Tectonic shifts - Apollo Asia Fund: the manager's report for 2Q2008

The greatest economic shock came from inflation. Headline inflation is now running at 9-12% in much of South and Southeast Asia, and 27% in Vietnam. Food and fuel is a large part of expenditure in this part of the world, and increases in the raw commodities have a much greater impact with fewer layers of markup, so there is immediate pressure to increase wages. However, the complacent assumptions of a few months ago on the inflation-hedging merits of property have been shaken even as inflation has accelerated so dramatically: property markets across the region have been softening.

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With consumption in the US and Europe now weakening, due to new caution on the part of both consumers and lenders, Asian exporters will have a tougher time than ever. Many squeezed prices to the bone in recent years and are only now trying to put through price increases: some have pricing power and some do not, but in any case volumes will suffer. And Asia is more, not less, dependent on exports than in past cycles.

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Globally, the initial outcome of the inflation-deflation conundrum is a reversal of the last twenty years: inflation in the price of things we need (food, energy, healthcare...), deflation in the prices of what we own (real estate, many financial assets...). Comprehensive worldviews have never been our strength, and we have a sneaking suspicion that the most visionary are prone to overlook details which reverse the practical implications. It seems easier to think individually about the impact of currently-visible trends on individual companies, and whether the balance of evidence has tipped the risk-reward ratio to the point where action seems appropriate. This is what we do, without necessarily spotting clear trends as a result.

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IFRS, the new accounting standards, make the task of analysing individual companies much harder: for the amateur investor, or for strategists trying to evaluate the whole stock universe, they must be a nightmare. Spreadsheets are necessary to extract long lists of exceptional items from reported profits in order to discern the trends. Headline earnings are so volatile as to be meaningless; book values are now based on shifting sands rather than the rock of objectivity. The job of the institutional CIO is unenviable. A recent FT article revealed that Sir David Tweedie was reacting to abuses he saw in the 1980s: his cure seems likely to result in much greater abuse in the long run, with the immediate drawback of incomprehensibility - which seems especially unfortunate when business conditions are so volatile. The time-honoured Asian practice of keeping three sets of books - one for the bank, one for the taxman, and one for the management - is returning, but now we have one set for the management and another for the public (and doubtless the other sets too). Inefficient markets may favour the stockpicker, but are hardly in the public interest.

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