten seatbelts.

Those whose appreciation of accounting footnotes preceded Enron should read Accounting for the ESF's Gold Swaps, which appears to confirm suspicions about the recent use of the US gold reserves. This short article is the result of both painstaking analysis and perseverance. Gold bulls and certain types of bear will be encouraged.

11 Feb 02:
The latest addition to the doggerel page commemorates the recent Goldman Sachs tech conference.

4 Feb 02:
NAV at end-Jan was US$141.84; charts etc.

2 Feb 02:
Amidst the Enron verbiage, Frank Partnoy's Senate testimony is a clear and readable analysis of the various ways in which derivatives were used, the creative accounting and cryptic notes, and the regulatory implications.

As more of the recent US excesses come under scrutiny, one question is where structured finance losses will surface. Insurers' lawsuits against JP Morgan about Enron recall a Partnoy story in his book FIASCO: how Morgan Stanley, days before the looming Mexican crisis, designed a derivative to lay off its huge currency exposure, and did so with the lure of an extra 50bp to 'the least sophisticated, sleepiest investor... a midwestern insurance company'. It is likely that a number of money market funds, local governments, and overseas central banks will eventually be exposed, along with insurers and pension funds and corporate treasurers, as having incurred risks of which many stakeholders and counterparties had no idea. Doug Noland, in his latest Credit Bubble Bulletin on prudentbear.com, reasonably observes that: 'writing insurance against potential credit or market losses is not a legitimate business... Such losses are not “insurable events”, since they are particularly non-random, highly interdependent, and unpredictable. And unlike true insurers, players in this arena are not accumulating pools of insurance reserves to settle calculable future claims, but are instead relying on sophisticated models and dynamic hedging strategies.' In a dangerous world, we rely more than ever on the managers of our companies - and on the 'margin of safety' between intrinsic and market value of their shares.

31 Jan 02:
Thanks to Bill Fleckenstein for 'The Sound of Wall Street', latest addition to the poetry & doggerel section.

29 Jan 02:
'NASDAQ 100 companies report combined losses of over $82 billion to the SEC while reporting profits of $19 billion to shareholders'... see succinct analysis of the 9M01 reports by John J. May at www.smartstockinvestor.com/commentary.html. Even those well aware of the distortions may be surprised by their magnitude.

Meanwhile the passivity of HK regulators remains scandalous. Following a series of columns about Eco-Tek and government procurement by Jake van der Kamp in the South China Morning Post, David Webb has written one of his best articles yet on the listed company. Must read: Eco-Truth.

25 Jan 02:
NAV is a touch over US$140 at present, which is up more than 9% month-to-date and 43% year-on-year. After a nine-month run like this, a hard setback would come as no surprise, and the US still seems the likeliest cause of shocks. Some share prices, especially in the illiquid TIP markets (Thailand, Indonesia and the Philippines), have been leaping upwards in unnerving manner, but in many cases the fundamentals are indeed supportive, and the overlooked is being rediscovered. In any case, recent visits to companies based in Thailand, Singapore and China have thrown up plenty of good stories (mostly driven by domestic demand, low interest rates, internal change and restructuring) - but we are still sifting volumes of new information, so that's the end of this comment.

9 Jan 02:
Bill Fleckenstein's daily Market Rap, in process of relocation, relayed the following gems today. The headlines go into my book of classics:

Turkey Inside The Trimmings
...Gateway tried to package a huge revenue shortfall as good news by talking about how it was going to do better on the earnings front. What was most amusing about the company was the headline that passed on Bloomberg last night: "Compaq, Gateway Have Fourth-Quarter Profit Before Costs." That was followed up with a story containing this stunning one-liner: "[Gateway] had a fourth-quarter profit before unspecified expenses. . .."

The Dog Ate My Expenses
So, ladies and gentlemen, based on today's new-era profit definitions, I guess all companies always, everywhere, are massively profitable, because after all, everyone is profitable before expenses...

8 Jan 02:
One of the pleasures of 2001 was the discovery of Thomas Mathiesen's book, Apollo's Lyre, which examines artistic, literary, archaeological and musical evidence about the music of ancient Greece. Recommended.

4 Jan 02:
NAV of the Apollo Asia Fund at end-Dec was US$128.56, up 3% for the month and 34% for the year. Thanks to co-investors for all the ideas contributed. See quarterly report, and performance charts.

To What was new archive - 2001
To What was new archive - 2000
To What was new archive - 1999