Musings

Since the Second Quarter of 2020 we focused on keeping the fund close to fully invested given the attractive opportunities available in the equity markets throughout the region. As a result of the beginning of the increase in interest rates which have led to there finally being a cost of capital again for financial markets, since the Third Quarter of 2022 holding cash (ranging from 5%-25%) has been an important reason for us being able to hang on to gains and continuing to outperform the region with the Fund returning +19% vs the MSCI ASEAN region at -16%.

We’ve written in the past about there being a cost to money again (see “The Clarity of Chaos”, June 2022) and that the ensuing volatility will present us with opportunities to either take profit from existing positions or initiate holdings into well operated companies trading at attractive values.

This year we have been active, in January we halved our exposure to oil related equities which included a full exit of PTTEP TB ¹, a return of +55%, HIBI MK ² and PGAS IJ ³ remain as the only 2 positions for oil equities and fully exited our coal positions, namely ITMG IJ ⁴, a return of 120%, given the decline in Natural Gas prices which usually (and did) precipitate a decline in coal prices of near -55%.Further we reduced our holdings in Vietnam, given that we bought during their market crash in August-October 2022, the weighting of Vietnam had increased to nearly 30% of the Fund by January and the outlook is still messy for the short term, this included fully exiting VCB VN ⁵ and SCS VN ⁶ reduced and weightings across the holdings given the fast recovery in share prices, Vietnam is down to less than a 20% weighting in the fund. Thus far in March we have added new positions that we will share in our quarterly review.

Despite the volatility seen in capital markets over the past week we are calm due to the high cash weighting in the Fund and will continue to remain active during these interesting periods in the financial markets and focused on looking for quality investment opportunities within ASEAN.

Without a doubt the outlook for ASEAN is favourable with the demographic dividend, the continued FDI expansion into the region, the continued reopening storyline and the increased travel in the region. Our holdings profitability grew on aggregate for CY2022 by +28% and we expect to see a similar profit growth profile for this year with the existing holdings. People still forget that South East Asia has only opened up for international travel and business 7 months ago, and North Asia, specifically China, is still in the process of beginning its international travel and business which may only begin to gain traction by mid-2023.

Without a doubt the outlook for ASEAN is favourable with the demographic dividend, the continued FDI expansion into the region, the continued reopening storyline and the increased travel in the region. Our holdings profitability grew on aggregate for CY2022 by +28% and we expect to see a similar profit growth profile for this year with the existing holdings. People still forget that South East Asia has only opened up for international travel and business 7 months ago, and North Asia, specifically China, is still in the process of beginning its international travel and business which may only begin to gain traction by mid-2023.

The only question we have on our minds is whether this will be reflected in the capital markets given the higher cost of capital. But a simple question remains, if a debt-free company with a dominant market position is valued at 10x PE, and growing 15-30% per annum, even if interest rates are 5%, is this not an attractive investment? We believe so and that the market will eventually value the company “fairly.”

Now, what about the narrative that we are reading in the news that there is a recession coming in the US and Western Europe? As we wrote there are Two Movies on One Screen, December 2022, playing out in capital markets, and will continue to focus on remaining Active and Focused on the investment opportunities that are presenting themselves in these volatile markets.

¹ PTTEP TB - PTT Exploration and Production Public Company Limited
² HIBI MK - Hibiscus Petroleum Berhad
³ PGAS IJ - Perusahaan Gas Negara Tbk PT
⁴ ITMG IJ - Indo Tambangraya Megah Tbk PT
⁵ VCB VN - Joint Stock Commercial Bank for Foreign Trade of Vietnam
⁶ SCS VN - Saigon Cargo Service Corp