The likelihood of 15,000 self-aggrandising politicians and assorted hangers on in Copenhagen coming to any sort of substantive agreement on an action plan to try to ameliorate global warming when every required policy generates near-term economic pain was infinitesimally low – and they did not disappoint. Is this a setback for our investments in new energy sources? Luckily not. We have only ever been interested in those companies and industries which do not depend on artificial government subsidies and where their business models are robust and offer a solution with both better economics and a lower environmental (not just carbon) footprint. These businesses will prosper because they can provide cheaper energy. Everything else is a bonus. We would also subscribe to the thesis that China’s reluctance to agree to any measurement of its emissions has as much to do with ‘face’ as anything else. China’s leadership is acutely aware of the economic and social issues that polluting and resource inefficient industry engender. They are likely to continue to legislate for a more sensible and green industrial landscape. They just don’t want to be seen to be being pushed about by the West, which is correctly perceived to occupy no moral high ground as far as energy usage goes. In the meantime though we would recommend purchase of real estate well above sea level and an allotment as our faith in the ability of our politicians to avoid disaster is waning fast.

The quality of recent IPOs in Hong Kong has been commented on in previous reports, but the go-ahead for Rusal (the so-called flagship for Peter Mandelson’s favourite oligarch Oleg Deripaska) shows that standards have been waived altogether. Apparently it is too ‘complicated’ for the retail market, so the minimum investment has been set at a high level. However, we find the story extremely simple. The 1000 page prospectus boils down to ‘Give us your money or that nice Mr.Putin will foreclose on us and steal (back) our assets’. Perhaps we haven’t fully tuned in to the Russian investment zeitgeist, but this does not strike us as a compelling reason to invest, and is a warning bell for the Hong Kong Exchange’s due diligence over listings. Go out of your way to avoid this particular opportunity.

Much has been written about the pensions crisis in the UK and US, and it is indeed a major problem for sponsoring corporations and deferred pensioners alike. However, the actuarial sigh of relief that has accompanied the recent back up in sovereign yields – and therefore the corporate bond derived discount rate, which minimises the deficit as it rises – provides a counter intuitive way to look at the funding calculation. Discounting back at a high rate is another way of incorporating higher investment returns into the calculation. Yet if rates are rising because of higher inflation down the track, wages and benefit liabilities are likely to be higher. This would be fine if the scheme’s assets benefited from higher nominal growth. Unfortunately half of a typical scheme’s assets are bonds – which go down in this environment – and the relationship of equity performance to inflation is variable to say the least. We have a sneaking feeling that the real shortfall in these schemes is a multiple of the published number. Another compelling reason to invest in Asia where these types of financial hand grenades hardly exist.

2009 was a year marked by extremes of sentiment, and in investment terms rewarded primarily market timers who called the turn in the second quarter, and although there was ample opportunity to supplement these market returns with stock selection as well it was the quantum of the move that made the asset allocation decision the most important. As we move into 2010, it seems highly unlikely that we will get the same magnitude of movement in equity indices in either direction, though nearer term volatility is likely to remain at an elevated level. In finance-speak, alpha is likely to supplant beta as a driver of returns. We feel this environment is likely to favour our bottom-up, stock picking modus operandi, and though we are more cautious than the consensus view over prospects for Western economies as they lean into the headwinds of massive bond issuance, tax rises and Government spending cuts, there is no shortage of opportunity providing one is prepared to look for it. Asian indices may have doubled from the lows of March, but plenty of stocks have not, including some perfectly decent businesses whose stock prices actually fell last year. These low expectation stocks offer some of the best risk/reward characteristics as we worry that too many people are valuing many cyclical businesses on the assumption that the global growth trajectory of 2002-2007 is a ‘norm’ that we will return to in 2010/2011. If you have friends or contacts in Ireland, Greece or Iceland, they will be able to shed some light on just how heroic this assumption is.

Despite Asia’s outperformance this year, it is still clearly the place to invest. Valuations in aggregate are no longer very cheap, but growth will remain materially better than in the West, and investment flows are likely to continue to be positive, if uneven. Crucially the private sector will not be crowded out by Sovereign bond issuance. We look forward to a profitable new year for our Asian vehicles, and wish all our readers and investors a prosperous and healthy 2010.

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