During the quarter, activity in the whole portfolio was again very limited: we added one new name, increased two other positions, and trimmed one. Value is not particularly compelling by historical standards, and macro concerns make us significantly more cautious than consensus on the earnings outlook for many sectors. We are also very wary of current psychology, and see the potential for western markets to retest 2009 lows. We have not, however, moved significantly to cash. Firstly, we have demonstrably no ability to market-time. Secondly, many of our holdings are illiquid, and even if we were certain of an imminent 50% or 80% fall in value, it would not necessarily be possible to sell out entirely and get back in. Thirdly, a current-year earnings yield of 8% and a net dividend yield of 3.5% on our portfolio holdings seem respectable, especially compared to the few basis points now available on deposit. However, we have also felt no urgency to deploy the current cash balance, while awaiting either more conviction on relative merits, or more compelling entry points.
One headwind for Asian exporters is FX. Asian currencies have appreciated against the Euro by 22% since late October. Against the US$, the moves have been relatively muted, but Europe is as important an export market, and for some industries a key competitor. The closure of airspace by the unpronounceable Icelandic volcano, a disruption which featured in few contingency plans, and the fears of a larger eruption at the neighbouring Katla, will also have boosted the case for shorter supply chains.
The broader problem for most exporters is global demand. The easy year-on-year comparisons against 1H09 are now over, and the effects of government stimulus are wearing off (with more distortion than lasting benefit achieved). Military spending is one area of strength; the PC replacement cycle is another, relevant to a larger number of Asian companies - but the Asian export model may struggle over the next few years, and it seems unlikely that new markets will compensate for the lack of demand in North America and Europe.
Caution on the cyclical outlook has made us cautious on the medium-term growth expectations for a number of sectors; a sense of the resource/environmental limits to growth makes us wary of some long-term assumptions. The future may not look like the past, and heightened risk perceptions have reduced our stock universe by eliminating a number of sectors in which consensus growth assumptions seem too optimistic.
So far that has been the main practical effect of our concern about energy. (See 'Energy for Asia: an overview', March/April 2010). Risks to business-as-usual seem widespread; clear beneficiaries are likely to be fewer, and seem harder to value. (Profits from a perceived windfall may have to be shared, and may not accrue to current owners of a resource.)
Shifts in Asian energy usage are of global importance - and may be underestimated, despite newsflow on international oil and gas moves, because China and India have hitherto depended to a large extent on coal, and have been self-sufficient therein, so the magnitude of their domestic energy usage may not have been fully appreciated. In 2009, the energy consumed by China in the form of coal was 3.3 times the energy produced by Saudi Arabia from oil. So if China and India now need to import coal, this is important - not just for the listed coal producers, which have rocketed to significant market capitalisation (without our participation, to date), but for anyone pondering global supply and demand.