World in upheaval: Apollo Asia Fund: the manager's report for 1Q2011
Activity during the quarter was light: we added modestly to three holdings, trimmed four, and completely sold out of one very small stake. Our additions were mainly in Japan; our sales mainly in Southeast Asia. In the short term this has done nothing for performance. Had we done nothing, the combination of share price and currency losses post-tsunami would have reduced the dollar value of our Japanese holdings by 8% at the end of the quarter, and we started with a 10% Japanese weighting. Since we increased our holdings, the headwind was a bit more; and both prices and currency have declined further in the first days of April. Nevertheless we have continued to make modest additions. The Japanese business environment is hard to predict in any detail - will government spending on healthcare rise or fall? - but it still seems a good hunting ground for companies of high quality. Valuations seem reasonable in relation to assets, and go far to offset the heightened risks.
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In looking at the impact of higher energy prices and supply hiccoughs, I decided to look at production / consumption of all forms of primary energy (rather than just oil), and related the net exports / imports to domestic consumption (as a measure of the impact relative to the current size of each economy) and to population (to measure per capita impact). The results can be seen in the table on the left, showing key Asian economies along with other big winners and losers, and some reference figures for comparison. From this perspective, Norway is by far the biggest winner: much of its own energy usage comes from hydro, and it has only a small population to share its large energy endowment. Russia is by far the largest exporter of energy, but the windfall for Kazakhstan and Australia is much bigger per capita. The benefits for Indonesia and Malaysia are spread over larger populations, but are very substantial in relation to their domestic economies.
Overlooked in such a table is the distribution of the wealth, and the calibre of resultant investments. Restless populations in Saudi Arabia and Egypt feel that they shared little of the energy windfall. Much has been frittered. Only Norway looks wise, with its petroleum fund, but energy revenues doubtless trickle down more equitably in Canada and Australia than in Indonesia and Malaysia.
Taiwan, Korea and Japan import essentially all of their fossil fuels, with nuclear and hydro contributing 10-20% of consumption. Thailand and India, too, are now very dependent on imports, having reduced their fossil fuel endowments more recently. China, until recently self-sufficient in coal, is much less vulnerable in relative terms, and is the main manufacturing competitor of all five of these economies. The richer, higher-technology exporters in North Asia may be better able to absorb and pass on price increases than Thailand and India.
To talk of oil-equivalents is to simplify, of course: gas is typically priced on long-term contracts; oil is indispensable for now in the transport sector; coal remains relatively abundant; oil reserves are the hardest to replace. Yet the mix can vary significantly over time, and from country to country, whereas energy usage remains strongly correlated with GDP growth. Energy constraints imply growth constraints. Few countries are yet thinking rationally about national objectives to replace the idiotic obsession with GDP, and few have coherent energy policies.
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