Never dull
Apollo Asia Fund: the manager's report for 3Q20

Apollo Asia Fund's NAV rose 10% in the third quarter of 2020, for a total six-month rise of 27% from this year's March low. The NAV closed at US$2,037.86, comparable to the level of a year ago before any of us heard of COVID-19. The global phenomenon of stockmarket buoyancy in the face of crisis reflects the monetary and fiscal response, the differential impact on savers and precariat, and a lack of alternative havens.

Earnings and dividends for the current year are expected to be down, although only three of our twenty companies are currently expected to make losses, and in aggregate we still expect underlying profits for the year. Fortunately we went into the crisis with few holdings in the sectors hardest hit, although we also own none which we consider to be beneficiaries of the pandemic on any sustained basis. Market resilience suggests that investors are looking through current woes and towards recovery, but global trade and disposable incomes now seem likely to remain well below previously expected trendlines. Medium-term growth prospects for our portfolio of businesses have probably been significantly reduced. However, we hope that our companies will all prove to be survivors. We believe they are more resilient than most, and may have opportunities to gain market share and strengthen their strategic advantages in the long run.

Three of our companies have had cash calls in the last six months, and one of those was for growth rather than necessity; one cancelled a planned distribution but went into the crisis with a cash hoard. With those issues addressed, all have cashflows and balance sheets that seem comfortable for now; only half have any significant debt at all. Companies manufacturing partly for export represent 24% of securities, and those exports are mainly regional. Utilities account for 23% of securities, energy providers 9%, and other domestic/regional consumption and services 44%. At the end of September, the portfolio price-to-last-reported-book-value was 1.4. Based on the last full financial year to be reported (for practical purposes, 2019, pre-pandemic), the portfolio was on a historic PE of 10.5, and the historic dividend yield over 5% after Asian taxes.

The damage to the international credibility of the US and UK from their mishandling of the COVID-19 pandemic is immense. Asians were shocked that the public health response started so late and failed to build on WHO advice or experience overseas. Echoing their question, a good recent update by Jerri-Lynn Scofield asks 'Why don't we study countries that have had COVID-19 success?' There may be other countries that have performed badly, but thanks to the wide reach of English-language media, the large number of students, and the even larger number of concerned relatives, the serial incompetence and insouciance of the American and British governments has shocked many overseas onlookers - as has the willingness of both governments to tear up international commitments, and flout long-established constitutional principles.¹

The US and UK used to take pride in the rule of law, but that reputation too may be left in tatters by the treatment and legal proceedings against Julian Assange - inadequately reported by mainstream media, but prompting serious concern internationally as an extraordinarily vindictive show trial. Many of the revelations at the hearings, as well as their conduct, have been shocking. I'd urge all US and British citizens, and those interested in freedom of expression worldwide, to make time to read the detailed day-by-day coverage by the former British ambassador Craig Murray, and the full statements of the distinguished defence witnesses.

These phenomena, and well-publicised instances of brutality by US police, naturally weaken the ability of the US and UK governments to claim the high ground on human rights or hold other countries to their commitments.²

It is only three months China imposed the new security law on Hong Kong, and it lost no time in tightening its grip. Western governments huffed and puffed, but had little influence: China shrugged off the protests, curbed its critics, and set to work on compliance and transformation.

US warnings against an attack on Taiwan therefore sound weaker than ever before, especially given Trump's past treatment of other allies, and the probable impact of COVID on US readiness. China has often made shows of force, and tests of strength, but past assumptions of posturing without real aggression may now be optimistic. Taiwan, necessarily, is preparing for war.

Let's hope that deterrence continues to work, as it has for decades. If it does not, sanctions and serious impediments to trade would ensue; the benefits of globalisation and peace dividends would go sharply into reverse. Nature might get a break; more likely it would be further assaulted in the new race for resources and advantage.³ Policymakers in the rest of Asia, and well beyond, would face difficult choices. China would establish a few more military bases, and procure the loyalty of a few more elites and professionals. Business and trade within Asia would continue, at some level. Comforting assumptions on international norms for the protection of foreign investors could be challenged. The managers of our companies would once again try to adapt to changing circumstances, and those who have always acted responsibly would doubtless do their best to continue. The adaptability with which so many have risen to the occasion would be invaluable. Funds like ours would attempt to muddle through.

Hubris and delusion delay the recognition of weaknesses - and that can be fatal when opponents see them more clearly. I have a strong preference for life in an open society, so am outraged by those who now seek to take advantage of the weaknesses in such societies that have been laid bare by the pandemic.⁴ I also fear the disappointment of societies where delusions may be punctured abruptly; clearsightedness is helpful. The fragility of so much that we value is unclear to the distracted. I support all who work to plug deficiencies, and to uphold valuable principles and institutions. The strength of open societies is that responses can be discussed, and individuals of goodwill can hope to shape our future - in small ways as importantly as in large; the pandemic has provided many interesting examples. Constructive actions on the smallest of scales may generate ripples with far-reaching effects. We can all start thinking about aspects that we wish to support and protect.

Southeast Asia now has plenty of problems of its own, including groups in many countries with a misplaced sense of entitlement, but may ultimately prove more flexible than the countries which used to be aspirational role models. There is no guarantee we'll fare better, but both personally and as an investor, I'm happy to be located in this constantly-changing, always-interesting region. Travel remains restricted, and published commentary often now likewise. To our well-placed readers and experienced Asia-hands, please do send alternative perspectives, and anecdotes on companies and situations of interest; personal observations from all parts of Asia are now especially appreciated. Good luck and good health to us all.

Claire Barnes, 8 Oct 2020