James Thom, Investment Manager at Aberdeen New Dawn Investment Trust PLC, on the encouraging signs for Asia in the wake of the pandemic.
Asia has been battling a second wave of Covid-19 cases, but the economic damage has been far less than in the first wave
Markets have remained resilient and avoided the sell-offs seen in 2020
The corporate sector is in good health, with earnings accelerating
Asia had initially appeared to escape the worst ravages of the virus. Early and successful action from governments had kept Covid-19 at bay. More recently, the region has had to cope with second waves that have forced further lockdowns and threatened economic recovery. However, there are a number of encouraging signs for Asia today, both on economic resilience and on corporate health.
During this difficult period, there has been a big divergence between countries, with the second wave most acute in India, but also in Taiwan, Malaysia, Vietnam, Indonesia and Philippines. This has been a tough environment to navigate, but good companies have continued to thrive. More recently, we are seeing case numbers drop and an acceleration in vaccination programmes even among the worst-hit countries.
The economic damage wrought by this recent acceleration of Covid-19 cases has been far less than in the first wave. The response from governments has been less severe: last year’s lockdowns were punishing on the economy, but this time restrictions have been more localised and less draconian, allowing economic activity to continue and growth to be sustained.
This may be why markets have been relatively resilient during the period and have, for the most part, avoided the huge sell-offs seen in the first wave. There is still plenty of government and central bank support in place, which has also helped support stock markets.
Reasons to be cheerful
From here, we see brighter times ahead. The region has certain key advantages as it recovers. For example, it is not facing the same inflationary pressures as in the US. Inflation has tipped higher, but this has largely been driven by commodity prices, which should start to drop later in the year. Nor is Asia facing the same debt burden as many Western economies. Debt can act as a constraint on growth.
Even amid these new Covid-19 waves, Asian companies are in robust health. Consensus estimates are for 30%+ growth in earnings this year. Those companies hit hard by lockdowns are bouncing back as economies across Asia reopen. Yet the Covid-19 beneficiaries, such as technology, continue to be very resilient. Equally, with Asia having lagged global markets in recent months, valuations look more attractive today.
Risks still exist. Geopolitical tensions rumble on, for example, as China becomes more assertive in its foreign policy. It is ratcheting up tensions in Hong Kong and Taiwan. President Biden does not appear to be changing course. These tensions have been reflected in markets at the margin. For example, ride-hailing group Didi Global is struggling on its debut on the US market, raising alarm bells for Chinese companies listing in the US. At Aberdeen New Dawn Investment Trust, we are generally avoiding companies that may be vulnerable.
In the Trust today, we are prioritising companies with pricing power. While inflation is not as big a risk as in the West, we still see rising input prices and want to make sure that the companies in our portfolio can pass those costs onto their customers if necessary. For example, we like cement companies that are seeing higher input prices, but can raise their prices because of buoyant demand. Financials should also be better insulated.
The ‘green’ trend is every bit as strong in Asia as it is elsewhere around the world. We have been adding to this theme, focused on China, given its commitments there. Recent examples in the portfolio include renewable energy groups Longi Green Energy Technology and Sungrow Power Supply.
This is part of a broader increase in Chinese holdings. We recently sold down the holding in a China ‘A’ Share Equity Fund and have started to pick individual names for the portfolio. This is a reflection of the number of exciting ideas to be found in the Chinese market and growing confidence in investing directly in this market. In addition to green energy companies, there is also a range of options in the domestic consumption and healthcare sectors.
Environmental, Social, and Corporate Governance (ESG) considerations play an increasingly important role in our stock selection process. At Aberdeen Standard Investments, we have developed our own ESG in-house scoring system, and every analyst can interrogate this database when making their decisions. We also make use of external groups to check areas such as climate emissions. The portfolio now has an AA rating from MSCI.
It has been a difficult few months for Asia, but its economies and corporate sector have shown resilience in the face of mounting Covid-19 cases. As cases drop and vaccination rates rise, the region should start to recover and Aberdeen New Dawn Investment Trust is poised to benefit as economies and stock markets improve.
Companies selected for illustrative purposes only to demonstrate Aberdeen Standard Investments’ investment management style and not as an indication of performance.
Discrete performance (%)
|MSCI AC Asia Pacific ex Japan||14.1||1.9||5.7||6.1||25.7|
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar.
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