We noticed two things this week that we wanted to write about. The first was an interesting pair of reports from J.P. Morgan and Goldman Sachs on the amount of oil transiting the Strait of Hormuz. The second was a thought about the evolution of thinking in Japan, and how we found it echoed in our meetings in China this past week.

First, with respect to oil, both Goldman Sachs and J.P. Morgan wrote that the volume of oil now transiting the Strait is about 98% of pre-war levels. The data is murky and comes with little public reporting, but keep in mind that roughly 190 million barrels of oil were locked inside the Strait at the start of the war, and there appears to be a ship-to-ship night transport, with transponders off along the Omani channel. Apparently, the 10-day average over the past week or so has been very close to pre-war levels. This does not mean the transit is safe – it just means it is happening. We also read that transportation costs now represent about a quarter of the cost of a barrel of oil, roughly five times higher than before the war. While the new flows are positive, we note that Brent remains above $100. This tells us the market is still clearly discounting a problem. Also, the US Administration has said it may ban diesel exports while at the same time asking EU countries to release their stockpiles. Oil products shipping (diesel/jet fuel) is still way down as the ship-to-ship method only works with supertankers. The situation remains very difficult.

One of the reasons we have increased our exposure to Japan over the years has been the improvement in Japanese corporate governance. Recently, more attention is being paid to shareholder returns. Dividends are increasingly set as a consistent percentage of cash flow. Shares are being bought back and cancelled, funded either by the liquidation of long held cross-shareholdings (a decades long “Japan only” issue) or simply from too much cash sitting on balance sheets (a decades long conservative approach), at cheap valuations. This has been a refreshing development for value investors who have waited years for the corporate culture to evolve. We heard similar commentary from the people we were speaking with in China. The Chinese consumer market has been depressed, and serious government stimulus does not appear to be forth coming. Investors have crowded into AI stocks in search of return. This crowding is viewed as a domestic risk for Chinese investors, and in multiple meetings, people were looking for investment in companies that can deliver long-term, stable returns (i.e. an improvement in management & governance). At the same time, we read similar commentary on hopeful governance reform in Korea. It seems there is room for improvement – and therefore opportunity – in Asia’s developing markets.

“This means that” we still believe the trend for oil is “higher for longer”. We note this week that a US$300 billion UAE fund is directing money toward infrastructure projects designed to remove dependence on the Strait. This will take years. At the same time, we think there is plenty of opportunity in Asia to look for companies where governance standards are improving. These two themes will be present in our portfolios for some time to come.