Is gold a risk asset or a hedge? The experience of the last few years is it can be both, but sequentially and at random intervals. Recent weakness has been ascribed to the absence of QE3, while the rapid mobilisation of the ECB’s printing presses has been ignored. BIS data show that Central Banks remain buyers, while Indian retail investors may have been discouraged by an increase in import duty in the recent budget. We view the sell-off in both the metal and mining shares as an opportunity to add a less correlated asset which (in the case of the gold mining shares) is now actively cheap relative to spot gold.
‘The Chinese have an insatiable appetite for luxury goods’ is a mantra that the CEOs of Western branded bauble vendors have become very familiar with – and to date has proven correct. The stock market is clearly well up with events, with valuations at high or even stratospheric levels for the likes of Hermes. Thus we note with interest the cooling in the high-end auto market in China, and the unprecedented discounts now available to a typical Mercedes S class or BMW 7 series buyer. The model cycle has an impact, but is not likely to be the whole story. Could the feeding frenzy over Louis Vuitton or Prada bags be next? We wouldn’t want to take a strong view either way on this high-end conspicuous consumption, but would merely opine that expectations in this segment are high, and the risk/reward unattractive. We prefer the next tier down where valuations have been crushed over the last two years and where a sharper slowdown in sales is consensual. After all, it is hardly a distinguishing factor these days in Chinese cities to be carrying a branded handbag or overpriced watch….

The purge of Bo Xilai has attracted a lot of newspaper comment, but little stockmarket effect bar a few A shares with Chongqing in the name taking a one day hit. We have absolutely no insight into the ramifications (if any) of this event, though we are inclined to think that there may be some. Given that there was little concern over the direction of the political aspects of economic and social governance prior to this rather public fall from grace, we feel that it is yet another thing that could unsettle markets where there is a high level of complacency.

In stark contrast to China, India exemplifies a market where politics matter on a day to day basis. Investors’ uncertainty over the cellular spectrum and (now) the coal block allocation fiascos has been exacerbated by a mooted re-drawing of the tax legislation that could potentially apply to deals done forty years ago. While the tax authorities may have a point over their inability to tax the Hutch/Vodafone transaction, the proposed legislation, if enacted, will represent a spectacular own goal. This is not what is required for investors to rediscover their appetite for a market that is still expensive and where recent profit announcements have left something to be desired. We remain unenthused and uninvested.

While many of the bigger picture sentiment indicators for equity markets are now at neutral to mildly bearish levels (Vix, average cash levels, bull/bear and risk appetite indicators), the level of insider selling to buying is at more worrying levels, especially in the US. In Asia the ratio also moved to favour supply of equity from those in the know, with a significant number of quite large placings and several sizeable rights issues accompanying executive disposals (always, of course, to fund tax bills or divorces). While this is not necessarily a definitive sign of a market top, it is a significant red flag. Allied with our bigger picture concerns outlined above, we remain cautious with a significant cash position and low beta, at least relative to economic developments.

The overall market has continued to trade higher given supportive currency moves, in turn a product of rising US bond yields, which continue to underline the importance of the economic recovery in the US in order for these trends to continue. We await also any signs of a rebalancing in favour of Japanese equities by domestic institutions in early April which would undoubtedly lead to a higher market. For those investors still undecided over the likely durability of this rally we do sense that the total return argument for leading companies, share buybacks and dividends, is a new, interesting and under appreciated development for Japanese equities and should prove supportive to share prices and limit the extent of any correction unless the US falters badly.

Our recent trip to Japan provided us with a heartening outlook, in terms of not only existing holdings but also prospective holdings especially as analyst commentary remains very short term in its outlook. We were also encouraged by the fact that certain corporate managements, previously resistant to meaningful restructuring, have changed their mind in the last 7 months due to an ongoing deterioration in profitability. Our thesis that China will prove lackluster in early 2012, in terms of capital goods demand, still appears correct as local Chinese manufacturing customers wrestle with issues of weak profitability and an ongoing shortage of credit and hence we suspect 3/13 initial earnings forecasts will prove lackluster for Japanese suppliers. Other encouraging elements from our company visits included instances of founding families ceding management control to outside executives, a strong preference for further significant M&A given high cash levels and the extent to which the financial industry is likely to leverage off their solvency and high liquidity features at the expense of their European competitors over the midterm. Collectively this suggests that Japanese companies could materially enhance their earnings in the coming years, a factor not reflected in current valuations.

Whilst we concede that the market has risen sharply in the last 3 months, it is important to stand back and reflect on the fact that the stockmarket had reached very depressed levels in late 2011 and therefore the likelihood of a significant near term correction, assuming a stable external environment, appears unlikely at present. Possible political upheaval is a risk but further monetary policy easing by the BOJ should prove equally effective. The proposed consumption tax hike contains a proviso that Japan achieves a 3% nominal economic growth rate which, by the standards of the last decade, would be quite an achievement and certainly not an outcome priced into equity valuations today.

The LTRO appears to have been a great success. It has reduced the catastrophic tail risk of banking insolvency, and bought down peripheral bond yields as banks gratefully ride the yield curve. Never mind the longer term crowding-out effect on private credit, Armageddon has been averted – or is it just postponed? We were under the impression that the problem with European banks was their portfolio of Government bonds. They now have a lot more of them and we fail to see how the ECB can exit this potentially endless stream of money printing painlessly. The mere fact that Spanish and Italian bond yields are back in ‘affordable’ territory means a reduced political impulse to tackle the root causes of the problem – lack of competitiveness, inefficient tax collection, over-generous pension provision etc. The can may have been kicked down the road, but a T-junction is coming up and monetary policy is at its limits. The piper will have to be paid by most of Europe (not to mention the US), not just the unfortunate Greeks.

We have been singing the praises of the undervalued Hong Kong and Singapore property stocks for a while and we no longer feel like Robinson Crusoe. Many stocks have moved up to near average discounts and are up 30-50% this year. This clearly makes the investment case rather less compelling, but vindicates the massive insider buying seen over the last six months. Tycoons 1: Analysts 0. Normal form there. Yet the REITS, especially those in Singapore, have not participated. Absent the (relatively small) management fees and the mandated higher yields, we fail to see much difference between a property ‘company’ and a ‘REIT’, especially in the landlord sector. Indeed in the UK, most of the former have changed structure to the latter with no discernible change to their business model. They are both a selection of income producing buildings, not the supercharged bond that many confuse the REITs for, and their valuations should be looked at in similar ways – i.e. primarily with reference to NAV. This provides a switching opportunity as some high yielding REITs now have the same discounts as the out-performing companies. We have switched a material part of our Singapore exposure in recognition of this.

Our preference for mid and smaller sized miners over their gargantuan brethren is well known to regular readers and this has a lot to do with being involved in potential targets as opposed to potential acquirers. However, there is another reason. The big integrated miners are appallingly managed. Not operationally – they probably do define the gold standard there – but in corporate direction. Removal of the entire board of most of these companies, with replacements that were only focussed on optimising current portfolios would have massively enhanced shareholder value over the last five years. Pursuing large acquisitions (or turning down generous bids) may keep these guys busy but it has cost shareholders dearly. BHP could have bought the world in 2009. Instead they pursued the only deals that had no chance of regulatory approval and eventually bought into Shale Gas at the top of the market. Xstrata turned down £34/share from Vale, tried to buy Lonmin and needed a rescue rights issue. Vale was lucky that its bid was turned down. Rio bought Alcan as a poison pill, nearly went bust and has written off half the acquisition cost. A very good job the legacy assets of these companies are such high quality…

A continuing negative refrain we experience when pitching Asia as an investment home is the governance (or lack of it) in Asian companies, with Sino Forest and the ludicrous Bumi in the vanguard of examples. It is certainly true that Asia has its share of bad apples, but it would be wrong to extrapolate too far from these extreme cases. As a general rule, any company that is seeking to list outwith its home market – and these are the minority – should not be given the benefit of the doubt. There are valid reasons for listing elsewhere (more informed specialist investor base, regulatory requirements and so on), but too many companies are taking advantage of dumb indexed money and in some cases even dumber active money that does not bother to do proper due diligence and is happily ignorant of home truths that are manifestly evident to the local investor. The further capital providers are away from the use of their money, the more likely they are to be parted from it. We would therefore take issue with the naysayers and we feel that Asian governance in general is not that bad. We would also point out that Enron and Parmalat, for example, are hardly stunning successes of great governance, and the traditional Asian models of either family control (i.e. a majority holding, unlike the nepotistic News Corp and the like) or Korean Chaebol structures have produced some great companies. They may not tick all the UK boxes (for separate CEOs and Chairmen, for example) but we would rather invest in companies that produce long term wealth than ones which obey the letter of the regulatory code of best practice but in reality are run by shadowy oligarchs looking to launder their ill gotten gains, unimpeded by a pack of non-execs that remind one of Tiny Rowland’s description of those on the Lonhro board as ‘Christmas tree decorations’.

The term ‘business model’ tends to be somewhat overused, but there are certain types of enterprise that greatly appeal to us as ones that have ‘house advantage’. Casinos are one of these, but our preference is not just for the zero on the roulette wheel. We like legislated monopolies, and most Australian States have them. Singapore’s duopoly is almost as good. Macao may be high growth, but it is a free-for-all, with regulatory goalposts that are somewhat less fixed than in developed markets. This reasoning has underpinned our recent investment in Echo Entertainment, which is the proud owner of, inter alia, the Sydney Casino, up to now a somewhat underachieving vehicle given its premier location and absence of competition. New management is improving the offer and corporate interest from the Packer-owned Crown is rising. On a completely different tack, we have also invested in Long Yen in Taiwan. Warren Buffett likes insurance because you have ‘free’ use of other people’s money for a year or two – providing your underwriting is not a disaster. Long Yen takes your money (for pre-paid funeral services and niches in columbaria) decades before they have to provide the service – and with some up-market niches costing $30,000, on property that is by necessity out of town, on a hill and unpopular for residential development due to poor feng shui – i.e. cheap – it is a great business. Not too many comparables and little analyst coverage add to the appeal. The portfolio hedge against our biotech investments is the cream on the investment cake.

Consequently investors have rushed to sell the yen and the BOJ, whether deliberately or not, has helped stem domestic criticism over its pedestrian attempts to loosen policy sufficiently to weaken the yen. We are still watching the Yen/Korean won cross rate very carefully on the basis that, from an industrial standpoint, a significant appreciation of the won would materially enhance competitiveness for Japanese manufacturers after several very tough years. Nevertheless the strong stockmarket uptrend for now seems established given the sudden yen depreciation in the last two weeks. For investors sitting on the sidelines and wondering about increasing weightings, April could prove a crucial period. In the last 20 years we can remember three occasions when a rebalancing of domestic institutional portfolios occurred which led to sudden 5% + upward moves in the stockmarket as somewhat bizarrely these institutions carry out this rebalancing within 3 weeks of the start of the new financial year, April 1st. The other interesting fact to note is that despite the official statistics pointing to heavy foreign buying of late, there is little to confirm this from brokers flows. Our overall stance is that foreigners have barely participated to date.

The overriding question now therefore is should foreign investors add to their positions? On balance the answer is probably yes so long as the US economy does not suddenly falter. Although we remain highly sceptical over European and Chinese growth rates this year, the weaker yen will at least provide some cushion to the March 2013 earnings forecasts. Given that several multinational manufacturing companies still produce an annual 6% total return, dividends and share buybacks, and are trading at sub book value with over 10% ROEs, this provides some comfort from an absolute return perspective. The financial sector valuations, whilst deservedly at a premium to Europe, are still not expensive. From a domestic standpoint our strong conviction over industry consolidation continues to be vindicated, most recently in the convenience store market with the buyout of Circle K by Uny. All this is not to say we have now totally eradicated our concerns over Euroland but we just feel that corporate Japan may start to find a badly needed breathing space and from depressed levels there is a case to reduce very underweight positions in the market.

From a portfolio perspective we have remained disciplined and, notwithstanding the above comments, there has been no sudden rush to invest in high beta and bombed out second liners which has caused a slight relative underperformance of the fund. We have added one high quality globally competitive manufacturing company at the expense of a domestic financial holding and have added materially to one existing blue chip holding. In the near term our more domestic companies are still very interesting. Although they may not immediately benefit from the reaction to a weaker yen they remain compelling from a longer term perspective and are very cheap, both on current and forward valuations. They trade at sub 10X earnings, sub book value, have well over 10% ROEs with earnings growth of 10-15% annually. This will cause the market to revisit them once the initial weaker yen euphoria subsides. Furthermore we are encouraged by the fact that in one relatively non-cyclical domestic sector that appears to be finally enjoying the benefits of ongoing consolidation, recent share price returns of our holding have matched the higher beta bank stocks, which implies that there is a significant rerating and hence opportunities to be had in such areas.

The Fund has now once again generated a positive return since inception despite a weak market and given our focus on generating absolute returns this is encouraging. We are not complacent and are heading off for a fortnight in Japan. Somewhat ironically we are visiting the same company at the same conference on the same date when the earthquake struck last year but hoping for a much calmer outcome. Irrespective of the stockmarket, Japan has proved itself highly resilient in the face of such a tragedy and our thoughts are very much with those who suffered personal losses as we approach the first anniversary.

Recent headlines that a Chinese fund had bought 10% of Thames Water (following Abu Dhabi’s purchase a few weeks earlier) have been lauded by the UK Government as the start of a wave of external financing for UK mega projects. It isn’t. China may get a few brownie points for the headline, but they are buying an existing stake, at an unreleased price, that will give them a steady return. This is a very different proposition to funding greenfield infrastructure. Ask Macquarie about how profitable the M6 toll road in the UK has been (it hasn’t!). Given that the seller is a Macquarie Fund, the deal merely demonstrates that the valuation of the asset since purchase has risen (performance fees, anyone?) and that there are options apart from low yielding sovereign debt out there for more diversified portfolios. Incidentally, this is probably a positive data point for Cheung Kong Infrastructure, a recent large buyer of UK infrastructure assets, which has corrected sharply despite a strong market in January. We have taken a position here to replace some higher beta names which have rallied 30% in the month.

The Chinese acquisition machine is not restricted to resources and infrastructure. Technology of various kinds is also on the shopping list and particularly so in less high profile industries such as heavy machinery, which will not raise the same degree of political hackles as, say, the electronics or communications industries. Hence the purchase of unlisted German company Putzemeister, purveyor of up-market concrete machinery, by Sany Heavy. The Eurozone crisis is throwing up a lot of opportunities for deep-pocketed Asian companies to acquire technical know-how and move up the technological learning curve rather more cheaply and rapidly than some of the well-known western multinationals would like.

Flat screen TVs may now be common as muck, with only minor technological differences (back or edge LED, IFFS or IPS technology), but this is about to change. OLEDs are finally coming, after a decade plus in development, to your living room (as well as your smartphone where they have been gaining share for a while). Better colour saturation, less power consumption for moving pictures and the ability to offer curved, foldable or even transparent screens at a cost which will rapidly undercut LCDs as economies of scale ramp up will mean a sea change in the display market and challenges for existing players. One of the cost advantages of OLEDs is the absence of backlights and colour filters, which is clearly an existential issue for some of the manufacturers of these items, while a clear opportunity presents itself for companies with expertise in the specialised fluorescent and phosphorescent chemicals and in related areas of glass thinning and specialised deposition equipment. We have added several companies in these up-and-coming areas, but would be a little wary of Samsung Electronics (the undisputed leader in OLED screens). The stock has performed well, is expensive in an historic context and is stratospheric on the investor love index. We would prefer to wait for a period when their phones are less popular, or if there is a major acquisition to enter (or re-enter) a new business area, such as autos or life sciences, which would almost certainly be heavily dilutive in the near term.

Our thesis that markets only required a European breathing space rather than a ‘solution’ to significantly increase risk appetite seemed to be vindicated in January, with some of the beaten up property and resource plays bouncing 30% plus and the market as a whole rising 10%. While in most cases this still leaves Asian stocks well on the cheap side of fair value, some names are somewhat overbought. We have sold or reduced some of these (New World Development, Wing Tai, Noble, Keppel Land) and taken the opportunity to add some laggard names in the more cyclical sectors (e.g. Fletcher Building, Incitec Pivot) and even initiate a few positions in more defensive names which have been savagely de-rated in a rising market – such as CKI (as mentioned above), MTRC in Hong Kong and AREIT in Singapore. Such was the depth of Asian investor pessimism in December that we have more upside to come despite the sharp rise in January, but the pace of advance is likely to moderate and will need to encompass the broader market as opposed to just the cyclicals. Super Mario may have come to the rescue of the banking system with unlimited and cheap 3 year money, but this does not address the fundamental insolvency of most of the Eurozone periphery or the uncompetitive nature of their industries and the concomitant German surplus. We are also concerned that a fading Chinese balance of payments is bad news in the longer term for cheap US borrowing, and deeply depressed by the quality of the political debate in the US, UK and France where the issues of private equity taxation and bankers bonuses are obscuring the bigger picture. Still, at least if Newt gets his way we’ll be able to emigrate to the Moon to escape our problems down here…..

Clearly the expectations for 3/13 are that many manufacturers should see a sharp recovery in profits given, we hope, the absence of further natural disasters. The issue however is valuations and for many manufacturers a weaker yen is critical to raise earnings and improve competitiveness whilst also making valuations more compelling.

The ongoing US economic recovery is helpful but only to a degree given, as we have argued before, the more pressing impact from China in terms of the capital goods sector. There is perhaps a more genuine case for financials that had suffered the global valuation de-rating, albeit their minimal exposure to Euroland and certainly the improved European bank funding has improved sentiment. Global equity markets, appear for now, relieved that Greece is no longer constantly front page news and have certainly benefitted from investor defensive positioning at the end of 2011 although there is still the risk of further trouble ahead, hence the better to travel than arrive investment strategies at present.

Our overall sense is that the highly globally competitive manufacturers, fewer in number today, remain the only sensible cyclical investments given that many second line companies will struggle to overcome the competitive issues. Our domestic companies are seeing considerably less volatile earnings trends, still look very cheap and although sold off as the market has become more high beta, should still deliver decent returns in 2012. The improved global equity sentiment will help the Japanese market to a degree but for those looking for a reason to become very optimistic, the yen at a minimum needs to trend back to Y82-85 and our view is that this remains unlikely until the Euro is seen as an investable currency, which at present still seems optimistic.

‘Asian markets down on concern over Europe’ is now a Bloomberg headline in danger of burning itself into one’s computer screen. In a year when the US markets are almost flat, Asia and Europe (the latter index crammed full of bankrupt banks) are level pegging, down circa 20%. It seems that Asian investors are interpreting all news as bad, as exemplified by the uniformly negative reaction to the (not that surprising) demise of the Dear Leader of North Korea. No one knows or can even usefully guess at what will happen, but the immediate reaction was to panic over a war breaking out. An equally or more likely outcome is some form of rapprochement and some degree of integration back into the world at large. Our base case is the status quo. Yet the default at the moment is to assume the worst, and with Asian markets suffering a double whammy of fund flows from both international capital and panic-struck retail investors (who are being influenced primarily by doom and gloom over Europe) and who still matter much more in markets such as Korea, Taiwan and China than in the institutionally intermediated Western markets, and who by their nature are high beta investors – all in or all out. Low market volumes exacerbate this effect. The good news is that it also works in reverse when sentiment stabilises. We do not need a ‘solution’ to European woes for this to happen. Indeed, anything other than a disorderly break-up of the Euro is probably enough to prevent disappointment from current expectations – and in that case Asian equity performance might be the least of ones worries.

Official pronouncements from China maintain that ‘strict vigilance’ over property prices will be maintained. The reality is that banks are lowering mortgage rates, at the behest of the self-same government. The RRR has been cut as inflation has undershot expectations, and an increasing number of functionaries are pointing out the undesirability of a prolonged property slump, particularly inasmuch as it affects Local Government finances. The rhetoric has to stay tough, but policy is clearly shifting as official indices now show house prices in modest decline, while inflation has now, for official purposes anyway, been conquered. We are also seeing a loosening of restrictions over property purchase in Korea and the first rumours of the unusually severe measures in Hong Kong being re-evaluated. However, moving south, and despite the stockmarket forecasting economic Armageddon, the Singapore Government is still worried about a property price bubble. Not content with having imposed a 16% (of proceeds, not profit) tax on re-sale within one year, tapering to 4% 4 years out, it has now imposed a 10% extra initial stamp duty on foreign buyers , making a cool 13% up front levy for alien purchasers. You will not be surprised to hear that speculative activity in the property market is at a somewhat low ebb. Equally predictably, the listed property stocks took a beating on the (totally unexpected) announcement, though for the larger players such as Capitaland and Keppel Land, residential exposure to Singapore is only around 15%. Once again the market seems worried over a lack of demand while the authorities are worried about the exact opposite. Arbitrary regulations such as these can be removed at a moment’s notice if the political calculation swings from voters being more exorcised by income inequality to worries over the broader economy. This is sadly not a luxury that Western property markets enjoy.

We have been wary of Indian macroeconomics for some time, finding them at odds with the long-term bullishness that demographics and sheer size of growth potential seem to imbue market valuations with. This is now changing rapidly, and producing a bifurcated market where the consumer staple names have retained nose-bleed valuations while virtually everything else has cratered. Political paralysis and tight money have clearly been negative for growth expectations, and valuations now generally reflect this low level of optimism. The clear exceptions remain the likes of ITC and Hindustan Lever, though we struggle to see how their prospects have improved in absolute terms in recent months to justify their increased ratings. We are finding value now in selected areas of the market, particularly in capital goods where pessimism has become extreme, but would be very wary of the consumer bellwether blue chips.

December has been a somewhat mixed month for Asian equities, with Taiwan and Hong Kong regaining some ground while Indian and Chinese bourses marked year lows. Market volumes have been extremely thin, thus magnifying the response of individual equities to news. The Singapore property stocks were poor performers on the month, due to the measures outlined above, as were some of the resource names, particularly Lynas, primarily driven by sentiment after some downgrades of peer Molycorp. On the positive side of the ledger there was a modest recovery in some of the HK property names (SHK Props) and we switched our HK Land to Wharf on grounds of relative performance and valuation as well as a more retail focused portfolio.

Fortunately Japan has a few positive factors. The economy will respond to the significant post earthquake reconstruction spending that will offset the more sluggish manufacturing export conditions. Corporate balance sheets are awash with net cash and consequently remain well placed, especially given the yen levels, to accelerate their overseas acquisitions, a more noticeable trend from Q4 2011. Industry consolidation will accelerate as will the more aggressive restructuring at individual companies. Shareholder awareness will continue to maintain a level of pressure on corporate managements and hence share buybacks at many companies will occur for the first time although it would be premature to expect the Olympus debacle to change overall corporate thinking in the near term.

Within the market the significant outperformance of small/mid caps in 2011 continues to stir debate. Given the more solid earnings prospects of these companies it would not be surprising to see this trend continue until global macro factors improve and liquidity, especially in terms of renewed foreign buying, returns although the mean reversionists would argue strongly against this. Valuations of many of the large companies are now very low and therefore patience is required albeit that further significant absolute share price weakness looks unlikely. Furthermore we would not be surprised to see analysts reducing their March 2013 earnings forecasts but this is arguably in the share prices of many such stocks.

Our fund enters 2012 with a similar thought process to this time last year, namely a continued focus on more domestic stocks where considerable upside is expected in terms of profits and returns, notably ROA, as restructuring initiatives bear fruit. We also expect certain domestic managements to be forced to unlock value at a faster pace than in recent years. Global manufacturers still occupy a small proportion of the NAV for reasons described above especially as a final rout within the Eurozone will likely result in further yen appreciation especially as the Swiss Franc is not longer seen as a valid safe haven.

Return on equity is one of the market’s favourite parameters for measuring corporate profitability and management competence. Frequently and erroneously mentioned in the same context as price/earnings rather than price/book, its overuse in analytical terms relies on capital being reinvested in the business at the same rate as that currently extant (often wrong for cyclicals, businesses in niche markets or with franchises or intellectual property that do not lend themselves to expansion via financial capital alone and where the ‘book value’ does not include these intangibles), and like any ratio is prone to manipulation – in this case both numerator and denominator are vulnerable. A low ROE can be a function of low stated profits or a ‘lazy’ balance sheet. Call us old fashioned, but in the current climate we view strong balance sheets as good things. For the banking sector we would say they are essential. We would also be wary of high stated banking profitability – dodgy borrowers paying munificent up-front fees, clever derivative strategies that could unwind or result in law suits….the list goes on. So we like Singapore Banks. ‘Boring’ and ‘overcapitalised’ are positive attributes, not insults. The banking regulator retains credibility for ensuring financial statements are not filed alongside their European brethren in the fiction department, and the market awards them a very low valuation – 10x per, 1.2x book – because the perception is that they have little scope for growth. Yet the likely wholesale departure of European bank capital – from good credits – back to a domestic ‘haven’ leaves a potential hole in Asian credit markets that the Singaporeans could fill, and at higher than current margins as credit availability shrinks. These are virtually the only banks worldwide that we are enthusiastic about.

In volatile markets, any stock that disappoints is likely to be punished. Committing the cardinal sin of failing to spoon feed the analysts with near-term data is met with savage retribution as a minor quarterly miss is seamlessly extrapolated into perpetuity as valuations are eviscerated. Yet this great success for efficient market theory presents opportunities, and we are seeing quite a few in China at present, especially in the previously highly rated domestic names. Many of the retail and a few staple and healthcare names have seen their multiples halve over the last few months as near term growth decelerates by a small fraction of the price movement. Several companies have seen their tax rates normalise from concessionary levels to the standard rate and had this treated by the markets as an event worthy of a multiplier rather than the one-off it obviously is. Rapid expansion of new stores with an associated ramp-up period or changes to distribution channels are not given the benefit of the doubt as far as future returns go. Shandong Weigao, Ports Design, China Resources Enterprise and Parkson are all now in the portfolio at multiples of 30 to 60% of those extant earlier in the year.

Taiwanese politics have not figured on investors’ radar screens much in recent years, but this may be about to change. The Presidential election is due in January, and the DPP is gaining ground in the polls – in fact it is ahead in several of them, and this is before one factors in a possible split of the KMT’s vote between Ma and the (evergreen) James Soong. The DPP may have mellowed since Chen Shui-Ban went to jail, but is unlikely to generate a positive response from Beijing if successful. Insults would be hurled and missile batteries and aircraft carrier(s) redeployed. The polls are public, yet there has been little credence given in the performance of the domestic stocks to a market-unfriendly outcome. We counsel caution, particularly in domestic, non-tech names which tend to act as a political bellwether at times of cross-straits tension.

Doom and gloom on the economic front is not dampening animal spirits in resource company board rooms. Anglo is buying more of De Beers, Mitsubishi is spending $6bn on Chilean copper assets and committing to billions in Australian iron ore infrastructure spending, the Chinese are actively pursuing exploration assets such as Meridian and Rio and Cameco are locked in a bidding war over Hathor. New Hope has put itself up for sale and has attracted multiple bidders. Irrespective of the travails of the Eurozone, the rapidly industrialising half of the planet, and the companies that sell to them, remain acutely conscious of supply issues for essential commodities (though we confess that gem diamonds’ ‘essentialness’ may be subject to some gender bias). This theme will not go away, and we remain positive on selected material and energy stocks.

India has been a market largely absent from our portfolios over the last eighteen months. High valuations, sclerotic politics and the last of the inflation-fighting central banks have produced an unattractive investor proposition. Some of this is now changing. The market has fallen and the currency has sold off aggressively, leading to the appearance of some genuinely cheap equity opportunities, at a time when it seems likely that monetary tightening may have run its course. Policy paralysis is now everybody’s base case, and the relatively insulated nature of the economy compared to some of its more export dependent regional peers may now be seen as a positive. We are attracted to some of the weak rupee beneficiaries that either export or compete with imports in the domestic market, and that are selling at some of the lowest valuations seen in a decade.