A rush of optimism invigorated Asian markets during the second quarter, sending stock prices to the highest level since early October. The MSCI Pacific Index posted a gain, as 463 of 491 companies advanced. Singapore was the best-performing country in the developed world. According to The Economist, trade is equal to 95.8% of Singapore’s GDP, making it the most heavily trade-dependent nation globally after Aruba. With simultaneous recessions underway in Japan, the U.S. and Europe, exports out of Singapore fell 17% in March (year-over-year). A record number of Singaporeans lost jobs during the first quarter, amid the nation’s worst economic contraction since independence in 1965. Early indications of economic stabilization in the U.S. and China thrust the MSCI Singapore Index into a 46.0% rally, the country’s largest since a 101.5% surge during the first three months of 1975. Japanese shares lagged neighboring countries, but still managed a gain. After nearly three years of downbeat assessments, the Bank of Japan upgraded its estimate of the local economy, noting that second quarter output should be “significantly better” than prior periods. Japanese consumer confidence rose to a ten-month high, while industrial production increased 5.2%, the most in fifty-six years.

• In the second quarter, the Allianz Pacific Rim Fund was up but lagged the MSCI Pacific Index.
• From a country perspective, China and Korea both added to results, driven by off-benchmark bets in the two Asian economies. Winners included Tencent Holdings Ltd, a Chinese Internet services company, and Hynix Semiconductor, a Korean chip manufacturer. The largest detractor for the quarter was Japan, where stock selection did not keep pace with the benchmark. Examples included Japan Tobacco and video game hardware and software maker Nintendo.
• Looking at sectors for the quarter, Energy was the best performer, led by positive relative stock returns versus the benchmark. The best performer was Woodside Petroleum, an Australian-based exploration and production company. Offsetting the positives were Consumer Discretionary and Information Technology shares, both of which had a relative underweight and negative stock picks versus the benchmark. Nitori Co Ltd, a Japanese furniture company, was one of the culprits, as was Nintendo, mentioned previously.

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• Standard Chartered was a solid quarterly performer for the Fund. The U.K.- based international banking company, which has a dual listing in Hong Kong, was up for the quarter. The stock benefited from a shift in global risk concerns and a resurgence in financial sector sentiment. Specifically, Standard Chartered continues to grow revenues, earnings, and book value per share. Their well-structured balance sheet enables the company to absorb losses should the current environment deteriorate. Both the wholesale and consumer banking divisions have been strengthening, thanks in part to a steepening yield curve. Market share gains, strong performance and wider margins suggest this stock may continue its recent run into the near future. Longer-term, the company’s unparalleled reach into Asia, Africa, and the Middle East further this opinion. We continue to hold shares of Standard Chartered.
• Hongkong Electric Holdings’ performance proved more challenging. The power company, which is one of two fully integrated power companies in Hong Kong, was off for the quarter. The stock’s defensive earnings composition and low beta meant it did not perform well in the recent market environment driven by higher beta, lower quality names. Longer-term, management is optimistic about overseas acquisitions to spur top-line growth, as well as a potential wind farm proposal. We hold shares of Hongkong Electric, given the company’s dependable positive cash flow generation and possibility for expansion into new markets.

With global stock markets and commodities up sharply since March, investors are asking whether the worst is behind us. Certainly, authorities worldwide have pulled out all the stops, using monetary and fiscal policies and government balance sheets to thaw frozen credit markets. As a result, we have seen stabilization in the rate of economic decline around the world and the large contractions witnessed in 4Q08 and 1Q09 should not be repeated. Still, we would prepare for a prolonged period of below-potential growth. The de-levering of the American consumer, growth engine for international export markets, will probably take time. Unemployment will likely continue to rise in many countries, as it is usually a lagging indicator. We also expect higher tax rates, as we have already seen in the U.K. and proposed in the U.S., and higher government involvement across the economy, from financial services to health care.