Apollo Investment Management

Opportunities for selective investors in Asia
Article for Marc Faber's Gloom, Boom & Doom Report, May 2001

Asian markets currently present abundant opportunities for the stock-picker - particularly for those investors small enough to look beyond the largest-capitalisation stocks in the most liquid markets, on which most institutional investors concentrate. Many markets and currencies have fallen to levels last seen in the darkest days of the Asian crisis. The broadly-based and US$-denominated MSCI regional index (all-country Far East ex-Japan) has round-tripped to where it started three years ago, after a powerful rally which peaked two-thirds higher. Bear market sentiment is leading to inefficiency. Valuations which should be immediately attractive to local investors are being left on the table, for fear of loss.

It is often a sign of a promising market when brokers turn to dividends as the most persuasive lure for their clients. Hong Kong retail investors traditionally took note whenever the dividend yield on the Hongkong Bank rose above the same bank's deposit rate. The new multinational HSBC Holdings has been accorded a premium megastock rating (temporarily, at least) but other Hong Kong banks are now in this position, with dividend yields over 5%. Many Hong Kong companies yield much more. In Thailand, a sixth of all listed companies offer gross dividend yields over 10% - and quite a few more, which saw shareholders' funds decimated by foreign exchange losses, have since rebuilt their balance sheets and will soon be in a position to resume payouts. Before getting too involved in individual opportunities, however, let's explore a few generalities and misconceptions.

Many Asian companies are conservatively run, debt free, and have commensurately conservative accounting practices. Businessmen in Asia have been able to learn from frequent change and cyclical downswings: nowhere has there been a financial bull market of the duration of that in the US, with all its potential to mislead one into the extrapolation of trends. 'Whatever doesn't kill you makes you stronger'; managers sometimes learn about how to withstand shocks. Difficulty in securing credit for many small businesses (many Asian banks lend only on or against property), coupled with an appreciation of the risks posed by panicking bankers in a downturn, have led to risk-averse balance sheets. In Hong Kong, Singapore, Malaysia and Thailand, 'normal' levels of gearing are low, sometimes inefficiently so. The few entrepreneurs who borrowed heavily and then crashed earthwards have understandably commanded significant media coverage, but they are not typical.

My statement about accounting practices may cause raised eyebrows, particularly among US investors who often seem to assume that 'different' means 'worse'. Disclosure, certainly, is an issue. Quarterly results, with full detail and tighter deadlines, and web publication of all corporate documents, should be a given across the region. The Stock Exchange of Thailand performs best on this score, which should be a major embarrassment to Hong Kong and other markets which would like to be considered more sophisticated. English language versions of all documentation in Korea, Taiwan and China would be helpful to foreign investors. (Again, if the tiniest Thai companies can manage this, it suggests that the burden is not intolerable).

However, a number of the creative accounting practices which have recently become prevalent in the US are uncommon in parts of Asia. Investment gains have not played such a large part in reported profits (not because of any restraint on the part of Asian entrepreneurs, but because of lesser opportunity in the absence of such a historic bull market). Likewise, acquisitions and mergers have offered fewer opportunities in recent years, and I would be surprised if vendor financing became much of an issue here. (Electronics companies which used to explain that they 'could not possibly' do business with Cisco, Compaq or Motorola on anything other than open account will however be learning the hard way about old-fashioned customer risk. Companies making old-economy goods such as garments stuck to letters of credit throughout). Perhaps most importantly, few Asian companies were able to switch to share options as their principal currency for employee remuneration, so will not face a reversion to cash accompanied by a reversal of tax benefits. Dilution for employee options has generally been kept within reasonable bounds. Share buybacks at high prices have been uncommon. Critics of current US practice have suggested that earnings may frequently be overstated by as much as 50%; while I no longer attempt to monitor all Asian companies, and seek to concentrate only on the most attractive, I don't have the impression that such overstatement is so prevalent.

Operating profits of Asian companies are vulnerable to recessionary risks, of course - but economic life does go on, even during severe political upheaval. Indonesia has demonstrated that this is true even when government breaks down, the banking system is dysfunctional, and the legal framework is unreliable: most economic participants attempt to continue as normal.

Excluding the electronics sector, I believe that earnings estimates in Asia will prove more robust than in the US, where companies have been benefitting for so long from a virtuous circle (rising valuations, cheap funding through issuance of expensive equity, pension and staff-cost and tax holidays due to rising share prices and to options, aggressive financial practices, imprudent lenders and cheerleading analysts). Having been through a vicious circle and economic crunch quite recently, Asian companies and investors are much more risk-conscious, and the remaining Asian analysts are more sceptical. Paradoxically this has led to even lower valuations, as Asian investors are now conditioned to be particularly nervous about deteriorating markets, but many companies combine solid balance sheets with valuations which would be a bargain to any rational long-term investor capable of evaluating the business and not worrying about whether the quote may be lower tomorrow. Surprisingly little money is now managed in this fashion!

Companies can be found which have very high-quality earnings, in the sense that they are relatively stable (business as normal, with strong balance sheets, and no aggressive accounting practices to be reversed). Those with strong managements and cashflows may even be able to turn recession to advantage, as weak competitors go to the wall and assets become available for purchase. Cafe de Coral is a prime example: its core fast food business thrived during the recession, as rental costs fell and choice locations became available, and it has made a number of acquisitions which immensely strengthen its prospects for future growth, some of these arising out of bankruptcies.

Corporate governance issues tend to be different in Asia than in the US or UK. Minority shareholders have to watch out for conflicts of interest with the controlling shareholder, frequently an individual or family; on the other hand, they are less likely to be mugged by employees.

Rarely can one rely on the regulators - even in Hong Kong, where one might have expected the government to take some interest in the long-term credibility of financial market infrastructure. Encouragingly, the PRC authorities seem to have a slightly greater idea of why this is important (because of the sums of money required to be raised!), even if implementation has a long way to go. Critical observers are making some headway: in Hong Kong, David Webb's webb-site.com and Jake van der Kamp's daily column on scmp.com are on our essential-reading list; in Korea, Prof Jang Ha-sung does sterling work; and in Malaysia the opposition and trade unions are beginning to pay close attention to investments being made with public funds. However, the investor should aim to be in companies which never need such critical attention. Integrity of management is paramount. To paraphrase Keynes, Asian managements may be allowed to abuse their minorities for longer than you can remain solvent. We attempt to invest only in companies whose managements do look after their shareholders and take note of investor concerns. Fortunately, the managers of many Asian companies maintain higher standards than those who govern or regulate them. Some managers act on instincts of fairness; others on realising that the valuation premium achieved by good practice can greatly outweigh the short-term gains from a rip-off.

Higher regulatory standards would be in the public interest, as a reduction in the risks borne by the investor would translate into higher share prices, a lower cost of capital, and better capital allocation. Those of us who work full-time on understanding the businesses in which we invest are still liable to misjudge the people from time to time; for the retail investor or distant fund manager, close scrutiny may be impractical. Some Asian companies are over-capitalised. Quite a few can be characterised as dozy, and drift along contentedly with ROE's lower than institutional investors might consider achievable. We are as demanding as any investor in this regard, and vote with our wallets by seeking out the companies likely to give the best total returns, but there may be something to be said for the less pushy approach to management. Relentless pressure on western managers to target 20% ROE and high growth in an environment of 2-3% inflation may have caused miracles to be achieved for a while, but at costs yet to be tallied. John Kay in a recent Financial Times article described how such pressures led to the downfall of Marks & Spencer, and how difficult it is to define the line between efficiency and brand erosion; a British banker has bemoaned the incompatibility of prudence and continued independence for a listed company; and US executives are beginning to discuss the implications of excessive growth targets for survival.

Dividends are a controversial subject. We like them - especially in countries where there are no tax disadvantages, but anyway it is generally a good idea that excess cash be returned to the shareholders. The payment of dividends helps to keep managers focussed on cashflow, and to maintain good returns on an optimised capital base. If companies with a value-adding record need cash for expansion, it is good discipline for managers to be required to explain why; if the reasoning is sound, investors can usually be relied upon to stump up enthusiastically for a rights issue. Dividends allow the investor to reallocate cash on a regular basis to the most attractive investment opportunities, a consideration particularly important if liquidity is a constraint (which it is for almost all institutional investors in Asia). Moreover, dividends allow the investor to calculate an intrinsic value, without making any assumptions as to the price a third party will be willing to pay in the future.

We are nervous of companies with no declared dividend policy, specifically including Chinese entities for which investment opportunities are effectively unlimited and the interests of majority and minority investors are imperfectly aligned. The difference between China Mobile and a Ponzi scheme is that the former delivers genuine service to consumers, as well as funds to its controlling shareholder, but to a minority investor the difference is less clear. We understand discounted dividends, but discounted cashflow models leave us unconvinced when minorities may never have an effective say in how the cash is deployed. A private buyer could value the whole business, but the controlling stake is not for sale; the value of individual shares should not therefore be calculated on such a basis.

Some of the companies which have refrained from or cut back on cash dividends claim to have done so because of expressed investor preference. The US is unfortunate in suffering double taxation of dividends, which does mean that a dollar paid out is immediately slashed in value, and is therefore worth less than a dollar retained by the company and invested wisely - but somehow that last condition has often been overlooked. Many tech share buybacks at huge multiples appear to have enriched insiders while impoverishing the minorities, and some of the capital allocation decisions taken with 'free' money appear decidedly questionable.

We are all for buybacks, but only at the right price. One Hong Kong company discussing appropriate parameters was confident that it should buy back its shares when the price was less than cash backing; another thought it reasonable below book; and a third thought it justified up to a price at which its earnings yield matched the return on bank deposits. These limits may be considered too conservative, but they represent a sensible way of thinking about the return on the shareholder cash thus spent.

Hong Kong has the best and least distorting tax regime in Asia, as well as a strong culture of dividend payment, and it seems to me no coincidence that this market has delivered the best long-term returns to investors. (The instincts of the present administration to grow the size of government are to be regretted, and will be strongly resisted.) Singapore and Malaysia have higher rates of tax but no double-taxation distortion. Foreign investors in Thailand suffer withholding tax of 10%, but many domestic investors are exempt. Korea is one of the markets where investors suffer the greatest distortion from double taxation; consequently companies retain most of their earnings, and who would argue that they have collectively invested well? India is another country where the effort devoted to tax avoidance and evasion significantly distorts capital allocation and detracts from productive activity. I am surprised that this is not raised more regularly as a policy issue, and can only assume that Americans are so subdued by their own tax burden that they find it implausible to conceive of a better way!

Market inefficiency in Asia presents investors with an opportunity, as companies which generate excellent returns for investors with a high dividend payout ratio are not always given the recognition they deserve. There is a tendency for market participants to forget about dividends while reviewing the track record, and to focus on growth rather than total return. This long-standing anomaly, along with the institutional neglect of 'dull' companies (eg those which fund themselves from internal cashflow, and are consequently of no interest to corporate financiers), work to the advantage of the compounding investor, who has a constant stream of income to reinvest and prefers to do so at low prices.

We noted above that a sixth of all Thai companies have double-digit dividend yields. When I ran through the ratings of all listed companies on 11th April, just over half of all listed companies were on historic PEs below ten, 28% on PEs below five, and 70% were trading below book. Many of these companies are too illiquid even for a small fund, but not all - and with local deposit rates of the order of 2%, the anomaly is extraordinary. Some local investors are beginning to take note: among them Bangkok Insurance, Thai Reinsurance, and MBK Properties, all of which take care to buy only into businesses in which they have confidence. However, state-owned Dhipaya Insurance in February explained solemnly that equities were 'obviously' much too risky to contemplate holding for the long term, and therefore its considered policy was to hold equities only for short-term trading. The first half of this policy exemplifies the negative sentiment prevalent close to a true market bottom (although I have no view on whether we are there yet), and contrasts markedly with the optimism of US and UK investors after a bull market of record-breaking extent and duration.

The six Thai holdings in the Apollo Asia Fund are, we estimate, on a combined current year PE of four, with a net dividend yield approaching double digits. Some are very small companies: one of the few brokers who follows a wide range of Thai shares and consequently provides invaluable bottom-up insights into the macro economy is James Miller-Sterling at Worldsec Securities [taken over in 2002 by UOB Kay Hian - Ed.]. Our two most liquid Thai shares (and the only two property-related investments in the whole portfolio) are MBK Properties and Golden Land.

MBK is Thailand's principal listed property investment company. Its principal cash generator is the Mahboonkrong Center shopping mall, which is one of the most successful shopping centres in Bangkok (of the practical and crowded rather than upmarket variety) and was recently given a major overhaul just in time for a major round of lease renewals. Fortuitously this coincided with the opening of the Skytrain; bridges lead to the station, Discovery Centre, and Siam Square, and the whole area is thriving. Mahboonkrong Center is now fully occupied, at rising rentals. The Patumwan Princess Hotel next to the mall has high occupancy and is doing about as well as is possible in Bangkok today: room rates are low in the city, but business is booming in the tourist resorts. MBK is building a hotel in the up-and-coming resort of Krabi, and is seeking to increase its associate holding in listed Royal Orchid Hotels. The management is more conservative than we might wish: it holds on to a rice-business which we would sell, and it has been using cashflow to build up Jardine-like cross-holdings. In this case we cannot fault the logic in terms of intrinsic value, but the unfortunate side-effects are to reduce free float, transparency and investor interest simultaneously. Moreover, MBK's hurdle rate for new investments appears to be based on deposit rates, which are low: to be fair, it claims to be paying the maximum dividends permissible, and may then be taking the best risk-adjusted investment decisions available with the excess cashflow, in an economic environment which still warrants some caution. This outsider frets about missed opportunities, but the shares are cheap: at Bt18 the market capitalisation is Bt 3.6bn (US$80m) with little debt, recurrent operating cashflow of the order of Bt600m (more this year), and a net dividend yield of 10% which is sustainable and should rise over time.

Golden Land is an aggressively entrepreneurial company, restructured and recapitalised during the crisis to acquire distressed properties in Bangkok (mostly for completion and/or renovation prior to rental and eventual disposal), and which has recently moved into housing development in the capital. The management has done itself no favours in public relations and consequently has a credibility problem (projects may take time to implement, but regular public progress reports would boost investor confidence), but it purports to have fulfilled the mandate given. The timing of purchases still looks good, and the housing market is now picking up strongly. The shares at Bt4 have fallen over 80% from their post-restructuring high, and total market capitalisation at Bt1.4bn (US$30m) is less than half the new capital injected two years ago. If the returns on individual projects prove anywhere near as attractive as advertised, the shares will prove very cheap.

Hong Kong remains by far the most attractive market in Asia for the school-of-Buffett investor, for reasons which include uncomplicated low and non-distortive tax, the number of big companies (which enables most institutions to ignore a swathe of medium-sized companies which in Thailand would be considered 'large-caps'), and of course China, a huge market in itself and a fabulously attractive manufacturing base, as well as once again a haven of relative economic strength.

Cafe de Coral's growth prospects have brightened in recent years. It took maximum advantage of the economic cycle in its core Hong Kong fast food business, methodically added new businesses in institutional catering, school lunchboxes, and food processing, and paved the way for a gradual cloning of its existing operations in Guangdong province. (This 'immediate backyard' has a population ten times the size of Hong Kong's). Meanwhile, an unexpected opportunity arose with the breakup of a distressed North American conglomerate. Cafe de Coral was invited in to assist with the management of Manchu Wok, a fast food business with a similar number of outlets to its existing network, and will have 48% of this chain for an equity outlay of US$3m. This LBO - leveraged for Cafe de Coral, at least - highlights the high barrier to entry in this down-to-earth business: greater perhaps than in the ostensibly-more-daunting business of contract-manufacturing electronic components. A Chinese fast food operation is very much more complicated than a hamburger or fried-chicken operation, and while many an immigrant will start a restaurant or two for lack of other options (hence in part the lack of "investment chic"?), few companies have the expertise and discipline to manage a chain. The scale and geographic spread must pose a significant management challenge, but while equity accounting will show up a share of any losses, Cafe de Coral appears to have secured substantial upside (both in profits, and in future businesss opportunities should it prove successful) in exchange for minimal financial downside, the temporary diversion of management effort, and some risk to morale. At HK$3.50, we estimate the shares to be on a PE of 7.6 for the year ended last March, with a dividend yield of 5.4%, and to be capable of sustaining growth in at least the high teens. Price to book is 2.0, and the market capitalisation is US$246m.

Two of our Hong Kong companies are lowly rated due to flat or negative growth - the ultimate turnoff for growth investors, which of course paves the way for a double whammy if an eventual turnaround is coupled with rerating.

China Hong Kong Photo distributes Fuji film, cameras and related products in Hong Kong, Macau and China. The year just ended is likely to be the fifth successive year of profit decline, but after some remarkably difficult years for the China business, sales there are now looking slightly more encouraging, and Hong Kong is once again doing well, due in large part to Fuji's hugely successful digital processing machine. If, as we hope, this year finally marks the turn, ROE would still be in double digits, and the company's excellent record of returning cash to shareholders throughout the downturn proves its cash-generating characteristics. While future earnings, and consequently dividends, are hard to predict, the company is moving sensibly and proactively to strengthen its business, and the shares at HK$0.60 are at 58% of book and a mere 66% of net current assets, most of which are cash and very current receivables. For what it is worth we envisage a PE of 6, and the company is committed to a payout ratio of at least 50%. Market capitalisation is US$84m.

Glorious Sun has shown little growth since listing, and may soon report its first significant decline. Other retailers are consequently much more highly rated - including some which in our view show dangerously little awareness of risk or control. We are impressed by Glorious Sun's more prudent approach, an ROE which should still be in the high teens, and by its cash generation. Garment exports to the US and retail in Australia may not be the world's brightest business prospects, but this is adequately discounted. At HK$1.24, the shares are not far above book, which means that the PE is 5-6, and the dividend yield over 8%. Market capitalisation is US$159m.

Vitasoy has one of the best consumer brands in Hong Kong and should be well placed to expand this both in China and in affluent markets (it is concentrating initially on the US and Australia). Somehow this potential is never quite realised, but even if progress is slow it is nevertheless positive. At HK$1.24 these shares are likewise not far above book, but a low-teens ROE translates to a PE of around 9. However cash generation is rather better, and the investments currently being made do sound relatively sensible, so there is hope for improvement. The dividend yield is about 6%, and market capitalisation is US$155m.

Tungtex exports silk garments to the US - which does not seem intuitively the most promising business at present, but in recent years there has been surprisingly little correlation between general US consumption and garment spending, and between general garments and silk, so we should not necessarily assume that it will be disastrous. This is another well run company, with an excellent track record of profitability and dividends. It is cautiously attempting to establish its own retail brand in China. At HK$1.14 the market capitalisation is only US$50m, but the PE is of the order of 4.

Jusco Stores (HK), a subsidiary of the listed Japanese company, has a very successful department store chain in Hong Kong and Guangzhou, and would be worth discussing were it not for the limited free float. Its fellow subsidiary Aeon Credit (HK), one of the most innovative consumer finance companies in Hong Kong, is a more practical proposition: at HK$2.50 it has a market capitalisation of US$134m, which is US$570 per credit card in issue, considerably lower than recent valuations of comparable businesses. Aeon targets the low end of the market, where average balances are low but interest rates high; past performance suggests that control systems are good. Analysts profess disappointment that its growth has been slowing, although so far only into the teens; ROE has been in the 25-28% range for each of the last five years. Subdued economic conditions and consumer sentiment definitely affect the business, and competition is increasing, but the shares stand at just 1.3 times book, with a historic PE of 5 and dividend yield of 5%.

The news flow from Indonesia is appalling, and the Manulife case worth watching carefully, especially following the freeze-out of the foreign investors who restructured Bentoel. These two cases raise troubling questions over basic property rights and the reliability of the legal system. The list of concerns could go on and on, but amid the chaos some companies continue to offer goods and services in exchange for cash, and conscientiously to report regular progress to their shareholders. Plausible holdings include the three tobacco companies Gudang Garam, HM Sampoerna, and BAT Indonesia (the first and last commanding more confidence as regards corporate governance, but HM Sampoerna is the most entrepreneurial, and there may be a case for just buying all three, rather than trying to follow the frequent twists and turns of excise rates and market share); retailer Ramayana Lestari Sentosa; telecom company Indosat; and our favourite leveraged play, United Tractors.

Outlining numbers here would take up more space than is probably warranted; these companies are all on ratings which would be considered reasonable or better in a normal market, but the issue really is whether Indonesia ever returns to normality or just slides towards Nigeria. Arguably, any Indonesian investment must now be considered option-money on the happier outcome. To stick to brief examples of management and potential: Ramayana last year grew revenue and profits of its entirely rupiah business by 40-45%, as they brought destroyed stores back online (and also achieved same-store growth), while planning significant geographical expansion and preparing for a major systems upgrade. To achieve this in such anarchic conditions with an all-cash business seems worthy of appreciation. BAT had a distinctly less happy year following changes to the tax structure, but still has a single digit PE and tolerable dividend yield, and with a capitalisation now less than US$60m in a market with a population over 200 million should have some upside potential. United Tractors' large US$ debts ensure that reported results are as unpredictable as the exchange rate, but its management has not only maintained and strengthened the franchise but found opportunities for expansion. Continued economic turmoil may require further debt rescheduling to repay principal, but servicing is not in question with EBITDA roughly 25% of enterprise value and approximately currency-balanced; 'earnings' are a debatable abstraction in the current turmoil but I think the underlying PE is of the order of one (definitely not more than two).

Malaysia's current leaders dislike the idea of 'creative destruction', to the frustration of middle managers who should be now be unleashing new initiative through leveraged buyouts from the dysfunctional conglomerates. Entrepreneurs complain of growing red tape. The flight of talent may be as serious as the flight of capital. Meanwhile captive domestic funds and savings prevent the broad market from becoming cheap - but against this depressing backdrop there is at least one neglected gem.

Bumi Armada supplies support services to the offshore oil and gas industry, and has moved steadily up the ladder of value-addition, from tugs and accommodation boats to the operation of a Floating Production and Storage Platform (FPSO). This is essentially a mobile oil rig, ideal for Malaysian waters where there are many small fields which can be fully exploited in a few years, with the platform then moving on to a new site. Bumi Armada builds its vessels against medium or long term contracts from the major oil companies (Esso, Shell, Petronas etc), and is the quality operator in a sector where efficiency and lack of downtime are of vital importance to these customers, even as they increasingly seek to outsource. The reported ROE is very high, but FX-adjusted is in our view sustainable at over 20%, as is the internal growth rate. The company in 2000 grew EPS by 19% and the dividend by 25%, reduced debt, prepared for expansion, and generally strengthened its position. The shares in contrast fell by over 50%, and at HK$3.80 are on an estimated current-year PE of 4, with a tax-exempt dividend yield of the order of 4%.

In Singapore our largest holding is Singapore Bus, which at S$1.81 is on a historic PE of 11 and net dividend yield (including special) of 4.5%. Brokers tend to quote dividend yields before tax, which sound more impressive - but in any case it is fairly easy to better S$ deposit rates. Singapore Bus was spun off in 1997 by a parent which temporarily forgot the importance of cashflow. Re-privatisation would be logical; a steady increase in dividends is the next best option (slowed only by the caution of a regulated public utility as to the profitability it is politic to admit); and meanwhile it is taking on parts of the expanding rail network and changing gradually into an integrated transport operator. The restructuring of Singapore Inc, with a long-overdue attention to efficient capital allocation, is rightly one of the major themes in that market.

China's H and B shares have recently been discussed in these pages; a growing number are of interest, although we have so far chosen to play the China growth story mainly through Hong Kong managed companies. The sweeping social and economic changes in Korea, and the breadth of that market, make us suspect that there must be good opportunities there, despite the well-chronicled problems of corporate governance. More mundane issues of obtaining English language information have hampered our search, but in practice we've been distracted by the opportunities in more familiar markets.

Investors who consider these opportunities too illiquid may be assured that there are attractive larger companies. As in other markets, larger companies tend to be more expensive, but we have a growing list of 'plausible institutional stocks', which are well run, and in which investment can be justified with conservative yardsticks. We believe the secular growth story for Asia is intact, although the cyclical downturn may be uncomfortable, and politicians reserve the power to mess things up. (Fortunately, the most important economy in the region, China, has a government which can be regarded as impressive and level-headed.) Three major reasons: firstly, most countries are still at the relatively easy catch-up stage of economic development, where they need only copy what works elsewhere, eliminate the barriers and inefficiencies which curb the natural catch-up process, and take advantage of new technologies and opportunities. The internet facilitates the transmission of information to accelerate this process. Secondly, Asia remains very hard to beat as a low-cost producer. For large-scale export manufacturing, the efficiency / productivity / cost proposition of China is awesome, as is India's for large-scale software programming. The internet helps companies and consumers to find the cheapest prices in the global market - and Asia's competitive advantage is durable. Thirdly, Asia has its savers. Whether the US$ remains the best home for their savings remains debatable. Purchasing power parity suggests that most Asian currencies are markedly cheap: trade competition may prevent this from changing soon, but it gives us some confidence as long-term holders.

However nervous one may be about cyclical and systemic risk, I submit that the risk-reward ratio of an Asian portfolio like ours, with a 20% earnings yield from companies of this quality and potential, is too attractive to ignore.

Claire Barnes, 3 May 2001

PS. Reading the Gloom, Boom & Doom Report over the years has contributed greatly to my investment education - and like another favourite, the Berkshire Hathaway annual report, it is entertaining. Details at www.gloomboomdoom.com.

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