Sunday, 9 February 2014

Future global growth slowing down?

Apollo Asia Fund's 4th quarter 2013 review "The next three decades may be different" is not a cheerful read, but a very well balanced view:

"Investors will be familiar with the adage that the most dangerous phrase in investing is that "this time is different". When it comes to excitement over new technologies, fads, and bubbles, the sceptics are generally (in the end) proved correct. Yet today it seems appropriate to examine several potential cracks in the foundations of conventional thinking on economics and investment. I have been fortunate enough to spend my working life in Asia during a period of peace, prosperity, and globalisation, and to have witnessed tremendous growth, with a few major bear markets along the way. I am accustomed to cycles, but currently more interested in secular trends. It seems to me that the next three decades may be very different from the last three, and from the last century or so on which most investment thinking is based."

From an investment point of view, the following paragraph is rather remarkable (emphasis mine):

"Given the above, rational investment allocation seems more challenging than in the past. Change always presents new opportunities, but they may arise in new sectors, rather than those in which our skills have been honed. Caution as to future growth leads us to see fewer opportunities among the 'inevitables', riding predictable trends of demographics and income growth: some are priced for rates of growth that may become hard to deliver.

Valuations of Apollo Asia Fund's holdings are as high as they have ever been. Fifteen years ago, in December 1998, the current-year earnings yield of the portfolio was estimated at 16%, and the net dividend yield at 6%. Five years ago, in December 2008, the figures were 13% and 5% respectively. Both were years of crisis, which presented opportunities, and set us up for good gains. Now the earnings yield is 6% and the dividend yield 3%: still worth playing, but promising less. On a range of valuation parameters, our portfolio is now 25-30% more expensive than averaged over the last ten years. Cheaper stocks can be found, but they are often cheap for good reason. Many small companies have attracted new attention, as often happens when bull markets mature, and we treat lobster pots with caution.

All this should demonstrate that past performance is no guide to the future. Given the higher starting valuations, return expectations from here should be appropriately subdued. With business risks higher, rational investment allocation currently seems difficult. In a changing world, fresh thinking and skills may be required. Investors may wish to seek fund managers better equipped for the future: redemption requests remain welcome."

It is not often that a fund manager recommends her clients to consider redeeming (part of) their investment with the fund.

The quarterly report was written on January 10, 2014, with the global stock markets taking a dive in the last few weeks, the advice was well timed.

GMO just published their quarterly report partly about the same issues, lots of big picture stuff about resources, global growth slowing down, etc.

But also an investing story (GMO is after all also a fund manager), to be found on page 9, with the following tips:

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