Change and adaptation
Apollo Asia Fund: the manager's report for 2Q20

Apollo Asia Fund's NAV rose 15.3% in the second quarter of 2020, to US$1,852.05 (Series A shares), clawing back about half of the first quarter's losses.

In March we noted the indiscriminate nature of that month's sell-off. Many anomalies were swiftly eliminated in the subsequent snapback, alas with inadequate participation by your fund manager. A few perceived beneficiaries of the New Normal soared to vertiginous heights¹ when we had eliminated them from consideration at much lower levels due to valuation, governance, government-dependence, and/or social impact. Anyone returning from a six-month expedition and glancing at Asian stock indices might assume that little had changed. Yet the world has changed dramatically, and the income streams and balance sheets which provide the long-term underpinning for company valuations have been battered by waves of extraordinary ferocity. The rally has continued this month to date, and caution again seems advisable.

2Q GDP in Singapore fell 12.6% year-on-year. Same-store sales in Hong Kong for the Chow Tai Fook jewellery chain fell 75% year-on-year. The revenue of many individuals and businesses vanished altogether. Others had income, but were unable to secure assets or carry out essential maintenance. The fortunate and agile adapted, and entrepreneurs filled many new needs with impressive speed, but shareholders of listed companies are likely to find that we collectively own a greater percentage of the income streams destroyed than of those created.

The countries and territories driving East Asia's growth have proven much better organised in their public health response to COVID-19 than the US, the UK, and others. During the second quarter, as the case-count surged in the rest of the world, several Asia-Pacific countries reduced theirs to near-zero. New outbreaks are showing that continued vigilance will be required. Cases in Hong Kong, for example, have soared to new highs - although the incidence is still low per capita, whereas countries in Central Asia and the Middle East are among the world's highest. International travel seems likely to be restricted for some time to come.

Societies could take advantage of the prolonged disruption to consider what we could do better. Many have noted the opportunities; it is harder to reach consensus on desirable changes and to put them into effect. Politicians and administrators already dealing with unprecedented change have understandably had little capacity to spare for imagination, but a longer pandemic may allow time for reflection on better responses to the popular enthusiasm for rebalancing in favour of the environment, work-life balance, and a less dystopian future. This may seem optimistic, but the mindless targeting of GDP growth seemed hard to dislodge until the pandemic swept away all economic orthodoxy. There is also a new appreciation of competence, which may change electoral preferences.

Election cycles however are much longer than the waves of a pandemic, and in the meantime, the exposure of disastrous incompetence by some governments has led to a quest for scapegoats, and the resultant stoking of enmities. This is hampering international cooperation when most needed:

Countries careening from complacency and sycophancy to hysteria and denunciation have not achieved respect or influence. Governments with a tighter grip and an ability to think strategically have had an advantage. Faced with incoherence, China has seized some resultant opportunities, and extended its influence on several fronts.

China's imposition on Hong Kong of its new security law removed valued freedoms, and caused consternation internationally because of its extraterritorial reach. (No longer is there just one superpower claiming extraterritorial prerogatives.) The flow of information has been immediately reduced.

Investors may not think that the information important to us will be affected, yet we should all be concerned. A perceived necessity to gloss, to slant, to self-censor... these undermine clear analysis, and obstruct recognition of issues. The self-deception which led to the disasters of the Great Leap Forward and the collapse of the Soviet Union may currently be more evident in the western world, but freedom of thought and freedom of expression are everywhere vital for the well-being of individuals and, I believe, for long-term prosperity. They are also essential to the accurate perception and independent thinking required for successful investment analysis, which is important for optimisation of capital allocation as well as to stockpickers.

Many of us live on the Ring of Fire, hoping (and most of the time assuming) that our landscapes will remain geologically stable. Great geopolitical shifts are now under way. Tremors may herald more movement in power and politics, and merit attention.

Freedom of expression has been under attack in many countries, just when most needed - in India, in the Philippines, in Malaysia.

The constraints on business meetings due to the pandemic present new challenges for investor education and understanding. New communication methods have some advantages, but also clear limitations. The last few months of experiments have already enhanced the toolboxes of companies and their investors. Over long periods... we hope that site visits and personal interactions will resume.

In the meantime, all the turbulence gives us an abundance of input to ponder. Macro developments may be unnerving, but we draw some comfort from the resilience of Asia's workforce, the flexibility of entrepreneurs, and the hope that worthwhile returns may still be generated from selected shares of sound businesses at sensible prices. Please wish us luck.

Claire Barnes, 23 July 2020