Apollo
Investment Management
How good is the investment
case for Asia now?
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I’m still very nervous about the bubble in US financial markets. I have
been for years, so I don’t even pretend to market-timing ability, but I
do know that it is a game I do not want to play. In Asia people learnt
the hard way how decades of gains can be surrendered in days. The US mania
is arguably the greatest in history: greater than 1929, greater than
the “nifty-fifty”, greater says Prechter than the South Sea Bubble. The
more a balloon is puffed up, the bigger the bang. When this bubble pops,
the wealth destruction will be awesome – and yes, for sure, we’ll feel
the impact in Asia.
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However, on all but apocalyptic scenarios, economic life will go on. People
will eat. Major disasters aside, the demographics of Asia suggest that
the population overall will continue to grow apace – as with the legions
of elderly demanding new services. If expensive pleasures are no longer
attainable, people will seek solace in cheaper ones. The economic damage
in Indonesia is stunning, and far too many people are hungry, but people
are still buying cigarettes – often by the stick – and cigarette companies
remain profitable. Not all news can be bad: good companies which have suffered
from crazy competitors or tight labour markets may benefit from the turning
of the tide.
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Asia, of course, is well on its way to correcting the excesses of the boom,
so economically a tidal wave emanating from the US will feel like just
one more after-shock. Many shares in the US trade at huge multiples of
fair value – indeed, many of the Internet stocks now valued at tens of
billions of dollars are likely to prove almost worthless. In Asia, by contrast,
one can buy good businesses, run by honest and competent managers, at fractions
of their replacement cost. One of our largest holdings is trading
at not much more than this year’s free cash flow – that is cash, repeat
cash, coming into the business, after allowing for maintenance expenditure.
Are these values common? No, they are not: you have to hunt, you
have to know where to hunt, and some of the stocks are quite small so one
has to try to avoid any mistakes. But the opportunities are there to be
found, and the markets are becoming less and less efficient, because the
shrinkage of asset values in Asia means that the industry can no longer
afford the fund managers and analysts to think about them.
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What’s the catch? One catch is that none of this has anything to do with
short term performance. Just because the stocks in the Nasdaq 100 index
are crazily overvalued does not mean they cannot become more so; that index
was still overvalued at its October low, and it has almost doubled in less
than three months. Could it double again? I doubt it, and I hope
not, but nothing is impossible. Likewise, the first stock I bought in this
Asian bear market was down 85% from its high. Painful shock:
this did not stop it falling another 85% - to 2% of its high. (Then it
rose eightfold in a month, but that’s another story.) Almost all investors
are “momentum investors” – they don’t buy assets when they are cheap, they
buy when stocks are going up – and they are most comfortable buying right
at the top, when their investment advisers can show them the experience
of all recent years that “stocks always go up in the long run”. Some professional
investors know better, but almost all behave as momentum investors, because
of a whole slew of commercial pressures, on which I will elaborate in another
article.
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Back to the crux. I believe there is tremendous intrinsic value to be found
in Asia. I believe there is tremendous danger in the US. I make no
representations as to short term performance. This is just as well, as
I would have said exactly the same one year ago, when the US market was
a lot lower. However, I preferred then to buy the bargains, and I have
absolutely no regrets about possible gambling profits foregone, because
I would calculate now the probabilities just as I did then. Net asset value
of the fund is higher now than then, but I have just as much confidence
in the underlying value – the numbers are broadly as good, because while
some of our existing stocks have gone up dramatically (and some have not),
I’ve found new ideas, of I hope equal quality, to rejuvenate the selection.
Because of market inefficiency, and the global financial perils, I think
opportunities will persist for some time. So I continue to invest my own
money in the bargains I see in Asia. I have no idea whether they will go
up or down in the short term, and to anyone nervous or undecided I shall
continue to recommend dollar cost averaging.
Claire Barnes, 16 January, 1999
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