Markets surfing, psychological perils below
Apollo Asia Fund: the manager's report for 3Q21

NAV of the Apollo Asia Fund rose 4.4% in the third quarter. At the end of September it stood at a new high of US$2,759.13 (Series A), 72% higher than at the end of March 2020 when markets were just beginning to rally after the pandemic-panic, and 34% higher than two years ago, the pre-pandemic autumn of September 2019. Several countries suffered brutal Covid waves during the quarter, and others which had congratulated themselves on superior management to avoid this fell prey to the new variants. The economic cost has been very high, and resilience to further shocks has been greatly reduced. Buoyant stock markets have been driven by monetary conditions and a lack of conviction about any alternative asset allocation; there should be no illusions that they reflect healthy business conditions.

It has been disconcerting in recent weeks to see company managers proudly presenting images of hazmat-suited spraying in their factories as part of anti-COVID precautions, and to find them completely unprepared for questions on ventilation. This is not unique to Asia; we read of similar hygiene theatre in the US and UK, and similarly patchy awareness of airborne transmission and useful precautions. Poor communications by many governments have cost lives, and the WHO's failure to acknowledge & act promptly on the accumulating evidence of airborne transmission has been described as "both a mystery and a scandal".¹ The difficulty of adjusting mental models for new evidence even when simple, and of forming consensus even on low-cost mitigations and precautions, bodes ill for effective action on biodiversity, climate change, energy, refugees, and all the other more complex issues now facing us. While we ponder the psychological challenges ahead, please everyone, cut down on unnecessary use of chemicals and plastic.

We face another attempt at squeeze-out delisting, in the Malaysian packaging company Daibochi and have written here about the specific case. We are disappointed by the behaviour of the controlling shareholder Scientex, and by the unproductive drain on the time of Daibochi's managers and shareholders. Scientex has previously said that it would like to separate its packaging and property development businesses, with Daibochi as the listed flagship for all group packaging interests. It discussed this with investors when it first took control, with widespread agreement that this would be advantageous for all parties, if arranged on fair terms. Instead it is now trying to use the threat of delisting to scare investors into selling to it cheaply, while earnings are depressed by the pandemic, before the benefits of recent capex come through.

Forced delistings, taking companies private on the cheap during temporary dips in performance (often in the hope of relisting later at higher prices), have been very damaging to investor confidence in the prospects for long-term investment in the Malaysian market, and therefore to its size, health, and capacity to serve the nation in the long run. I remember years of huge public participation in the market, with days on which Malaysia traded more than the New York Stock Exchange. Such huge volumes were admittedly driven by short-term speculation, but the market was underpinned by the long-term growth prospects of blue-chip shares, and a perception that stockmarket investing was for everyman. It's a reminder of how much has been lost.

A broad base of investors with different time horizons, confident of fair treatment by companies and regulators, is the prerequisite for a market to optimise the allocation of capital. Well-run stockmarkets played a valuable role in this for several hundred years, and the huge investments now mooted for energy, climate change and green investment will make allocative efficiency important for future economic performance. Society benefits when companies are encouraged to regard financial investors as long-term partners, treating them with appropriate consideration for mutual advantage. Regulators in some countries have made it clear that they would frown on relisting of recently-delisted businesses. That's helpful. To discourage abusive delistings, they could also require bidders to commit to maintaining the listing and taking steps to restore free float in case of any failure to reach a high level of voluntary acceptance. If bidders required 90% independent-shareholder acceptance in order to move to both compulsory acquisition and delisting, purchasers would have to pay up to attract willing sellers. Then we'd see fewer negative-sum financial manoeuvres, and a more socially-useful focus on optimising real-world efficiency.

Claire Barnes, 4 October 2021