Monday, January 11, 2010

Dangerous times: Apollo Asia Fund - the manager's report for 4Q2009

The historic PE of the portfolio at the year-end was 14.8, and the prospective for the current year 15.8: taken together these are comparable to the past highs of October 2007. As noted in the last report, our company mix currently includes some with temporarily-depressed earnings and losses (with the potential to recover, but no certainty as to timing), and some with high long-term growth potential (economic conditions permitting). The two writeoffs were the only two holdings for which the debt burden had seemed to pose a major risk (which we had wrongly decided to accept); less than a third of the portfolio is in companies with any significant borrowings at all. Despite our recent war-wounds, we still consider our company portfolio, as a whole, to be relatively resilient - and resilience is a quality to be prized.

Portfolio BVPS has risen 15% yoy. Book value used to be a useful yardstick, but its value under IFRS is limited. On an aggregate basis, we would not place much confidence in this measure. P/B is now 1.6: it has been much higher in the past, but portfolio ROE was then higher than the current 10%.

The current-year dividend yield is estimated at 3.1% after local taxes. The current-year estimate for portfolio DPS is 15% below its peak of March 2008. Since business conditions have rarely been tougher, this seems somewhat reassuring.

The regional MSCI index peaked in October 2007, lost 63% by November 2008, and had by Dec 2009 recovered 56% of those losses. This still looks consistent with a rally in a bear market, and a rally which could falter at any time. The world is in a mess, and while 'growth' headlines will be temporarily facilitated by the depressed comparative figures of 1H09, we are far from convinced that this growth will be sustained, or that Asian economies can make a swift and smooth transition from the export model. Since all of the world's fundamental problems have been papered over and compounded, rather than addressed, we fear that major turbulence will recur. So, apparently, do Asian companies, obliging as ever in accelerating the supply of new shares to meet demand.

However, an esteemed former colleague, now one of our valued brokers, believes we are in a new HK/China bull market. He reviews the psychological stages: "disbelief, resistance, acceptance, consensus, enthusiasm, momentum, naked 'n' crazy" - and considers that we are only on the cusp on a transition from consensus to enthusiasm, with the fireworks yet to come. Given derisory rates on bank deposits (1-10 basis points at many of the safer regional banks), the relative attractions of emerging markets to a host of newly-converted investors from the eyeball-indebted OECD, and the notorious zeal of new converts (cannon-fodder for the corporate issuers), he may well be right that there is much further to go.