Asia: Imperfect, but rich with opportunity

• Fears on Chinese growth have weighed on Asian markets

• China is not Asia, and it is possible for active managers to side-step any vulnerable areas in the region

• We see more growth across Asian economies than is available in Western markets

In common with the rest of the world, Asian markets have experienced considerable turbulence since the start of the year. However, the concerns driving this volatility are different to those elsewhere. With only moderate inflationary pressures and a different interest rate cycle, growth Is likely to remain more abundant in Asia, making it a good environment for active investors.

Perhaps the key concern for investors in Asia has been over Chinese growth. Certainly, the government’s pursuit of a zero Covid policy has been disruptive for economic activity, while geopolitical tensions with the US could cause problems, such as technology decoupling. There remain lingering worries that the government will impose tighter regulation on key industries.

However, it is clear that the Chinese government recognises many of these problems. Greater vaccine coverage and new anti-virals should ensure that the Covid revival is a short-term difficulty rather than a long term drag on growth. The Chinese government also recognises the importance of innovation and the private sector to the long-term health of the economy. Monetary policy in China has already started to reverse.

Equally, while it is undoubtedly influential, China is not Asia. The abrdn Asia Focus portfolio has historically been underweight in China and particularly the regulation-sensitive technology companies. More recently, other areas within Asia have been much stronger economically, including areas such as Vietnam and South East Asia, with growth normalising and recovering. India has been surprisingly resilient despite being a net importer of oil. The country’s oil dependence has gradually reduced and the government is continuing its pro-growth and pro-consumption agenda.

Asia, including China, is not struggling with the same inflationary pressures that have been seen in the major economies of the US, Europe and the UK. Its governments have more firepower to help manage the pressures on households and its central banks have already acted decisively to curb inflation. This means there is not the same difficulties for households and consumer demand remains relatively strong. While the US and Europe wrestles with the implications of rising interest rates, much of Asia is already out the other side.

The corporate sector

The relatively resilient economic backdrop is reflected in corporate earnings. Business has normalised for the vast majority of companies in our portfolio in the wake of the pandemic and many have managed to sustain earnings and dividends in spite of rising costs. As Warren Buffett once said ‘it is only when the tide goes out that you see who is swimming naked’ and it is only in the current climate that it is clear which companies have true pricing power.

Markets, however, haven’t been particularly discriminating. This is creating a significant mismatch between the operational performance of many companies in our portfolio and their share prices. The price to earnings ratios – a measure of valuation - for many of the stocks in our portfolio is as low as it has ever been. At the same time, balance sheets look strong and well-equipped to weather a more difficult environment.

Equally, in an active portfolio – and our active share is significant, at 98% - it is possible to side-step many of the more vulnerable areas. At the moment, the portfolio has around 12% in China (5% in the ‘A’ shares market and 7% in Hong Kong) and our exposure is focused on high growth areas. This includes renewable energy company Sinoma, the country’s largest wind turbine company and engineering software group Cyient.

Some companies are even benefiting from a trickier economic environment. Hong Kong-based Pacific Basin Shipping, for example, is a dry bulk carrier, which has seen earnings improve on higher freight rates. Dah Sing Financial is a high quality, well run bank that should be a beneficiary of rising interest rates. Logistics and supply group AKR is good proxy to Indonesia’s economic growth, running petroleum and basic chemical distribution. The agility of the Trust has also been shown in those areas we’ve exited, including Raffles Medical Group and a pet food company. In both cases, share prices had run ahead of fundamentals. We have also taken profits in Affle and Momo, which did well in the technology bull market of 2020 and 2021.

It is our firm view that high quality companies – with sound balance sheets, strong market share, good management and a robust end market - can fare well in all environments. Our portfolio is unlikely to have substantial exposure to short-term, economically-sensitive growth areas, such as material and commodities. We prefer growth based on new technologies, breakthroughs in medicine, plus the long-term growth of the consumer.

The challenges facing Asia today are different to those in the US and Europe. While the environment is still tough, we see more growth available in Asia today than in the rest of the world and fewer pressures from inflation and monetary tightening. It is an imperfect environment, but one that plays into the hands of active managers.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK. An investment trust should be considered only as part of a balanced portfolio.

Find out more at www.asia-focus.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.

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