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Cherry Reynard: Welcome to the latest in the Aberdeen Standard Investment Trust podcast series, I'm Cherry Reynard.

Today I'm talking to James Thom, portfolio manager of the Aberdeen New Dawn Trust, about the state of play for Asian economies and markets. Welcome, James.

James Thom: Thanks, Cherry, great to be with you.

Cherry: As we've seen in the press, some parts of Asia are battling a new wave of COVID-19. To what extent is that hurting the economic recovery in the region?

James: Well, I think, yes, unfortunately, Asia is battling a number of new waves. And it's across the region, really, everywhere from Singapore, where I'm based, India, of course, which has had the worst of the waves, but also Taiwan, and some of the other Southeast Asian countries, Australia, even another small outbreak in China. So that's the bad news. The good news, I think, is that this time, the impact of that is, is much less severe than the initial waves we saw last year. And by that, I mean, there's been no sort of wholesale nationwide lockdown in response to these waves. And instead, we've had a much more targeted and less restrictive kind of intervention by governments. And that's meant that the impact economic activity has been far less dramatic - even in India, where, as I say, the pandemic really got to very scary levels, in terms of case numbers.

Even there, whilst we have seen some downgrades to GDP growth forecasts, they're not terribly dramatic. So, I think the overall economic recovery remains broadly on track, and that's been reflected, really in the way in which Asian equity markets have performed as well – so we haven't seen those dramatic falls that we saw last year amid the initial wave, and in fact, the markets been pretty resilient.

Cherry: And how have governments and central banks responded to this sort of new wave? Have they put in place further stimulus measures, or have they just kind of left things as they are?

James: Yes, there's been further support, and I think one of the big positives if you like, for Asian economies is that there is still a lot of firepower, in terms of policy support available. So, most countries here have followed, you know, fairly orthodox monetary policies – so, they can if they want to though we haven't seen it, yet - they could cut rates. Obviously, there's some inflationary pressure that we're seeing at the moment, so that I think they're a bit hesitant to cut rates, but they could if they wanted to.

Instead, we've seen central banks kind of pursue more kind of, different kind of relief measures of the type that we saw last year as well, so kind of loan moratoriums and things like that. So, there has been help on hand to help economies through this period.

Cherry: And you mentioned inflationary pressures there and obviously, that's, that's been a big issue in in Western markets. Have you taken any action in the portfolio to mitigate those pressures?

James: Yes, on the margin, I have to say at this point, I'm not unduly concerned by the inflationary pressures. We are seeing a bit of kind of cost push inflation out here with rising commodity prices in particular, so that's sort of eating into margins in some cases, but it's not a serious issue at this point, and may very well proved to be temporary.

So having said that, I think we are all conscious and aware that at some point rates will have to rise again, and there'll be a normalisation of monetary policy globally, so we are thinking about how that might impact Asia. So we have been just, as I say, on the margin, moving a little bit more into some of the sectors or segments of the market that might actually sort of be, I guess, either more insulated from that, or even beneficiaries of that.

So, banks, for example, for the most part in Asia will be beneficiaries of higher rates, so we have just been adding a little bit to our bank holdings with that in mind.

Cherry: Okay, and have there been any other notable changes to the Trust over the past six months?

James: I think the key change has really been in the domestic China A-share market where previously we got the exposure to that market through holding the Aberdeen China A-share fund. And we did that as a way of diversifying the risk across multiple holdings.

We have since transitioned out of those fund holdings. So indirect exposure to the A-share market, now into direct A-share stocks instead. And that reflects really just a growing level of comfort and conviction in the direct holdings. So New Dawn now holds eight or so direct Chinese stocks that span a range of sectors, but they're all, you know, high quality and many of them high growth companies. So that's been, I think, the key change. And then we have added a little bit more to some of our electric vehicle theme, not directly, so we're not buying the electric vehicle makers - but we are buying some of the suppliers and component manufacturers into that growth area, in both Korea and China. And we've added a little bit in the healthcare sector as well.

Cherry: Okay, so could you give us sort of a big picture view of the of the Trust as it stands today, you know, the type of themes that are running through it?

James: Yes, so there are several really, I think, I mean I mentioned the electric vehicle component makers there. And that's part of a broader kind of green economy theme, if you like, that encompasses not just electric vehicles, but kind of renewable energy. And that's becoming a more important theme within the portfolio, we've got some exposure to the China solar energy sector as well in there. And we're seeing more and more ideas within the sort of green economy theme - so that's one.

And that I think, just reflects the increasing emphasis that we're placing on ESG in the portfolio as well - it's always been a core part of our stock selection process. But it's becoming ever more important, I think, and so that cuts right across the portfolio today.

Aside from that, I think technology's an important theme still within the portfolio, that's both on the hardware side. So, we have large holdings in some of the semiconductor and memory stocks, and we're still very constructive on the outlook for that sector.

And then also into the area of digitalization, so the internet names and some other service providers into that.

I've mentioned adding to health care and that remains an important theme too, spanning everything from kind of services within the healthcare space - particularly around the sort of high growth biologics segment - but also medical devices.

And then finally, I would just say the portfolio continues to be a play on kind of rising wealth levels and aspirational consumption, right across the region.

Cherry: And what about the health of the corporate sector, generally? I mean, what are you seeing in terms of corporate earnings at the moment?

James: Earnings are rebounding nicely, right across the region. So, not withstanding the fresh waves of COVID that we talked about just a minute ago, and some of the impact that that's having on economic activity in the short term, we are seeing, nonetheless, a continued rebound in earnings. Consensus estimates are for growth of, you know, 30% or more in earnings this year for Asian corporates, with very strong growth in the tech sector. But also, as you would expect, a rebound in the cyclical sectors, financials and some of the reopening stocks or plays that had been most impacted by the by the pandemic.

So overall, still a very healthy outlook. I think I've mentioned the inflationary risk already in some of the cost pressures, but I think, you know, that might take the edge off it a bit, but I think we'll still see a very healthy year this year in terms of earnings.

Cherry: And do you have a sense of which changes that have been seen during the pandemic will have longevity? I mean, things like cloud computing, or ecommerce or that sort of thing?

James: Well, I think there are a host of changes that are here to stay. You mentioned cloud computing, I mean, I think that's absolutely one that's seen an acceleration as a result of the pandemic and isn't going to reverse. You know, we've seen companies push faster and faster on their digitalization strategies and shift to the Cloud, so that's, that's key. Working from home, I think we'll, you know, my personal view is that that will moderate a bit and we'll see a kind of shift to hybrid, working with a split between home and office. But obviously that has implications for the real estate sector, ecommerce and again on the sort of digitalization theme, that has seen a big acceleration as in Asia as it has elsewhere. And I don't see that reversing. So that shift from offline to online, I think is structural and will continue to accelerate.

So, you know, I think within all of this, there remains opportunity. And it's certainly something that we're alive to and focused on trying to identify really high-quality companies, that might be a play on some of those structural shifts.

Cherry: Okay, and there have been some concerns about the shifting regulatory environment in China and in the internet sector, specifically. How are you viewing that? I mean, has it shaped your view of any particular stocks as a result?

James: Yes, it has - I think, in the near term, we remain fairly cautious on the China internet sector because of this regulatory uncertainty, and it's been ongoing for some time now. So some of the sort of uncertainty is clearing and we've seen some companies kind of maybe not quite emerge from it, but certainly a further along the journey than others. And it's getting a little bit clearer to decipher what the future is going to look like. Whereas other companies, it's still quite uncertain. So overall, I think, cautious at this point.

But looking longer term, I think we're still positive on the sector as a whole, I still see very strong growth opportunities longer term. And we don't think that the regulators are trying to sort of take down the internet sector I think they're trying really just to sort of catch up with the huge amount of innovation that's been going on in the sector in recent years, and bring it within the sort of regulated realm, and ensure fair play is at work.

So that'll take a little bit of time, it will mean a bit of change to some of the business practices and so on. But overall, I think it will find a new equilibrium, and the as I say, the long-term prospects are still very attractive.

Cherry: And are there any other kind of major risks that you've identified today?

James: So, I think COVID remains front and centre of the risk register. Fortunately, many of the countries are now emerging from those new waves. So India has, we've seen such a clear reduction in case numbers from the peak back in May, of that second wave, and elsewhere as well, numbers are coming under control again. But where vaccination rates remain low - and India would be an example of that - clearly, there's still a risk of further waves. So I think that's, that's probably the key risk. We've talked about inflation already and my views on that, but obviously, that's a risk factor too. And you only have to rewind back a few years to the so-called ‘taper tantrum’ when quantitative easing policy in the US started to be unwound and the impact that that had on emerging and Asian markets. So, we have to be a little bit cautious there.

And then I think just geopolitics will remain the big sort of macro question, with no obvious thawing of tensions between the US and China in particular - and I don't, I don't envisage based on what we've seen so far under the Biden administration, that we will see a reversal of tensions there, so that will remain a tricky dynamic to navigate.

Cherry: Okay, thanks, James. And then I guess, just finally, can you give your thoughts on that on the on the remainder of the year? Are you feeling sort of optimistic? Do you do you have any sort of key predictions?

James: Cautiously optimistic, I think is probably the right phrase. And I say that because, you know, in part, if I look at the fundamentals in Asia, as I said, we're still seeing a robust rebound in earnings growth this year. So that's, that's encouraging. And, you know, notwithstanding some of those risk factors, I think, will, will continue.

I think, also, you know, there is that scope for further stimulus and, and support from Asian governments so that will provide a bit of a cushion too. And then when I look at it relative to other markets, Asia remains, under owned within global portfolios, it has lagged global markets, year to date, so I think there's scope for a bit of a catch up there given still resilient fundamentals. And looking longer term, you know, all of those longer term structural attractions that we've talked about in terms of themes, those are still very much intact and, and continue to be as attractive as ever. So, I think that provides quite a sort of supportive backdrop for the remainder of this year.

Cherry: Thank you so much, James for those insights today. For any more information on the Trust, please check the website at www.newdawn-trust.co.uk. And thank you all so much for tuning in.

This podcast is provided for general information only, and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen Standard Investments. 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 returns, return projections or estimates and provides no guarantee of future results.

Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is James Thom from the Aberdeen New Dawn Trust. We'll be talking about the recovery in Asian economies and how he's positioning the fund in this new environment. Welcome, James, I wonder if we can start by looking at the big picture across Asia – are you finding that economic recovery is in full swing there?

James: It is looking very encouraging. I think Asia is now clearly benefiting from the way in which it handled the pandemic through the course of last year. And an economic growth is racing back. And if you think about the two big kind of economic engines in the region, even last year, China managed to eke out 2% GDP growth, and that momentum is kind of continuing through to this year. India was pretty hard hit by the pandemic, but it has seen a remarkable rebound with case numbers now down substantially in the fourth quarter and into this year. And that has allowed the economy there to open up far quicker, I think, than anyone had expected. And across the region, you know, they're certainly not totally out of the woods. So some of the countries are still struggling and growth is still not there. But overall, I think the picture is pretty encouraging.

Interviewer: And there was speculation ahead of time about what the recovery might look like. Are there really noticeable characteristics about the recovery - any areas that have been particularly weak or particularly strong and any surprises?

James: I'm not sure, it's been sort of particularly surprising in the way in which it's playing out. So as you would expect, the sectors that were hardest hit by the pandemic are those that are now sort of coming back most strongly. So if you think you know, anything sort of consumer discretionary related, you know, we're seeing quite good growth come back there, whether it's, you know, auto sales, or retail, restaurants, those sorts of things. Maybe the bit that has arguably been a little surprising has been the sudden rebound in the kind of commodities area. So, metals and mining and oil and gas has come back quite strongly on the expectations that economies are going to continue opening up and demand is going to come back. So we're seeing that play out. And meanwhile those sectors that were kind of seen as beneficiaries, through the pandemic, have continued to perform pretty strongly. And that almost feels now like a bit of a sort of structural improvement. So if you think about the internet sector, ecommerce, the tech space, we’re still seeing very good performance there.

Interviewer: And what do you see as the big risks today? Is it still a revival in outbreaks of the virus? Or are there other things emerging that you're looking at just as closely?

James: The number one risk is still very much the pandemic and another wave. And, you know, as much as I said we've seen a dramatic drop in case numbers in India just in the last couple of weeks, we've seen, unfortunately, numbers pick up again. So still fear and concern there. We'll have to see how that plays out. Obviously, the vaccine developments are key here and India is now rolling that out much more quickly than it than it had been initially. So yes, vaccine and the virus still front and centre of the risk register, if you like. I think the one that's kind of reared its head that wasn't there previously, is now concerns about inflation and rising rates. We've seen the sort of yield curve pick up a bit. And so concerns that maybe Asia is on the cusp of another so called taper tantrum. If you think back to 2013, when the Fed sort of changed course in terms of monetary policy. I don't think we're there yet. And I think Asia is in pretty good shape, actually. But certainly, there's quite a bit of thought now going in to what this all means for Asian markets and economies. And then the third one would just be, you know, the continued concerns around geopolitics and relations in particular between the US and China and how that's going to unfold under the new White House administration.

Interviewer: If we could turn to the fund now, and the fund’s quality focus certainly helped during the pandemic. Have you shifted the focus at all as the economy recovers, perhaps moved into more cyclical areas?

James: Yes, a little. I mean, I would say that the focus on quality hasn't changed. So you know, I think there is no substitute for quality, particularly in Asian markets, where there are sort of risks to the downside. So we're still very much focused on quality companies. But yes, from a sort of sectoral standpoint, we have rotated a little to reflect that the opening up of economies and the growth that we're seeing coming back in some of these more cyclical sectors, as you said, and in the commodity space, as well. So, so yes, we've kind of reflected that a little bit in the portfolio in recent weeks and quarters.

Interviewer: And anything else you'd say about the current theme running through the portfolio and trust positioning?

James: So I would say I mean, overall, the portfolio remains a well diversified portfolio. So whilst we have still probably a third of the portfolio in China, and we're still positive on the China growth story, we have substantial positions across North Asian economies and markets, in India and in Southeast Asia. From a sector standpoint, we've got quite a significant exposure to the tech sector, as I said, that had been kind of resilient through the pandemic, but we've seen it continue to perform very strongly. So I think we're still positive on the outlook there, both on the internet sort of side of that sector and on the sort of tech hardware side where growth remains very robust. But otherwise, I think, you know, thematically, probably the new, or the newest theme that we've been thinking about and positioning around somewhat is the sort of shift to a greener economy and renewable energy and a move to electric vehicles, and all these things, which is, as we're seeing across the globe, you know, in Asia is gathering real momentum. And there's some great companies in this part of the world that we have the opportunity to invest in.

Interviewer: And what about the longer term themes in Asia that have sort of been recurring over the past decade or so - things like infrastructure and the growth in the middle class and urbanisation? Has the pandemic changed any of those at all?

James: My sense is, is not. I think those you know, those remain very real, long term structural growth drivers for the region. Asia is still in need of significant infrastructure build out - urbanisation is still a very real phenomenon, you know, maybe less so in somewhere like China today, given the huge progress they've made there. But if you look to a market like India, urbanisation is still very real and very much happening. And there's still a huge paucity of sort of housing, for example. So demand for infrastructure service providers, cement companies, paint companies, you know, we're seeing very good growth still in many markets there on that theme. And, the rise of the Asian middle class is continuing and continuing to drive growth and aspirational consumption. And we have quite a number of stocks in the portfolio that are a play on that still very kind of resilient themes.

Interviewer: Asia is has been quite resilient over the past year, particularly in China. Is that reflected in higher valuations for Asian companies? Or are you really seeing sort of valuations on a par between both kind of relative to their history and relative to the rest of the world?

James: So valuations have run up a bit. The markets have performed well and continue to perform well. Earnings are catching up but there has been a rewriting in valuation multiples. And I think it's fair to say certain parts of the market do look a bit frothy at the moment. And we are seeing quite a lot of new IPOs and issuances taking advantage of that. But overall, if you kind of chart valuations relative to their long term history, they're a little bit above that long term average, but not, you know, materially so, so they don't look overly stretched. And I think the key is that we see the earnings growth come through to support those multiples. So that's, I guess, the sort of the risk to this. But notwithstanding that, I would argue that Asia still looks pretty attractive, versus global equity markets, and certainly versus US markets. With the region trading on a still very wide discount versus those markets. I think there's the relative attractiveness is very much that still.

Interviewer: And you mentioned earlier that you have around 1/3 of the portfolio in China. Is that focused on any particular kind of stock or are there things that China is doing particularly well?

James: Well, it seems to be doing a lot of things very well. And there are multiple themes to our exposure in China in the portfolio. One is very clearly the internet sector. So one of our core holdings remains Tencent and that is still seeing very strong growth. And there are multiple drivers there, you know, everything from gaming revenues to online advertising, to FinTech now, so that remains a fascinating and highly innovative space with a lot of growth opportunity. As I mentioned, you know, that rising middle class, that's still very much a real trend in China, and the aspirational consumption that comes with that. So we have two or three holdings that are at play on that theme. We've got a couple of holdings in the healthcare sector. And again, China's been quite innovative, particularly in the biotech space. And I mentioned, renewable energy, obviously, China's just made this key pledge to be carbon neutral by 2060, which is a long way off, but the amount of investment and capital expenditure that we think that shift is going to require will be huge. And therefore we're seeing a lot of growth and investment into some of the China companies. And that's reflected in the portfolio as well.

Interviewer: And you mentioned the new US administration. Obviously, it was quite a tetchy relationship under the previous administration. But do you have any geopolitical concerns about China? And if so, how do you manage that in the portfolio?

James: So I think those concerns are still there. Yes, there's been a change in administration. And, you know, the hope is that we'll have a slightly more diplomatic relationship now. Less confrontational, but I think that the tensions aren't going to go away. And there is sort of broad based support for them politically on both sides of the house in the US. So I think and, you know, notably, in the first few months of the administration, Biden has not rolled back any of the sort of key sanctions, if you like, that have been placed on China under the prior administration. So there's been no relaxation, we're waiting to see whether there'll be a further escalation - my sense is that there could well be. So you have to be kind of alive to those risks, I think we, for our part, tend to focus on the companies and ensure that we're in the best quality companies that can sort of withstand any turbulence. But also, you know, when you look at our exposure, in China, a lot of it is kind of domestic focus. So we don't have a lot in companies that are kind of trade dependent or export dependent, or are sort of more politically sensitive, if you like. We tend to kind of shy away from those and I think that helps insulate us in the portfolio overall from some of the sort of real volatility here.

Interviewer: Okay. And I wonder if we could just wrap up by talking a little bit about what the last 12 months has done to the long term argument for Asia. And, you know, whether that's still kind of firmly in place, whether it's actually potentially got stronger?

James: Yes, I think I mean, there is an argument to be made here that Asia, well, if it doesn't emerge stronger in absolute terms, I think it may very well emerge stronger relative to the rest of the world. If you think about the sort of strength of the economies in Asia, in contrast to much of the developed or Western world. Asia, given the way that they've handled the pandemic, they have pumped stimulus into the economies to support them through this tough period, but not to the same level or extent that we've seen in western economies. As a consequence, they're much less indebted, and will emerge in a far stronger position from this as a consequence. And Asian central banks have largely pursued orthodox monetary policy since the global financial crisis going back a number of years now, so they still have no monetary policy levers at their disposal to keep stimulating the economy should they need to. And as I've already commented, Asia is racing back into growth and remains the fastest growing part of the world. And that will also continue to position it very well. And, you know, all of those long term structural drivers that we've talked about already, I think remain intact, coupled with the huge innovation that we continue to see in this in this part of the world and that's only accelerating - so I remain as positive on the region as I ever was, if not more so.

Interviewer: Great. Okay, thank you so much, James, for those insights. And thank you to our listeners for tuning in. Please check into the website, which is www.newdawn-trust.co.uk for any more information, and please do look out for our future episodes.

This podcast is provided for general information only, and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen Standard Investments. 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 returns, return projections or estimates and provides no guarantee of future results.