Introduction
I visited Singapore in the middle of October for a series of meetings with companies and Fund Managers. My trip could not have come at a more interesting time as we witnessed two of the most tumultuous weeks in global stock market history which prompted some interesting conversations.
We have long believed Asia is an attractive continent in which to invest and after the recent falls in its markets investment opportunities are even more exciting. We believe domestic demand will continue to be strong and we envisage a long term boom in consumer goods and infrastructure projects powered by Asian governments and the Asian consumer. Such developments will allow Asian economies to grow with less reliance on money from developed economies which currently look to be in a less strong financial position. Another positive is that Asian economies will suffer a more muted hangover from the freeze in credit markets and will also enjoy disproportionate benefits as they become even more embedded in the supply chains of major Western companies.
During my trip, headlines were dominated by bad news from the West concerning the plight of several high profile banks and insurance companies. Many of the Singaporeans I spoke to were intrigued as to the level of credit extended to the financial institutions by counter parties particularly given that it was the Western authorities which took stringent actions against the Asians in the wake of their own credit bubble deflating. In Asia, the impact of the 1998 crisis is still very much at the front of everyone’s mind but the prospect of a bad debt cycle is diminished as a consequence of the West’s imposition of policy measures which paid particular regard to lending practices.
First State Asia Pacific Leaders Fund
The first meeting I had was with Alistair Thompson, manager of the First State Asia Pacific Leaders fund. Alistair remains very calm in the current situation. He commented that the reckless and excessive actions of financial institutions in so keenly advancing money to aggressive investors has had a notable adverse impact on Asian markets. Investors have moved money out of the emerging markets and the sheer extent of de-leveraging, by hedge funds in particular, has proven to be debilitating for Asian equity markets as money has retreated back to the West.
Alistair said the current low valuations were reminiscent of the period post the 1998 Asian crisis. When we last met thirteen months ago Alistair was wary of valuations in the commodities sector but he is now building a position in major mining stocks.
Aberdeen New Dawn Investment Trust
I also saw Hugh Young, manager of the Aberdeen New Dawn Investment Trust. Hugh had positioned his fund defensively for most of the last two years and therefore, although he missed some of the upside, has been somewhat protected on the downside.
Hugh talked about impact of the commodities boom on Asian consumption. As a result of the huge increase in the price of food stuffs, primarily driven by financial speculators, the Chinese consumer was spending around 50% of their take home pay on food. Hugh explained that the recent falls in commodity prices would have a significant beneficial impact on the Asian consumer but that the pain of the last eighteen months should not be ignored.
Industry Groups
We deliberately sought out meetings with companies which we believed would have been impacted by financial speculation in their underlying markets and those which were also likely to be beneficiaries of rising consumer demand. As such, attention was focused on food manufacturers and producers.
Petra Foods is a family owned company with two related sets of operations: refining cocoa for large chocolate producers and manufacturing own brand chocolate bars. The company derives 95% of its revenues from South East Asia, principally Indonesia and The Philippines.
In the area of refining and producing customised cocoa products their aim is to differentiate their products to make them more attractive to Western food and drink manufacturers. Despite good progress on the innovation front in what remains a basic commodity business, they have been affected by the dramatic run up and recent collapse, in the price of cocoa. While the impact on margins has been minimal, due to a long standing and well considered hedging policy, it did cause some disruption in their markets. “We used to come in every day and see the price go up but we knew we weren’t in the market and our customers told us that they weren’t in the market.” The hype surrounding the price of cocoa was “just not justified by the price move…everything became elevated.”
The outlook for their own brand chocolate products is good as chocolate consumption in Asian markets is increasing and the company believes they are in a strong position to compete with the Western majors.
Petra was the first company I saw to report on what became a running theme by the end of the trip, namely that they were receiving questions from analysts about capital expenditure freezes and the element of discretionary spend in their capital expenditure. The management said analyst questions used to focus on the impact of rising commodity prices.
Wilmar International is another company involved in the supply of food products and the processing of soft commodities. The company processes oil seeds and grain in Malaysia, owns palm oil plantations in South East Asia and has a consumer division which supplies cooking oil.
The shares have suffered recently due to the drop in the price of palm oil. However, the company says, “we are not a wholesale plantation company.” They were keen to point out the impact on the share price of the financial speculation in palm oil in recent years. “There has always been an element of speculation but 2008 saw prices that were unsustainable and hedge funds have since lost a large amount of money.” They explained how their internal Risk Committee had “found the turmoil in our markets almost unbelievable….we stopped warehousing products for some time due to the increase in prices. The implication of aggressive buying by outsiders was disruptive to our entire planning process.” In the wake of palm oil falling in price, the de-rating of Wilmar and their sector peers has left share prices languishing at multi year lows.
In the consumer division they are excited by the potential for local consumption patterns to rise. However, as with the palm oil operations, the recent increases in the price of all food stuffs has undoubtedly hurt them yet they look to the future and the expected increase in consumption of their goods in Asia and in particular, China. The company has made a significant investment in China building a distribution business which now has over one thousand outlets. The integrated model of production and distribution could be enhanced notably by extra volume demand.
Golden Agri is also a food products and palm oil producer. They have a much larger plantation base than Wilmar and therefore benefit in margin terms from greater economies of scale. “We are focused far more on the upstream of the plantations business…our model has far less exposure concentrated in retail and marketing than any of our peers.”
They explained in great detail how they manage, identify and monitor their plantations and what the longer term outlook for each development is. It seems to be an efficient model and one where they can easily keep track of their capital and operating budget.
Banks
On my two previous visits, I have seen the highly regarded United Overseas Bank (UOB) which has an excellent record for diligence and prudence. This time, I decided to see another bank that is well spoken of, Overseas Chinese Banking Corporation (OCBC).
Under the guidance of their highly regarded CEO, David Conner, the bank has successfully reviewed methods of working in all divisions and refined their operations overseas according to a plan set out five years ago. The bank has not so far seen the dramatic growth that investors may like but the slow and steady incremental progress recorded is encouraging for the future.
The thorough due diligence undertaken prior to initiating strategic stakes in banks in neighbouring countries has saved them from making the same mistakes as a number of their peers in recent years. In terms of their domestic operations there is no doubt they have done better than could have been envisaged at the outset of their five year plan. They have of course been helped by the prosperity and wealth created in Singapore during this time and have sought to increase their share of deposits, loans and wealth management.
XP Power
My final company meeting was with Duncan Penny, the chief executive of XP Power. XP Power was previously based in the UK but two years ago moved to Singapore which is well positioned within Asia to market its products and because it provides a cheaper manufacturing base. The relocation continues to deliver benefits in excess of expectations and XP Power’s location has enabled them to acquire some major customers in new industry areas “all of whom are asking for contracts above the level we first thought possible.”
In terms of the global demand backdrop Duncan explained that they are yet to see any tailing off in orders from specific geographies or sectors but did explain that the issue of cost-push inflation in China had certainly had an impact: “for the first time we are able to ask for price rises from our customers and obtain them.”
Conclusion
It was a very interesting and worthwhile trip. The meetings gave me a valuable insight into the impact the actions of the more reckless banks in the West have had in Asia. The sheer amount of de-leveraging by a small but powerful group of investors in recent weeks has led to volatility in markets which is ultimately having a detrimental impact on economic activity and not just in the financial sector. However, despite the problems the overspill may cause the real economy over the next few months, pending any further crisis, the outlook for Asia remains bright and we hope to benefit from taking a long term view and continuing to invest in the continent.
