Rips in the fabric
Apollo Asia Fund: the manager's report for 1Q21

NAV of the Apollo Asia Fund rose another 2.7% in the first quarter, touching a new high in February; at end-March the NAV was US$2,439.32 (Series A), 52% higher than at the end of March 2020 when markets were just beginning to rally after a pandemic-panic sell-off.

While markets continued to rise, the first quarter saw lives and potential shattered in too much of the region. My past reports may not always have reflected the sunny optimism conventional in the investment community, but over the course of my long career I remember no quarter more disturbing to complacency on the continuation of Asian prosperity.

I'll comment briefly on political changes in Myanmar, Hong Kong and Malaysia, and then note some alarming new COVID trends.

First, Myanmar. The fund's investment there is minimal and indirect (a small underperforming subsidiary of a packaging company); the stock market had yet to take off. However, the military coup on 1 Feb, and subsequent massacres and brutality, have destroyed one of Asia's most promising recovery-and-development stories. They may plunge the country back into the civil wars that lasted for so many decades, and make life even more dismal through the new possibilities of a surveillance state. This would not only be a nightmare for the citizens, and a challenge for the neighbouring countries which previously provided escape routes and hosted large refugee populations. Myanmar's resources, its highly strategic location between China, India, and the rest of ASEAN, and Russia's arms sales to the junta, heighten the risk of proxy wars and a new global flashpoint. In the meantime, the crisis has highlighted the internal contradictions and deficiencies of ASEAN, yet to form any coherent response, and the limited influence of the western powers which have huffed and puffed to extraordinarily little effect, while failing to provide effective support to the National Unity Government currently in exile. The gulf between rhetoric and action is doubtless being carefully monitored by China; stability is interpreted in different ways, and their strategists have a keen eye for asymmetries and opportunities. ASEAN has a problem.

Second, Hong Kong. The territory has changed unrecognisably since inception of the fund, when Hong Kong companies formed the core of our portfolio, and since July last year when the new security law was imposed. The arrests, extended detentions without bail, and casually-callous treatment of elected democrats showed a contempt for procedural fairness, noted by Jerome Cohen. Electoral reform introduced executive-led government with few checks on power. Children were quizzed on the security law; the police retrained to goose-step. Hong Kong was dropped from the rankings of the Index of Economic Freedom, which now treats it as just part of China.

The managers of our Hong Kong companies continue to do their jobs with the utmost professionalism. Only a few of our contacts have emigrated in the last year, and widely-reported events in the US, UK and Canada have probably discouraged any idyllic illusions about these once-popular alternatives. However, a lack of confidence in freedom of expression, fairness and due process in Hong Kong seem likely to erode the civic-mindedness, international diversity and creativity that once made the city so special. Hong Kong used to be an exemplar of the investment case for Asia; many more caveats must now be attached. We wish our Hong Kong friends well in their impressive efforts to maintain the aspects that they love and value.

Malaysia, fortunately, is not a major market for the fund - but it is the location of your investment manager. It has huge natural advantages and human potential, but has been frittering the profits of extraction, and we hope it does not become a failed state. The government democratically elected in 2018 was irregularly toppled in March 2020; its replacement failed to impress MPs or electorate, so avoided seeking endorsement. The situation deteriorated further when a state of emergency was declared in January, suspending parliament and the state legislative assemblies, and preventing the Public Accounts Committee from scrutinising spending. Without accountability, decisionmaking appears increasingly haphazard, and the cost to the economy is growing. Examples are legion, but by way of example, the importance of telecommunications infrastructure could hardly be overlooked after a year of movement controls and home working, so frustrated internet users hoping for an end to the outages have been infuriated by the predictable consequences of a protectionist decision favouring one small and unsuitably-equipped company over the representations by the largest national & international telecom/IT companies, and all of the most relevant ministries, on the necessity of efficient maintenance of the undersea international cables. (A review has belatedly been ordered, but the loss of investment may not be reversed.) Politicians of all parties seem to be preparing for a second-half election; we hope that better days will be ahead.

An exodus from Myanmar and Malaysia is providing some short-term relief to landlords and hoteliers in Thailand, although tiny in scale compared to the country's former huge tourist trade. This could be an opportunity to rebuild Thailand's attractions as a centre for ideas and investment, and its competitiveness relative to Vietnam and cheaper neighbours. We used to invest a lot in Thailand, and would be happy to be alerted to any signs that the opportunity will be grasped.

COVID. Recent relief and euphoria in the US and UK about the terrific success of the vaccines in stemming the pandemic failed to take into account the surges in several populous countries and the limited access to vaccines in much of the world. The speed of increase in India is now causing particular alarm, given prior high seroprevalence in several major studies, suggesting to some epidemiologists that the new variants are more transmissible, and/or causing widespread reinfection. Public health professionals are urging accelerated vaccination everywhere, in a race against dangerous mutations, but vaccines are in short supply and export bans will not help. Contracts are one thing; deliveries another. The pandemic is far from over.

Politics and pandemic are both exacerbating the accelerating ecological crises. Throughout Southeast Asia, there are reports of landgrabs, forest clearances and ill-considered approvals of highly polluting projects that seem to have been facilitated by border closures, movement restrictions, and the lessened scrutiny of tourists, scientists & reporters.

The Dasgupta Review, published in February, introduces 'The Economics of Biodiversity'. In 600 eloquent pages, it "constructs a grammar for understanding our engagements with Nature" and may, I hope, transform the teaching of economics and the goals set by economists. It highlights the need for a system of economic accounts reflecting an inclusive measure of wealth, and taking account of the degradation and destruction of natural resources. It ends with a plea to prioritise nature studies in education: we need more ecological insight, and "should all in part be naturalists".

Meanwhile, the terms of a sustainable bond that I just examined will do nothing to change business practice. Parts of the existing business that meet various criteria will be funded with the new money, and existing funds will be freed up for all other activities, however destructive and unsustainable. The investment bank notes the 'sustainable label' which it expects to reduce the cost of capital.

Amid the stampede of countries and organisations proclaiming 'net zero' targets, relatively few seem to explain the changes intended, and all deserve scrutiny. Simon Lewis identified some howlers: 'The climate crisis can't be solved by accounting tricks'.

I agree with Tariq Fancy, who attracted much attention for his comments that "sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community", that "the climate crisis can never be solved by free markets", and that "real change has to be led by government" (USA Today, Guardian) - but I am sceptical about the ability of governments to provide the required leadership, or to build consensus on appropriate policies. (Simon Lewis has just provided one useful draft: 'Four steps this Earth Day to avert environmental catastrophe'.) I also believe that we have to keep trying to think about these issues. If readers see attractive investments for the fund which they think truly benign, or sustainable investment initiatives which may be effecting constructive change in Asia, please let me know.

Claire Barnes, 22 April 2021