Wednesday, October 19, 2011

Not a normal cycle: Apollo Asia Fund: the manager's report for 3Q2011

The outlook, however, seems much trickier now. Too many western economies, having hurled taxpayers' money indiscriminately at the banks without allowing normal bankruptcies and restructuring, have catapulted themselves into a debt trap from which it is hard to see any satisfactory exit route. Debt dynamics alone would now make a return to sustainable growth difficult; resource constraints and rising ecological costs compound the problem.

Complacency on Asia's prospects seems misplaced. The region remains as export-dependent as ever. Hopes that weakness in US & European demand can be offset by growth in emerging market consumption seem implausible; and after the greatest stimulus money could buy, it is hard to see what China could do for an encore. Asia-ex-Japan may not have the sovereign debt and social security problems of the west, but the region is not debt-problem-free, and may not be able to maintain the levels of growth to which it has become accustomed.

Asian equities are now priced to discount cyclical squalls; they are not priced for an ex-growth global economy. Stock selection is therefore complicated, as we envisage poor secular prospects for a number of formerly strong industries, and relatively subdued growth for others which are priced for perfection.


We urge all our investors to reassess their asset allocation, and in particular any assumptions about Asian growth which may have been forged in a different era. The export machine faces headwinds which may be secular, not cyclical. Energy self-sufficiency has given way to constraints, and to growing shortages. Pollution is becoming a huge problem. Climate change is becoming expensive. (Some of our companies suffered in the recent Thai floods.) Destruction of the commons over the last thirty years has been monumental. Mangroves are gone, rainforests are gone, coral has gone, fish are gone: natural resources which seemed infinite have shrunk to tiny, endangered fractions in the space of three decades. The exploitation of these may have boosted GDP in past decades. Replacement activities such as fish farming may boost GDP in the future - but the easy stages of development are in many places behind us, and stored problems are mounting. Despite all this, Asian equities still seem to us a reasonable place to try to preserve real purchasing power - but this is a different proposition from that of the past.