Apollo Investment Management 

What's new archive - 2001

To What's new? currently

31 Dec 01:

The Economist's latest Big Mac index shows the currencies most relevant to the Fund to be very competitive on PPP. Compared to the US at 2.59, China is at 1.21, and Thailand only slightly higher at 1.26. Hong Kong is also noteworthy at 1.44. Malaysia is at 1.19, Indonesia 1.55, and Singapore 1.80. Interestingly, Korea and Taiwan, where we currently have no exposure but which dominate the regional indices, are both over 2; Korea at 2.41 on the strike date (14 Dec) was even higher than Japan, admittedly a fast-moving target. (The rand is the most undervalued of all currencies listed in the print edition: the profitability of South African gold producers is soaring.)

27 Dec 01:

John Hussman's explanation of EPS-growth-by-acquisition is more succinct than I have ever managed: see his comments of 23 Dec on hussman.net, a concise summary of key US risks. He talks of public and analytical 'gullibility', and I think that broad swathes of the financial industry are guilty of both false marketing and cavalier risk-taking with OPM (Other People's Money), but I note also that people often tend to believe what they wish to believe (in the case of the US market, that all is rosy). Like Hussman, I have no idea when this will all end, but fear that it is unlikely to end well. Given the liquidity flood, the continued strength of the US$ is a greater surprise than that of the stock market (although the broad market is not as strong as the 'headline' indices) - but overvaluation and systemic cracks imply considerable risk. Ramifications of the Enron debacle are emerging surprising slowly, but make interesting reading: see Doug Noland's Credit Bubble Bulletin of 21 Dec on prudentbear.com.

Apologies for the recurrent emphasis on the US, but events there can affect Asian businesses profoundly, so the backdrop cannot be ignored - but we do try to concentrate on micro analysis of individual businesses, and as ever we believe that strong balance sheets and cashflow confer relative advantage. Pear-shaped risks are ever-present, but it looks possible that the Fund's NAV may close the year at a new US$ high.

David's Phoenix Gold Fund is also doing well. See Mike Silverstein on gold v US$.

21 Dec 01:

Results for the period to Sept have been a mixed bag. Some of our companies have disappointed, and some dividends were cut. On a count however, these have been balanced by the number which exceeded expectations and where dividends were increased. My immediate jaundiced reaction may have been coloured by the continued difficulty of actually obtaining the results, before starting to analyse them... the disclosure campaign will have to continue in 2002.

For many companies, the real test will start in the post-Sept period. Since the renewed complacency and optimism in the US strikes me as misplaced, it follows that I am not at all relaxed about the corporate profit outlook in our trade-dependent markets. Overall business conditions may well be extremely taxing. We have, however, concentrated on well-run companies with strong balance sheets and a 'margin of safety' in the valuations, so even after recent price increases (NAV at today's close was approximately US$127.70), the risk-reward ratio still appears attractive compared to many alternatives, including cash.

To company executives I barely know who sent Christmas cards: this was very sweet, and I do hope that 2002 brings release from government employment and/or your imminent financial peril.

Just in time to save the poetic year, and overlay rumblings of 'bah-humbug' with some seasonal cheer, I have discovered the versatile Mike Silverstein's wallstreetpoet.com. Favourites so far include Boom and Bust, the currency limericks, and, not least because of the message, Profit from Chaos... may all our investors thrive in the year ahead.

9 Dec 01:

NAV of the fund was US$124.67 at end-Nov, up 7% for the month and 30% year-to-date.

28 Nov 01:
From last night's US market report on prudentbear.com:

Goldman [Sachs] said that after speaking with many institutional investors last week... everybody seemed to agree that weren’t any fundamental reasons to own semi equipment stocks, tech valuations in general are still extreme, and that the downturn is likely to last longer than expected. But, these same managers were buying semi equipment names and such because they were obsessed with performance going into year-end and needed the beta to try and 'catch-up'.

We've seen a similar melt-up in Asia, with a swift return of optimism about some of yesterday's growth stocks - but mostly from foreigners. Despite very low interest rates, local investors remain unconvinced about US economic prospects, nervous of the international politics, and appropriately cynical about stockmarket pundits. They bargain-hunted in September, but neither in Hong Kong nor Singapore have local investors remained particularly active, despite the availability of adequately-trusted blue chips and yields which should be attractive relative to cash. In Korea, locals have been on the sidelines during a remarkable straight line rise. Only in Thailand are local individuals and companies driving the market, and increasingly interested in dividend yields as well as speculative opportunities.

An optimistic interpretation would be that Asian investors can therefore take up the reins when the foreign inflows falter. My guess is that this may happen in the medium term and will certainly happen in the long term, but will not quickly materialise in the present climate of layoffs and insecurity. Therefore I would be nervous to invest where foreigners are over-concentrated (we have not been doing so anyway, but won't start now), and am unabashed to report that the fund's NAV is currently up a little over 6% month-to-date, versus 16% for the regional index (and much more for Korea). This does not mean that we can be confident that months of gains may not be quickly surrendered, but the shares we own seem closer to solid ground, and we can base our assessments on dividends and other 'real' numbers, regardless of what other participants do.

22 Nov 01:
Andy Xie's latest article is a must-read for Asian investors: see the Morgan Stanley Global Economic Forum of 21 Nov. He notes how problems are transmitted from the financial industry to the real world: short-term performance pressures drive most fund managers to stick close to indices; indices are backward looking; thus capital continues to be allocated to yesterday's stories, and the cost of capital for new growth industries remains unnecessarily high. This may delay secular adjustments - such as those necessary for ageing Asian tigers facing a formidable competitive threat from China.

His analysis of two critical index sectors is devastatingly punchy, and to my mind spot on. Please read the original, rather than relying on these extracts:

The semiconductor business looks worse than the shoe business. The difference is that the latter actually gives you dividends... Investors who made a lot of money in this business want to believe otherwise... this sector should eventually trade around its book value, as it's just another manufacturing business. Check out the numbers. It's a long way to fall.

Property is another sector that made good money for investors, is not doing well but still has big weights in the index... As deflation replaces inflation in East Asia, the business model of property developers becomes value destroying.

Instead, in the Tigers, 'profitability is shifting to service companies, with scale as the main entry barrier' while, almost indisputably, 'China takes over the role of export production... the productivity gap between China and the Tigers is narrowing much faster than the wage gap'.

Such top-down analysis can never encompass critical factors such as corporate management and price, but can be helpful in suggesting where it is most promising to look.

Changing the subject completely: my old firm WI Carr closed all its Asia-ex-Japan offices yesterday, with its French parent firing long-serving staff in peremptory style. Not one of the three major Asian-market brokers of twenty years ago survives intact: Jardine Fleming has been swallowed, and Vickers da Costa is long gone. This in the world's fastest-growing region - and it is not as if successors have achieved great profitability, or even stability. (After WICO I worked for BZW, which also died after little over a decade, after burning through prodigious amounts of capital.) So much for long time scales. The irony of investment bankers criticising the management of other businesses does not escape me.

18 Nov 01:
The Fund's NAV is a fraction over US$120, and for the next few months there is one extra reason to visit Kuala Lumpur: a new exhibition of the historic shipwrecks around Malaysia, which sheds new light on the trade and economic history of the region - or should do, once the museum puts up the captions. The virtual alternative is at www.maritimeasia.ws.

2 Nov 01:
Asian markets bounced in October, and the Fund's NAV rose more modestly to US$116.30. We remain extremely wary of the systemic risk from the US, where the authorities appear to be deploying desperate measures to prolong the life of a bull already long deceased (and, inevitably, beginning to smell - for one of many examples, see Marshall Auerback's report of 30 Oct on prudentbear.com, entitled 'SEC chief Harvey Pitt: Friend of the Fraudster'). This risks greater, structural, damage. Meanwhile the risk-reward ratio for our holdings appears very much more attractive. There is little company-specific news for the Apollo Asia Fund to report, which in these conditions may be reassuring.

10 Oct 01:
3Q report posted.

9 Oct 01:
The NAV of the Apollo Asia Fund at end-Sept was US$114.32; as of this afternoon it was a short 1% higher. Charts on the performance page.

25 Sep 01:
The MSCI Asia-ex-Japan index which we monitor is down 18% month-to-yesterday, but the Fund's holdings have been more resilient; NAV at the close today is approximately $112.50, down 5% month-to-date. I mentioned a week ago that our stocks had been trading unusually actively in the wake of the US terrorist attacks; so have we, mostly buying, although the still-not-expensive MBK Properties has gone, to make way for increased holdings in more entrepreneurial companies and shares which have fallen more drastically.

Absolute returns over the last two years have been about 12% pa (25% total), which may be respectable - especially if you look at the relative performance - but is hardly world-shattering. However, the valuations are as attractive as I can remember, and multiple compression has been concealing how well our companies have performed. Multiples are unpredictable: they may go further down, and given my views on the US bubble this would not surprise me, but I would not personally wish to sit on my hands and wait, because that may not happen. It is interesting that, while Hong Kong investors are demoralised (contributing factors include property prices, unemployment, government, perhaps even environmental degradation), and Singapore has been particularly nervous (understandable given its heavy electronics, trade and private-banking exposure to current tensions), Thai investors appear to have taken the view that the global panic has little to do with them, except that interest rates may fall further, and have continued to bid in size for high-yielders.

The historic PE of the Fund's holdings is 5.8, and price-to-book is only just over 1. Estimating current-year profitability clearly involves more guesswork than usual, but for what it is worth our estimates still suggest current-year EPS growth of 13%, and on that basis the current-year PE would come down to 5.1, and the after-tax dividend yield is expected to be over 8%. One may wish to compare the earnings yield (19%) and the dividend yield with the return on bank deposits: there is a large 'margin of safety' on this decision, as earnings could halve and not invalidate it.

Going back to how well our companies have performed: over the last two years, intrinsic book value per Fund share has risen by about 50%, the current-year dividend expectation by 64%, and the current-year earnings expectation by over 100%. Much of this growth has come from the companies themselves, which are of high quality; it has been boosted on a few occasions by rebalancing from the relatively-fully-priced into the relatively-cheaper (sufficiently often, so far, to offset my mistakes).

Incidentally I pay at least as much attention to cashflow when considering the individual companies, but this lends itself less well to 'headline' and hence aggregate numbers.

We currently have 9% net cash, not because of market timing but because of sales and dividends, and continue to invest this gradually. Of the securities, all of which are now ordinary shares, 52% are in Hong Kong, plus a further 2% in Singapore-listed HK/China operations, 27% in Thailand, 14% in Malaysia, and 2% in Indonesia. These weightings are derived 'bottom-up'.

22 Sep 01:
The US credit bubble now appears likely to burst, with unnerving implications for the global economy and financial systems; the status is usefully summarised by Doug Noland in the Credit Bubble Bulletin of 21 Sept on prudentbear.com.

Chris Wood of ABN-Amro observes that:

While it is true that Asia got caught up in the US-driven tech bubble in late 1999, it has not participated in the credit bubble. Indeed, Asia saw its own credit bubble unwind in dramatic fashion in the crisis of 1997-98. There has been almost no releveraging since then. Loan deposit ratios remain depressed throughout the region and corporates have in general moved to replace debt with equity. This means that Asia is more defensive than commonly presumed. The stocks that are not defensive, following the tech bust, are those geared to external demand and/or those whose valuations have been bloated by the curse of closet indexing which has so distorted the allocation of investment capital globally...

Asian sovereign bond yields, which widened sharply after the World Trade Center attack, are now back at levels prevailing before that event. This has been helped by Asian domestic buying of these bonds, which is itself a consequence of one of Asia’s defensive attributes: a high savings rate.

21 Sep 01:
John Hussman's warning of US market dangers, on www.hussman.net, is succinct. He believes (we agree) that "the US economy was already in recession (which will ultimately be dated as beginning during the first quarter of 2001), and the market was already in a bear market before last week's tragedy. Terrorism certainly affected the timing of the inevitable bear market decline, will force the recognition of this recession, and might perhaps deepen it slightly." His warning about the stockmarket is based on:
(1) extreme valuations, (2) unfavorable trend uniformity, and (3) hostile yield trends.

On the subject of valuations, I keep hearing analysts saying that this market is cheap. What they really mean is that stocks are significantly off of their highs. Unfortunately, that fact has nothing to do with value. Value is measured by the relationship between prices and fundamentals such as earnings, dividends, book values, revenues and free cash flows. On that basis, stocks remain well over twice the historical norms, and even more extreme relative to typical bear market lows. Yes, stocks have declined, but they would still have to fall by half to approach historical valuation norms. 50% is about 4000 points on the Dow...

Second, trend uniformity remains terrible, with absolutely no evidence of a reversal here. Remember that favorable trend uniformity is essentially a signal that investors have a robust preference for taking risk. Right now, there is no evidence of the sort. In a market with razor thin risk premiums, any increase in risk aversion can lead to spectacular price declines...

Third, yield trends have moved back to a hostile, rising condition. As recently as last week, bond yields were behaving favorably. Unfortunately, long-term bond yields have surged higher in the past two days across all credit grades.

Asian markets are vulnerable to jitters (or indeed panic), and Asian businesses are of course exposed to the US economy via global trade and multiple knock-on effects, but saving patterns, balance sheets, accounting health, and share valuations are all very different. The fund still has net cash, and we continue to buy selectively.

18 Sep 01:
Our concerns about the financial risks centred on the US have been heightened by the terrorist atrocities, and are now compounded by political and humanitarian fears.

NAV of the Apollo Asia Fund was a touch over US$110 at the close yesterday, just before the US market re-opened. (For what this is worth, Asian markets moved higher this morning.) Although liquidity is generally poor, and volatility high, our own stocks have been trading more actively than usual, so this figure seems representative. We have 13% of the fund in companies which export to the US as a major proportion of their business (Compass East, Glorious Sun, and Tungtex). We have 23% in companies which have some domestic US business (Cafe de Coral, Vitasoy - both near the 'staple' end of the spectrum). We have only 2% in electronics / technology (Kingboard Copper Foil). All of our companies have strong cashflow; many are debt-free. In cases where the outlook has deteriorated, share prices have in my view discounted the probabilities - ie, some of those most clearly affected may also present good bargains. By luck, we started the month with an unusually high cash balance, due to the bond sale and dividend receipts; we have also accepted the cash offer for Wong's Circuits, which is now unconditional. (This was a cash arbitrage, which has taken longer than either we or the directors expected, but nevertheless gave us a respectable profit in the end.) We have been adding to many of our existing positions, while studying new candidates. Ideas and comments, as always, are welcome.

One website I read is stratfor.com, which provides interesting coverage of the Middle East, regularly writes on Central Asia, and has an apparent background in the US intelligence and defence establishment. The Mises Institute published a worthwhile article today entitled 'What Not to Do'.

4 Sep 01:
Against a backdrop of weaker regional markets, but helped by the reversal of the US$, NAV of the Apollo Asia Fund rose 4.9% in August, to a new high of US$118.35. See charts and comment on performance page.

We sold the Land & General bonds, which we bought as a relatively straightforward US$ instrument for a high one-year return but had turned into a messy Malaysian muddle. The buyer may well have the better side of the bargain, since we sold at a large discount to the put-exercised obligation, and the company has abundant assets to pay all its debts in full - within six months, IMHO, but this may not happen under the present management. Meanwhile my confidence in the independence and the financial advice of the 'Independent Financial Adviser' PricewaterhouseCoopers is low, to put it mildly. (Personal diatribe on the local specifics and the broader global issues re accounting/consulting firms may be written later; I am delighted to see the US SEC taking action, but fear that the results will be far from adequate, given the magnitude of the problem.) Whatever the merits of the sale decision, I am relieved to have cut the exposure and eliminated a time-sink. The return on this investment was lousy, but we had been carrying it below cost so there was a small writeback.

The foreign investment herd stampeded back into various regional markets during the year; the return to Malaysia seems to be characterised by unusual wishful thinking, but the earlier return to Thailand seemed to us amply justified - and we accordingly sat with our still-very-cheap holdings as the market rallied. Now that activity and prices are substantially off the bottom, research coverage is again proliferating. Some of the most interesting reports have come from David Scott at my old firm, Indosuez W.I.Carr, who made the very good points that: (1) contrary to widespread impression, restructuring really is under way; (2) once one company in an industry restructures, the competitive picture changes dramatically and others are forced into action; (3) spurred by restructuring, falling interest rates, and bank enthusiasm for 'safe' mortgage lending, the property market is reviving; (4) VAT receipts and electricity consumption, the most reliable economic indicators, are growing at healthy rates; (5) savers need income and the corporate debenture market is growing fast, along with high-yield unit trusts and other alternatives to the established financial system; (6) trade credit is no longer constrained; (7) Thai banks have turned huge net FX debt into credit - so 'Thai assets and the returns they generate look a lot better relative to those offered in the USA than they did a year ago. The outflows seem to be ending as a result.'

'The last thing a country like this should be doing is exporting its savings to the USA. As this export of capital ends we should see: a substantial monetary stimulus; rising utilization rates and improving pricing power; rising returns on capital; improving credit quality... The (US) Fed's current reflation should mark the beginning of the bull market rather than its end.'

I intended to write about the Hong Kong visits last month and apologise for not doing so. The global economy is clearly problematic, and I was keen to talk to all of our companies about the difficulties facing their specific businesses. Suffice perhaps to say that I have made no changes in our Hong Kong holdings. Some of our companies have already encountered difficulties: China Hong Kong Photo suffered yet further in China, and Glorious Sun's problems in Australia proved more serious than expected. Kingboard and Tungtex have fared well to date but have given frank warnings of the dangers ahead. Aeon Credit is concerned about 'strategic bankruptcies' under Hong Kong's newly lenient regulations, and alert as ever about the risks in its increasingly competitive sector. Vitasoy yet again reported disappointingly weak growth, but still has an immensely powerful franchise. Only Cafe de Coral, our largest holding, appears relatively problem-free (and might be in danger of developing a cult following as a safe haven, judging by recent bizarre price action, but is not yet expensive). In all cases I have confidence that the managers are taking appropriate action, and that valuations are attractive if one thinks in terms of ongoing business, rather than attempting to guess the price at which shares may trade in the market tomorrow.

While happy to have most of my personal assets in this fund, due to its spread of holdings in well-managed businesses at valuations like these, I remain acutely concerned about the fragility of global financial markets and the complacency of most participants. John Hussman provides an excellent (succinct) summary of the US valuation problem and other relevant risk-reward issues in his latest monthly report (Acrobat format). Doug Noland's weekly Credit Bubble Bulletin on prudentbear.com remains on my essential-reading list, despite length and repetition, due to frequent original insights. The case for gold appears increasingly compelling, and John Hathaway has written an excellent article dated 23 August summarising both the investment case and the growing evidence of extensive official manipulation, and helpfully linking the fragmented web sources. (The last part of this article also provides a good summary of the systemic risks emanating from the US.) My colleague David Crichton-Watt is very bullish on his Phoenix Gold Fund.

3 Aug 01:
NAV of the Apollo Asia Fund crept up a further 0.5% in July, to US$112.82; performance charts. Visiting all our HK companies next week.

26 July 01:
"The level of corruption, dishonesty and ethical laxness in corporate America and Wall Street is staggering. For those who are new to the investment arena, it's worth pointing out that this situation has only come about over the last five years. When I got into the business 20 years ago, it wasn't anything like this. Even 10 years ago, things weren't nearly this bad. The last five years of the mania really distorted just about everything." Bill Fleckenstein, in his latest market comments. Unfortunately, I agree with this, and that recognition and backlash are now inexorably under way. Despite global interdependence, our Asian backwater seems a safe haven by comparison. This is because some excess was eliminated, and some exuberance deflated, within painfully recent memory.

23 July 01:
There are two 'must-read' articles currently on prudentbear.com: Doug Noland's Credit Bubble Bulletin of 20 July, including the fascinating announcement by American Express about its US$826m write-down of high-yield paper, and 'Why analysts can't deliver' by Richard Hastings (guest analysis, 19 July) on accounting tricks used in the US to inflate reported revenue, auditors' conflicts of interest, and the urgent need for reform.

I was recently pointed to two other interesting (but to my mind heavier and less essential) sites: the Mises Institute (www.mises.org) with Austrian-school analysis, and the Jerome Levy Economics Institute (www.levy.org) with an article by Wynne Godley and Alex Izurieta entitled, for those who like horror stories in their holiday reading, 'As the Implosion begins...?'

Followers of Warren Buffett may agree that too much economics gives one a headache and that it is better to concentrate on analysing businesses and valuations. In our markets this is certainly a much more congenial activity, as the values on offer are excellent, giving us in effect a two-way bet: if our gloomy fears about global markets are correct, our companies are still a relatively safe and potentially rewarding place to invest, and if our pessimism were overdone then the value anomaly should be eliminated and the outlook would be rosy. Marc Faber has tackled the economists' objection to investing in emerging markets at this stage of the cycle in an article for Forbes global: 'Suicide or contrarian opportunity'. I don't entirely agree that 'in the long run, Thailand's manufacturing sector has little chance against China', although I do consider China formidably attractive as a manufacturing base: there will always be a case for putting some eggs into different baskets, and Thailand is currently one of the most credible options in South-East Asia. (It was the logical alternative to China in the fourteenth century, too: see comments of 7 March.)

6 July 01:
I have just been studying the preliminary results of Cafe de Coral, our largest holding, for the year to March. Earnings and dividends per share grew by 16%, a pace which I believe is sustainable despite the deflationary economic backdrop. (The management's own targets are a little higher.) The challenging outlook is a source of opportunity: the chairman's account of operations and strategy encourages my belief that this group will continue to operate more successfully than challengers, and it now has the advantage of scale. Despite strong price performance, my forecasts put the shares on a current-year PE of 7 with a dividend yield of 6%. The company has net cash, very strong cash flow, significant opportunites for expansion, and an excellent track record. We'll be holding. Our thanks to the management and staff.

5 July 01:
NAV of the Apollo Asia Fund rose 4% in June to a new high of US$112.30. Year-to-date, we are up 17%. The long term performance continues to look respectable in both absolute and relative terms: see charts. Moreover, we can still find many good companies at valuations which appeal. The numbers remain highly attractive: these are in the 2Q report.

6 June 01:
NAV of the Apollo Asia Fund rose 14% in May to US$108.07 - so the charts on the performance page look better than hitherto.

1 June 01:
Andy Xie's latest article on China, predicting continued expansion of the asset bubble and long-term structural progress, is well worth reading:  see the Global Economic Forum of 30 May.

The same article has the following pertinent question about Korea and Taiwan, where most foreign investors are heavily weighted, highlighting the importance of the ongoing restructuring of those economies. "Japan has intellectual property and consumer brands. China has scale and low cost. The past export successes of Korea and Taiwan were due to a strong yen and belated economic development of China. The core of the Taiwanese and Korean economies is mass production. Their success depends on 1) inexpensive labor, 2) low-cost capital, 3) good infrastructure, and 4) management expertise in manufacturing. China now has all four. With both China and Japan becoming "normal" economies, Asia/Pacific is experiencing the ultimate mean reversion. Can one argue that living standards in coastal China should be so dramatically different from Taiwan's or Korea's?"

23 May 01:
My pleasure in Jusco (HK)'s tripling of earnings and dividends has been slightly muted by the struggle to obtain Friday's announcement. After rising 7% on moderate volume in the three days beforehand, the price has jumped 67%, with as many shares changing hands in four days as in the year to date. Offshore investors meanwhile remain in the dark. The PR agency has sent a summary P&L and, after many messages, has promised but not delivered the rest of the announcement. I am not unduly concerned as the majority of the material has probably now dribbled out, the company is well-managed I think, the historic PE and yield are still attractive (4.5 and 9% respectively), and pre-tax margins have recovered only to 3.0%, v 4-5% pre-crisis - but the whole issue of disclosure in Hong Kong remains a farce, and the exchange's half-hearted proposals should be improved.

Shares of many of the better small and medium companies in Hong Kong and Thailand have been bubbling away recently, with price action which would be recognisable in a bull market but is surprising against the current subdued backdrop. While selected values remain excellent, I am therefore uncertain how long this will last, but month-to-date the Fund is up 10%.

10 May 01:
Marc Faber kindly invited me to contribute an article for the May issue of The Gloom, Boom & Doom Report - to which I heartily recommend subscribing, but meanwhile I have posted the text of my bit here.

7 May 01:
Interesting snippet on Bloomberg: Matushita Electric Industrial Co (the Panasonic giant) said that "Thailand and China will be the company's main investment destinations in Asia-Pacific region as it moves some plants from Japan, Taiwan, Singapore and Malaysia". I suspect this view is typical of Japan Inc, and probably of multinationals in general. The FDI flows have been clear for some time; the anomaly is that many foreign portfolio investors have lost interest in Thailand. Not coincidentally, we find interesting opportunities in that market. Some of our holdings are small enough to benefit significantly from the 5-year tax reduction from 30% to 25% on the first Bt300m of profits, but there are anomalous valuations among bigger companies too.

4 May 01:
NAV fell 0.3% in April, to US$95.09 - more hopping on the spot. Charts, as always, on the performance page. The exchange in Hong Kong has finally decided that it should ensure web publication of some company announcements; one might wish that they would be slightly more thorough, but at least it's one step in the right direction. David Webb has chronicled the details. Meanwhile Jake van der Kamp in his SCMP column continues to press the SFC to accept regulatory responsibility, which it is trying to leave to the stock exchange (inappropriate anyway, now that it is listed), and vice versa.

Doug Noland's Credit Bubble Bulletin of 27 April on prudentbear.com included the following fascinating example. The full article contains a great deal more background. He has been documenting his concerns about the government sponsored enterprises (Fannie Mae, Freddie Mac, the FHLB) very fully over recent months, and it was interesting to read of recent AGM comments by Buffett & Munger on their sale of long-standing holdings of Fannie and Freddie.

Doug's example: Hedge Fund has been contacted by Investment Bank with a US$1bn derivative trade. Hedge Fund will pay the 90-day borrowing rate of the Federal Home Loan Bank System or FHLB (4.36%), while receiving the higher yield on 10-year Freddie Mac notes (6.45%). Hedge Fund accepts the risk of higher interest rates, but not until final settlement at the end of the three-year life of the derivative agreement. Meanwhile the Central Bank of Taiwan has received US$$1bn from local exporters and places it in the FHLB's short-term discount notes, which it considers to be safe US government obligations. These are transferred by the FHLB to an investment bank's derivative subsidiary in the Caymans, where they are used by Hedge Fund to buy US$1bn of newly-issued Freddie Mac 10-year notes. Freddie uses the proceeds to buy $1bn of mortgage loans from Countrywide Credit, which in turn transfers the proceeds to its account at Community Money Market Fund. Countrywide then originates $1bn of new mortgages, giving US households the funds to import another US$1bn of Taiwanese goods. The Central Bank of Taiwan exchanges the proceeds with its exporters, and buys another US$1bn of 'safe & liquid' agency instruments...

Doug's comments: This example highlights a couple of important anomalies of the present extraordinary environment. For one, it may have appeared in the data that foreign "investors" were behind the $1 billion of agency bonds sold out of the Cayman Islands. In reality, this "foreign" purchase was part of an interest-rate derivative play by a US based leveraged speculator. The true "foreign" flows were actually risk-averse dollars necessarily being recycled back to the US financial system from overseas institutions. It is a wonderful – almost magical – arrangement. With the foreign central bank placing funds directly into the safety of what it views as US governmental obligations, it is not necessary to bid up the price of its local currency by selling dollars in the open market. Hedge Fund profits mightily from the leveraged "spread trade" that it can put on in size, with the FHLB creating cheap liquidity. Freddie Mac is quite pleased as well, as it is able to lock in long-term financing for its ballooning balance sheet. Countrywide receives uninterrupted liquidity, while the unlimited availability of mortgage finance supports the American homeowner’s spending habits (including imports) through the inflation and extraction of home equity. [Investment Bank] profits handsomely as it takes a bit of commission on every trade and a little slice of every spread, profits that provide the means for it to more aggressively leverage its own balance sheet. The US credit system operates with endless liquidity.

Is this realistic? Should Asia's central banks be keeping so much of their reserves in US$? What happens if they (or other market participants) become nervous?

In this environment, I'm inclined to think that ordinary shares of Cafe de Coral may even be a safer long-term holding in real terms than cash in the bank (which banks? and what risks of eventual hyperinflation, as the printing presses roll?) - let alone money market funds. On a risk-reward basis this seems increasingly clear-cut. While NAV has been moving sidewise, the companies we hold have continued to prosper, so the earnings yield has risen to 20%, even as short-term deposit rates have fallen. Sure, tough conditions could dent profitability, but for our particular companies... and we may only be contemplating slower growth.

13Apr 01:
1Q report posted. Morgan Stanley's Global Economic Forum dated 12 April has a good summary of China's current economic attractions - but if you have yet to look up the 28 March article, that remains the 'must read'.

4 Apr 01:
NAV fell 3% in March, to US$95.41, so again we have made no headway for the quarter. (After the carnage in the US, we have lost a little more ground as at the close today, but are so far still a touch ahead of last November's closing low.) I have added a few additional comments as well as updating the explanatory charts on the performance page, but have today decided to visit some Thai companies early next week, and will write the quarterly report after my return.

29 Mar 01:
Must read: Stephen Roach on Zhu Rongji in Morgan Stanley's Global Economic Forum dated 28 March.

27 Mar 01:
Christian Wignall sent the following: 'Foot-in-mouth disease strikes Britain. Someone wrote to a British newspaper offering an extra stanza for The Gods of the Copy Book Headings:

'And up jumped the Gods of the Market Place screaming: all of your cattle must die.
And the Gods of the Copy Book Headings just said: if you don't laugh, you will cry.'
Contributions for the financial poetry & doggerel page are always gratefully received. Abby Cohen received yet more publicity with her recent composition, which I I found about as compelling as her analysis and consequently haven't added - but if anyone would like to read it please let me know.

26 Mar 01:
The official speakers at HSBC Securities' conference in Beijing were mostly macro, and it was notable that almost all emphasized ecology and the environment (and development spending for the western regions). HSBC arranged visits to NCR (whose high-end ATMs are now being rapidly adopted by Chinese banks) and to Motorola in Tianjin; both of these foreign companies are well-established and very upbeat on their current businesses as well as the growth prospects. Motorola describes the domestic market for mobile phones as high-end, which surprised some visitors unfamiliar with Asian mobilephiles. Across the whole product range, China represents 12% of Motorola's worldwide sales, and by the sound of it some 20% of global production. China-focussed companies presenting included China Everbright (a play on banking and securities market development) and the newly-focussed Tingyi, both of which I shall watch with interest. Wandering around town over the weekend (and looking up local artists and other friends after an absence of several years) left me thoroughly impressed, not only with the growing affluence but by the grace with which people are adapting. It is my impression that professionalism is keeping pace with economic development. These sweeping generalisations are notoriously dangerous, and I shall stop without elaborating too much here, but I tend to come back from China trips very optimistic about macro developments and opportunities. Existing investors will be aware that we have played this so far through companies listed in Hong Kong or Singapore, with senior managers from Hong Kong or Taiwan, but a number of PRC-controlled enterprises are in my category of 'plausible institutional holdings'.

On Sunday I visited the Dabaotai Han mausoleum, the tomb of a first century BC (Western Han) king with his horses and chariots. It is neither on the tourist maps nor widely known, but is well worth visiting, so I have posted directions and a few pictures here.

The impact of general stock market weakness and the extraordinary strength of the US$ has reduced the fund's NAV by a little over 3% for the month to date. This means it is doing better than the indices, as it should given the very much higher quality of the companies we own and their already-attractive valuations. I personally expect the US markets to remain extremely turbulent and treacherous for some time, which is an unhelpful backdrop for Asia, but remain extremely comfortable with our basket of hand-picked, cash-generative companies (versus, say, cash in the bank - be careful which bank - let alone money market funds, which can be dangerous). I'll update the portfolio valuations in the upcoming quarterly, but with our companies continuing to report generally good progress in earnings, dividends and corporate activity, little turnover amongst our holdings, and a downward drift in the prices at which we can buy them, the only surprise in the next set of figures should be that these opportunities are still there for the picking.

Of the two stodgiest (but still attractive) companies in our portfolio, Singapore Bus has just doubled its ordinary dividend and added a special, which is long overdue but nevertheless welcome and, I think, evidence of the change to a more shareholder-oriented focus in Singapore Inc as well as this specific group; and MBK Properties is showing further signs of gumption with its either-way-we-win bid for Royal Orchid Hotels. Meanwhile, more and more brokers are quoting that strange new valuation tool, dividend yield... fortunately (for us) without too much impact on investor behaviour.

16 Mar 01:
'You asked me about a specific stock?' said Andrew Sheng, in a tone of incredulity on Monday, so I am pleased to see Jake today trying to pin down responsibility on two more specific stocks, to either the HK Exchanges or the SFC. One or the other needs to get specific, and to get on with basic umpiring. Jake has chosen to discuss selective disclosure; more elementary and less vulnerable to theological argument is the need for basic information which has been released to the Exchange to be available to investors. Even Thailand and Malaysia now have this sorted out; it is a disgrace that Hong Kong has not, and dangerous for Hong Kong's future that the chief executive is more interested in cavorting with Mickey Mouse than in the efficient operation of the financial markets. (There are still many good, responsible companies in Hong Kong, but the integrity of management is increasingly the investor's only effective protection.)

15 Mar 01:
For more on what's wrong in Hong Kong, see Jake van der Kamp's column in today's SCMP on the bloated, uncommercial, but now listed Hong Kong Exchanges and Clearing. As a mere side note to his main criticisms, Jake comments '...the exchange did not publish a balance sheet and I could not find one on its Web site. Analysts around town also had trouble tracking down the release of the results on Tuesday. There was no analysts' briefing and no alert to them of where they could find the figures. This from an outfit that is all in favour of transparency.'

13 Mar 01:
To start the week on a surreal note, I attended a huge regional conference on corporate governance organised by the Malaysian Securities Commission, which received many compliments on its magnificent (large and expensive) designer-building. Andrew Sheng, the chairman of the SFC in Hong Kong, basked in mutual congratulations between the regulators as he held forth eloquently and at length on what he saw in the rearview mirror, analysts' rosy projections for mobile phone demand in China, and vague principles of the primacy of information, but was singularly unwilling to be pinned down on the specific inadequacies of Hong Kong disclosure and regulation, even those which could be very easily fixed - like the flow of information released to the stock exchange but unavailable to the hapless public (EGM notices, financial results of Tsingtao Brewery, etc). Hong Kong deserves better. Khun Prasarn from the Thai SEC, in marked contrast, was interested in discussing glitches in order to fix them, and is optimistic that the non-voting depositary receipts, which unlike the Thai Trust Funds do not require individual company initiative, may work smoothly.

7 Mar 01:
A report on a fourteenth-century Chinese shipwreck is online at www.maritimeasia.ws. The cargo sheds interesting light on the history of Thai ceramics, and is consistent with 'major leaps' in style and technique in (1) the 1280's, following the collapse of the Sung dynasty, (2) the 1370's, following restrictions on overseas trade by the first Ming emperor, both of which resulted in a significant brain drain from China, to the advantage of the more liberal economies in which the refugees re-established. The 'Ming ban' also caused a short-lived shipbuilding boom in Guangdong and Fujian, with the commissioning of fast ships capable of outrunning the enforcers. One wonders whether this caused Emperor Hongwu to crow about the success of his alternative economic policy, and wishes that Asia's present leaders were students of history.

Many wrecks of this period carried commercial quantities of iron, which shows that Southeast Asian trade in the fourteenth century was ruled by 'comparative advantage'. Iron ore is found throughout the region, but some areas rich in logs and spices evidently found it easier to import iron ingots, and either ore or semi-processed iron (granulated, in bags) from the north - and China and Thailand were clearly dominant in the export of manufactured goods, then as now.

Another interesting aspect is that the ship carried fish as part of the commercial cargo - and again, fish can hardly have been scarce at the destination. Modern Papua New Guinea, with all its agro-fishery riches, imports a depressing amount of spam and canned fish, and the phenomenon is evidently not new. Imported fish may of course have been regarded as 'exotic'; unfortunately any associated marketing material has not survived. The fish appear to have been dried, salted or smoked, so maybe kedgeree was fashionable in fourteenth century Borneo.

This reminds me of an analysis of Thai statistics in about 1990, when every official publication trumpeted the transformation of Thailand from an agricultural to a manufacturing economy, with pie charts on the breakdown of GDP and of exports 'before and after'. Of course, putting the pineapple into a tin moves it from one category to another... so I took a closer look at the breakdown of manufactured exports, in which there were a bemusing number of categories relating to fish: canned fish, dried fish, flaked fish, fish meal, powdered fish (?), smoked fish, etc - which all added up, if memory serves, to around 45%.

5 Mar 01:
NAV was up a feeble 0.2% in February, to US$98.24; charts as usual are here. Six of our companies have reported results to December. (All are from Thailand and Malaysia, but our Indonesian holdings have provided reasonable operational updates in the meantime. Meanwhile, regulators in Hong Kong and Singapore apparently see no reason to improve their disclosure standards, which in the case of Hong Kong are outrageously poor.) The results so far are about in line with expectations, and our ordinary share portfolio is on an estimated current-year PE of 5.7 (earnings yield of 17.4%), and dividend yield after Asian taxes of 7.7%.

15 Feb 01:
I have been thinking of adding a Manglish dictionary, to aid in the decipherment of Malaysian English - but while I pondered political incorrectness and the magnitude of the task, others have been hard at work on the Coxford Singlish Dictionary. Singlish is a related language with similar charms, but appears to omit certain key terms. One such is the transitive Manglish verb in 'I'll doggy-bag you', music to the ears of those whose friends cook better than themselves.

12 Feb 01:
Just back from Hong Kong, again revisiting some existing holdings and a number of new ones, and remaining happy to stick with the former - but company visits are invaluable; it is rare that I do not learn something new, and the executives of good companies are often very good teachers indeed. Meanwhile, Andy Xie has eloquently set out the bull case (and key risks) for China in Morgan Stanley's Global Economic Forum of 6 Feb.

6 Feb 01:
Over the last few years we have found Fred Hickey's analysis of the US tech sector insightful. His monthly newsletter is by subscription (inexpensive), but there is a good interview here setting out his current views - which are decidedly bearish. I'm inclined to agree, and the Apollo Asia Fund has very little direct tech exposure.

5 Feb 01:
NAV at end-Jan was US$98.02, representing a gain of a little over 2% for the month. January was a mixed month in Asia: some of our shares in Hong Kong and Singapore rose significantly on a mixture of the US-liquidity-led rally and a belated scurry into 'real businesses', others were ignored, Thailand soared briefly following the election and then started to sputter, and some of our other Southeast Asian holdings barely traded all month. The Fed's liquidity injection is real and extraordinary, but exacerbates the long-term dangers, and I personally remain nervous about the risks of a severe bear market and US depression. This would cause some difficulties for Asian economies, but we have some truly attractive share buying opportunities here which leave the risk/reward ratio very attractive, and hence we remain fully invested. The advantage of a portfolio with a worthwhile dividend yield is that we are ongoing buyers, which has two benefits: firstly, it enables us to allocate cash at the margin to the most attractive options, without trading too actively, and secondly it is effectively 'internal dollar-cost averaging' - if the prices are cheaper, our cash buys more shares, adding to the fund's intrinsic value - which is already rising, because our companies continue to perform well.

3 Feb 01:
Just back from Bangkok where I visited several of our existing holdings and a few other possibilities - as a result of which I remain happy with the companies we already own (sorry, brokers). For investors who can tolerate the very low liquidity of Thailand's small and mid-cap stocks, this is an attractive hunting ground - and local investors have been so battered that very few are inclined to buy-and-hold even shares of conservative companies yielding several times the local deposit and bond rates. The investment chief at one local insurance company explained that Thai equities are not safe to hold for the long run, so their only stockmarket activity is trading on a three-month view...

23 Jan 2001:
Having commented before on the purchasing power of Asian currencies, I was pleased to see their ranking in the Economist's Big Mac index:

Countries where we're invested:  
Hong Kong
Countries we think about:  
Expensive places:
United States
- and good Asian food of higher gourmet quality is an even better bargain! Best wishes to all our investors for the Year of the Snake.

10 Jan 2001:
Another fascinating report came in this morning, from David Scott at WICO, commenting on the intensifying Asian competition in motorcycles, driven by China, and the regional export of deflation. Many of the PRC producers have listed A shares, and David presents some appalling 5-year numbers for eight such companies on the decline in ROCE (mostly to low single digits) accompanied by high inventories "yet with ongoing access to equity capital from the share markets" - historic PE's for four of the eight are over 100, and the lowest is 33. David succinctly sums up as "the Asian problem all over again: industrial policy; forced savings; underpriced capital; overcapacity; domestic deflation; dumping overseas; trade wars... if there's one thing in the region that makes me nervous, it's China."

The A share market does indeed look like an accident waiting to happen, which is not to say that it will happen soon; the difference with the Nasdaq is the scale of domestic savings, which do need to be recycled. There are many complex issues here, but it is good to have David taking a cynical look at the macro implications.

Only Chinese investors have the currently-dubious privilege of being allowed to own A shares. Some of the B and H shares-for-foreign-devils, which are very much cheaper, are significant beneficiaries of the ability to raise cheap capital, provided of course that they then use it wisely. So far we don't own any of these either, although I find an increasing number worth monitoring, and in the category of "justifiable institutional holdings".

9 Jan 2001:
There is an interesting article in Morgan Stanley's Global Economic Forum of 8 Jan, noting that the income of European-owned companies in the US fell 20% in 3Q00, and commenting:

European firms are clearly in the crosshairs of a US slowdown. They... accounted for more than half of total foreign-owned affiliate output in [1998]... The effects of a weak US economy have already spread to Europe and Japan via their US-based operations, a fact largely overlooked by many investors who think the most likely victims of a US downturn are Canada, Mexico and a host of Asian exporters. These nations are linked to the US via trade, and shifts in trade flows happen over time, or with a lag. So the pain of a US slowdown has yet to fully take hold in these trade-dependent economies. On the other hand, the US linkages of Europe and Japan are less through trade and more via foreign direct investment and foreign affiliate sales. European and Japanese multinationals compete in the US by being "insiders," not by being exporters. The good news is that this strategy bestows a host of competitive advantages upon a firm relative to a company that just ships goods. The downside is that any downturn in the host market (the United States in this case) is quickly transmitted to the foreign company, with affiliates the first to feel the pain.
... and some of the recent US acquisitions by European firms appear to have been under the influence of New Era euphoria. There are clearly also a number of positives for Europe at present, as pointed out by another Morgan Stanley analyst in the very next article, which recommends "put on your rosy glasses and discover Europe as a safe haven" - but the affiliate-company numbers provide a twist which I hadn't seen elsewhere.

5 Jan 2001:
4Q report posted. The possibly-diminished number of comments on the US and global markets on this page does not mean that I have become any more relaxed about the risks, but the flow of news and commentary has changed so dramatically that it seems less necessary to point out the supporting articles. Also, the US websites which we have regularly recommended (including prudentbear.com, Bill Fleckenstein's column and Richard Russell's newsletter) provide excellent coverage. I'd like to add more comments about the Asian companies on which we focus our research, but meanwhile our major holdings are mentioned in the quarterly.

4 Jan 2001:
The Apollo Asia Fund's NAV rebounded slightly in December to US$95.79 (charts here). This is down 7.8% for the calendar year, so with hindsight it would have been better to leave cash in the bank - but since we have run an unhedged and essentially fully-invested portfolio the outcome was relatively respectable:  we outpaced not just the regional average but every one of the stockmarkets in which we invest, as well as the S&P500, the Topix and the Footsie. Investors thinking in sterling or euros ended the year roughly flat; in Thai baht and Australian dollars we are up by 7% and 8% respectively, and both are thoroughly congenial places in which to contemplate future spending! I'll try to post the 4Q report tomorrow.

Claire Barnes
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