The 2017 annual letter for Overseas Asset Management’s Asian Recovery Fund is now out. You can access and download it directly from the firm’s website. As usual, Desmond Kinch’s letter contains lots of interesting insights and ideas for discussion, so reading it is well worth your time. To see our coverage of last year’s letter, please click here. 

Some brief highlights / excerpts below (paraphrased; mistakes are my own):

• On Asian currencies: He continues to think Asia ex-Japan currencies are extremely undervalued, but expects it will take many years for the gap between fair value and current exchange rates to narrow. In the medium-term, part of the gap may be closed by the region (ex-Japan) having higher inflation and interest rates than the US.
• On ASEAN: They remain overweight the region. Their biggest exposures are to Indonesia and Vietnam respectively. Vietnam was a big source of gains for the fund in recent years, but recent valuations have seen them reduce their exposure there. Indonesia still has scope for strong increases in consumer spending and major infrastructure projects.
• On value vs. growth: Over the last 6 years, value has under-performed growth by a wide margin. Value stocks in Asia now look “absurdly cheap” relative to growth stocks. He thinks they could be close to the bottom of their cycle versus growth.
• On geopolitics: He thinks there are two issues that currently pose a major, if low probability, risk to the region. One is the well-covered situation in North Korea and the other is the Rohingya crisis in Myanmar. He also recommends Graham Allison’s Destined for War: Can America and China Escape Thucydides’s Trap? for those interested in the topic of US-China relations.
• On HK small caps: They were left behind last year as the focus tended to be on larger, more liquid shares. The relative performance of HK small companies vs. large companies now appears to be close to the bottom of the cycle. Their main exposure is through the Value Partners Classic Fund, which is currently their largest investment.
• On their fund holdings: Overlook Investments returned US$1bn to its LPs on a compulsory basis this month. He calls them the “poster child for good behaviour in the fund management industry.” They started trimming their holding in Arisaig back in 2013 on valuation concerns, but now think this was perhaps a case of selling their winners too early. They do, however, have investments in two Arisaig “cubs” with similar approaches. 
• On the main risk to Asian markets: A very expensive US equity market. If the US stock market crashes, everything else is likely to go with it. Still, he thinks non-US equities are likely to outperform US equities by a wide margin over the next 5-10 years.