The Apollo Asia Fund's NAV rose 2.1% in the second quarter, closing at US$865.01. This left it 0.5% down for the first half, although still up 5% year-on-year. (However, the first few days of July reduced NAV by 4%, reducing our progress over twelve months to a minimal figure.)
2Q08 was marked by upheaval, not only in regional economies and financial markets but also in the physical world. Damage from the cyclone in Burma and the earthquake in China was so heavy that "routine" disasters such as a flood in South China (1.3m people displaced) or a typhoon in the Philippines (destroying a few villages) received little press coverage, and were noticed mostly by those with friends or family involved. They do however put financial disasters in perspective, and should focus attention on the environmental damage which is extremely rapid and visible in Asia (and in the Middle East, Russia, Latin America...) The demise of one-third of Guangdong manufacturers, or of one-third of global financial jobs, may be contemplated with much greater equanimity than the extinction of one-third of reef-building corals.
The greatest economic shock came from inflation. Headline inflation is now running at 9-12% in much of South and Southeast Asia, and 27% in Vietnam. Food and fuel is a large part of expenditure in this part of the world, and increases in the raw commodities have a much greater impact with fewer layers of markup, so there is immediate pressure to increase wages. However, the complacent assumptions of a few months ago on the inflation-hedging merits of property have been shaken even as inflation has accelerated so dramatically: property markets across the region have been softening.
| Geographical
breakdown by listing; 30 Jun 08 |
% of
assets |
| Hong Kong | 17 |
| Japan | 10 |
| Malaysia | 9 |
| Philippines | 6 |
| Singapore | 29 |
| Thailand | 20 |
| Other equities | 4 |
| Net cash & receivables | 5 |
100 |
With consumption in the US and Europe now weakening, due to new caution on the part of both consumers and lenders, Asian exporters will have a tougher time than ever. Many squeezed prices to the bone in recent years and are only now trying to put through price increases: some have pricing power and some do not, but in any case volumes will suffer. And Asia is more, not less, dependent on exports than in past cycles.
Globally, the initial outcome of the inflation-deflation conundrum is a reversal of the last twenty years: inflation in the price of things we need (food, energy, healthcare...), deflation in the prices of what we own (real estate, many financial assets...). Comprehensive worldviews have never been our strength, and we have a sneaking suspicion that the most visionary are prone to overlook details which reverse the practical implications. It seems easier to think individually about the impact of currently-visible trends on individual companies, and whether the balance of evidence has tipped the risk-reward ratio to the point where action seems appropriate. This is what we do, without necessarily spotting clear trends as a result.
IFRS, the new accounting standards, make the task of analysing individual companies much harder: for the amateur investor, or for strategists trying to evaluate the whole stock universe, they must be a nightmare. Spreadsheets are necessary to extract long lists of exceptional items from reported profits in order to discern the trends. Headline earnings are so volatile as to be meaningless; book values are now based on shifting sands rather than the rock of objectivity. The job of the institutional CIO is unenviable. A recent FT article revealed that Sir David Tweedie was reacting to abuses he saw in the 1980s: his cure seems likely to result in much greater abuse in the long run, with the immediate drawback of incomprehensibility - which seems especially unfortunate when business conditions are so volatile. The time-honoured Asian practice of keeping three sets of books - one for the bank, one for the taxman, and one for the management - is returning, but now we have one set for the management and another for the public (and doubtless the other sets too). Inefficient markets may favour the stockpicker, but are hardly in the public interest.
In both Thailand and Malaysia, the political scene is an unedifying muddle. This may not matter, if more responsive and responsible government eventually results - but in neither place is it a foregone conclusion. The business sectors immediately affected by political uncertainty tend not to be those which most interest us, but policy vacuums in the long run are stultifying and can be dangerous.
Our first quarter report was entitled 'The turn of the stockpicker', and we continued to find more and more opportunities of interest in the second quarter. Being rather slow to evaluate these, however, we added only one new name (our second in Japan), while adding to six more existing holdings, and so far selling very little. The cash balance had been reduced to 5% of assets at end June, and has been further reduced by new purchases in July.
However, our holding in Unisteel is subject to a bid by KKR, expected to be completed by about end-August; the market price is now relatively stable at an arbitrageur's discount to the takeover price. Since the founding management team intends to sell out - a decision which surprised us, but may make sense if they hoped to do so within the next few years - we'll exit with them. Another of our companies reported a takeover approach, but no subsequent developments, and initial excitement has fizzled away from the share price - but this is a fast-growing company, probably better off in the public domain, and we are happy to remain invested while it develops organically.
Input from our well-placed fellow-investors is always most welcome, but especially in these interesting times. Thank you for the ideas to date.
Claire Barnes, 13 Jul 2008
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