Apollo Investment Management

Markets expensive, complacency dangerous
Apollo Asia Fund: the manager's report for 4Q2012

The Apollo Asia Fund's NAV rose 4.1% in the fourth quarter, to a new high of US$1,805.72: over the last twelve months it was up 41%.

This has taken valuations right up to the high end of the historic range. At the end of December, our portfolio was on an estimated current-year PE of 16.2. The 'portfolio EPS' for the current year are estimated to be 15% higher than a year ago, but we forecast lower EPS growth for the year ahead. As we noted in the last quarter, past growth in the Fund's NAV has been enhanced by rerating; this could very easily be reversed.

Portfolio turnover for 2012 was as low as it has ever been, at 13%. This is probably too low, given the valuations - we err on the side of sluggishness when it comes to making changes. That has stood us in good stead in the past, but more good ideas would be welcome - so if I can develop a greater degree of enthusiasm for new possibilities than for our current holdings, you may see a higher figure in 2013.

Geographical breakdown
by listing; 31 Dec 12
% of assets
Hong Kong
14 
Japan
14 
Malaysia
11 
Singapore
31 
Thailand
16 
Other
4 
Net cash & receivables
10 
 
100 

Companies behaving badly: first Unilever and then Holcim announced steep unilateral increases in the royalties charged to their listed Indonesian subsidiaries. Both shares plummeted. At the time, fortunately, we owned neither - but the corporate governance precedents are quite shocking.

Extreme weather seemed prevalent. Asia experienced nothing this year on the scale of New York's Superstorm Sandy, but Malaysia saw an extreme rainy season, with recurrent floods and jams which damaged property and sapped productivity. (It seems to be deemed frivolous nowadays to consider mere quality of life - but is this not supposed to be the point of development?) Many Malaysians were glad to hear the Prime Minister acknowledge the impact of global warming, but less impressed when he went on to explain that 'the Government and other parties should not be blamed for the disasters as they were facing a phenomenon which was out of their abilities to tackle effectively'. Targetting 15% annual growth in construction as the main driver of an already overbuilt economy might play a role? Chopping down city trees, encroaching on forest reserves, developing mangroves? And keeping the drains clear would surely help. There's a failure to connect the dots here.

I had an interesting conversation with a lady who advises governments on disaster planning and risk mitigation. The job must be much easier now, I surmised: after quakes, tsunamis, floods, and ash clouds affecting the world's major cities, fewer people could fail to imagine how This Could Happen To Us? Yes and no, she said. They can now imagine, but the willingness to act changes only for a few weeks after each disaster. Few officials or politicians are willing to exert themselves for an event that might not crystallise during their term.

A holiday in Egypt in December was fascinating: pondering the many challenges of today¹ in the context of the achievements, excesses, follies and cycles of millennia. Tourism to the ancient sites has collapsed due to the political turmoil in Cairo. This enables visitors to see the ancient sites without crowds or queues; marvellous for us, not so good for the huge number of people dependent on our business. The downturn has now lasted for almost two years, and is causing significant hardship. Hotels are closing wings and restaurants, new resorts have been mothballed, and some project budgets are being diverted into salaries. The government is maintaining services for now, but its own finances are under pressure, and the political consensus and policy stability required to stabilise the situation appear elusive. The diving is excellent, the historic sites of Upper Egypt are extraordinary, cruising timeless stretches of the Nile was relaxing and beautiful, the architecture of Islamic Cairo is stunning, and the Egyptians we met were charming, funny, and hospitable. Sustainability should not be assumed. Visit soon.


Claire Barnes, 16 Jan 2013

  1. Loss of energy windfall; cost of subsidies; shortages of diesel, gasoline and water; the hidden cost of low-grade substitutes; loss of flora and fauna; pollution; population growth, overdevelopment, loss of agricultural land, salinization; strained infrastructure; cash shortages; balance of payments; capricious officials, power struggles, social tensions... long-term issues, mostly, and none of them unique to Egypt.
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