Desmond Kinch’s 2023 letter for the OAM Asian Recovery Fund is available via the firm’s website. His letters are always worth a read as he is one of the most thoughtful and experienced investors focused on Asian markets. I have included a few interesting excerpts below, but you are better off reading the letter in its entirety (he also presents some interesting data to support his points). 

On the relative valuations of Asian vs US equities:

“Over the very long-term, equity prices follow earnings per share. Yet, over a decade, the two can diverge widely when P/E ratios expand or contract. These cycles of P/E expansion and contraction are probably so long because momentum (the tendency to buy what has gone up a lot recently, and vice versa) stretches valuations to extremes distant from equilibrium or fair value. Russell Napier teaches a course in financial history that shows these long cycles of expansion and contraction using several important measures of valuation of the US equity market going back to the late 19th century. It is clear from these long-term charts that US equities are close to an extreme high in historic valuation terms. Asian equities (apart from India), in contrast, look inexpensive. Now feels similar to 2002/03 in comparing Asian to US equity markets. That is too far in the past for most investors to recall. I suggested that if the recovery from the current Asian equity bear market is similar to the recovery from prior Asian bear markets, Asian equities could realistically generate annualised returns in the 20s over the next 4 years, i.e. more than double in price. That may sound outlandish, but it is exactly what happened to Asian equities from the end of 2002.”

On the geographic split of the portfolio:

“The Fund’s Directors resolved shortly after Russia’s invasion of Ukraine to limit its exposure to each of the three main geographic regions in which the Fund invests – Greater China, India and ASEAN – to a maximum of 40%. While we think the risk of China being “cancelled” in the same way as Russia is very low, the risk remains, so this policy was implemented to control risk to a tolerable level. The quid pro quo is that if Greater China outperforms the Fund’s benchmark, which we think has a higher probability of occurring, the Fund is likely to underperform its benchmark by being heavily underweight that region [the MSCI Asia ex Japan index has a ~60% Greater China weighting].”

Two examples of their HK/China deep value holdings:

“COSCO Shipping International, which still sells for less than net cash on its balance sheet, paid dividends (free of withholding tax) of HK$0.34 last year which represented a nearly 14% yield on its share price at the start of last year, plus they repurchased shares in the market. The shares returned 37% last year inclusive of dividends. Swire Pacific sold its Coca Cola bottling business in the western US and paid HK$1.864 in dividends last year to B shareholders which represented a nearly 21% yield on its share price at the start of last year, plus they repurchased shares in the market and its share price rose. Its shares still sell at a more than 70% discount to NAV. We are seeing strong insider buying, record levels of share buybacks, and entire privatisations of listed businesses (an average of 11 annually over the past 3 years vs an average of 4 annually in the 6 years from 2013-18) in Hong Kong, all hallmarks of an undervalued stock market.”

On a related note, this was an interesting recent post putting in context the extent of the recent underperformance in HK stocks.