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Asia: economic resilience and corporate strength

September 2021

James Thom, Investment Manager
Aberdeen New Dawn Investment Trust PLC

  • Asia has been battling a second wave of Covid 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 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 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 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 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.

Portfolio changes

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 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 (%)
Year ending 31/07/21 31/07/20 31/07/19 31/07/18 31/07/17
Share Price 24.0 (2.3) 15.2 4.9 27.8
NAV 21.5 1.3 11.6 5.1 26.7
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.

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can fall 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.
  • 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.
  • 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.
  • Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.

 

Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

 

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The value of investments and the income from them can go down as well as up and you may get back less than the amount invested. Please refer to the relevant Key Information Document (KID) prior to making an investment decision. Please be aware of scams that can affect investors.