AIMS ASSET MANAGEMENT SDN BHD

ecently launched what we anticipate will be a successful expansion to Mainland China. Offsetting
these long positions, we have various single stock shorts on HK-listed firms which we think will
come under pressure as the credit cycle progresses, and which in some cases have also adopted
aggressive accounting policies which we think do not reflect the underlying economic
fundamentals of their businesses.
Thoughts on the last three years, and what to expect for the next three…
Panah’s recent birthday has been a time for reflection on what has changed in the markets and in
our investment approach over the last three years. I moved to Malaysia to set up the Panah Fund in
May 2013, which was also the month when Asian equities tumbled by ~15% – the so-called ‘Taper
Tantrum’ – as investors panicked that the Federal Reserve was about to tighten monetary policy
aggressively. By the time that Panah was born in September 2013, Asian equity markets were in
the midst of a sharp rebound. Since that time, the Fed has only succeeded in raising interest rates
on one occasion (by a meagre 0.25%), and the regional MSCI Asian equity index is flat. Instead, the
big global investment stories have instead been all about the dominance of US Dollar-denominated
assets, as well as the extraordinary central bank-fuelled rally in G3 bonds. That’s not to say it has
been impossible to make money in Asia during this period. Since 2013, the notable Asian equity
market outperformers have been the Indian stock market (from late-2013 to early-2015), China’s
Shenzhen index (from mid-2014 to mid-2015), and Vietnam (in 2016), all of which have returned
more than 35% in USD-terms. In an uncertain world, it pays to be selective.
One of our recurring concerns over the last three years has been that overly loose monetary policy,
in all so-called Developed Markets and many Emerging Markets too, has managed to inflate asset
prices and also perpetuate excess capacity in numerous industries by delaying the exit of
overleveraged and uncompetitive firms. Looking out of the window here in Kuala Lumpur as I
write, this point is forcefully illustrated by the preponderance of empty tower blocks and cranes
dotting the horizon. It is also true of other sectors in other countries. But this has been the case for
quite some time, so when will these imbalances correct? What to expect for the next three years?
Perhaps the best investment scenario we can hope for is ‘more of the same’, with loose monetary
allowing equity valuations to drift slowly higher, even if growth disappoints. However, there are
various reasons that such a benign outlook might prove to be too optimistic. Even if the current US
expansion approaches the length of the previous longest post-war expansion on record (1991-
2001), a US recession at some point in the next three years does not seem unlikely. Such a
downturn might well be triggered by more monetary tightening from the Federal Reserve, which
seems likely to increase interest rates again within the next couple of quarters. A resurgence in
stagflation (i.e. a combination of higher inflation and lacklustre growth) would present serious
challenges to monetary policymakers, with the potential to trigger a more aggressive tightening
cycle than markets are currently expecting. The fragile nature of China’s debt-fuelled expansion
raises the stakes, and increases the likelihood of a global downturn when imbalances do start to
correct. More generally, increases in inequality around the world are fuelling scepticism about
globalisation. Increased geopolitical tensions further increase uncertainty.
Whereas the response to the Great Financial Crisis of 2008 has been dominated by aggressive
action from central banks, there is now a growing perception that the negative side-effects of their
policies are unacceptable. The response to a future downturn will likely involve more heavy-lifting
from G3 fiscal authorities (if indeed this does not begin before the next recession), with a
reasonable chance of seeing an attempt at coordinated fiscal and monetary policy. The key question
would then be whether sovereign bond markets respond favourably to such developments, which
will probably vary country-by-country depending on perceptions of fiscal sustainability.
Given the uncertain and potentially hostile investment outlook, we reaffirm Panah’s bias towards
investing in well-run companies with solid balance sheets, strong cash flows, respectable long-term
growth prospects, and reasonable valuations. Over the last three years, it has struck us how hard it
is to find firms which genuinely fit these criteria. When we do find such companies, and as we get to
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