An update from manager James Thom in Singapore
In this podcast, manager James Thom gives his views from Singapore. He explains the current situation in Asia, discusses the positioning of this portfolio and explores the long-term structural changes that may be brought about by the Covid-19 outbreak.
Recorded on Tuesday 2nd June 2020
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Interviewer: Welcome to the latest in the Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at the implications of the COVID-19 outbreak on their portfolios. With me today is James Thom from the Aberdeen New Dawn Investment Trust, welcome James. Now, Asia is some way ahead of Europe and the US in the progress of the virus. To what extent are you seeing a return to normal for businesses there?
James Thom: Well, it’s fairly piecemeal is the honest answer. There are some countries where businesses are definitely getting back to normal and there are others where they are still very much in lockdown and really no different to what you're seeing in Europe. I think China is the most obvious example of a country where life is getting back to normal. Obviously, they were the first into the virus outbreak in early January and are now the first to emerge. Lockdown has been eased substantially and people are back to work and companies are functioning almost normally now. When you look at the sort of high frequency economic indicators and some of the more some anecdotal points that we've had from our conversations with companies in the mainland, in many cases they are now back to sort of 80%, 90% of normal levels. But certain parts of the economy even in China remain pretty restricted. So there are still travel restrictions in place so passenger volumes are still down heavily on subways, airports down heavily, some of the sort of more discretionary sectors continued to be impacted by those travel restrictions. And I think the concern was that all looks quite positive as a sort of case study for how Asia and indeed the rest of the world might begin to normalise. There is still this lingering concern and risk of a second wave of infections particularly as travel resumes once again, which could dent any recovery.
Interviewer: With that in mind, have you drawn any conclusions about the likely hit to the broader economy in Asia?
James Thom: So I think that the main conclusion, although it’s still early days, is that we’re unlikely to see a true kind of V-shaped economic recovery. I say that because even in China where the recent data looks encouraging, you're not seeing a V-shaped recovery even there given there are still restrictions on travel and that is impacting certain parts of the economy. I think outside of China you still see the virus is in various different stages of its evolution. While China is emerging from the outbreak, markets like India are still in the relatively early stages, and by that I mean the case numbers are still escalating. So even if you see a continued healthy recovery in China, you won't see that uniformly happening across the Asian region as other markets are lagging behind China. So I think it will be a bumpy recovery, unlikely to be a V-shaped recovery, and therefore much more sort of gradual phased recovery over time.
Interviewer: Okay, and turning to the Trust now, how were you positioned ahead of the outbreak and how did the portfolio perform during the period?
James Thom: So, when we construct the New Dawn portfolio, we’re very much focusing on identifying high quality companies and one of the big attributes that we focus on is the strength of balance sheets and cash flows. With that in mind, the portfolio has been pretty resilient through this period of market turmoil with these high quality businesses faring better than the broader market as there’s less of a question mark or concern around their viability through a sort of period of lockdown and zero revenue potentially. So the trust has inevitably, in an absolute sense, been impacted in performance terms but it has fared better than the broader market, thanks to this quality focus. I think from a kind of sector and geographic positioning standpoint too, that worked quite well for us. We were relatively light in China, which was hit at least initially, obviously the hardest when the outbreak first kicked off, and that had knock-on impact for other countries particularly the sort of more commodity dependent markets like Australia and again, the Trust is relatively light in that market so that helped our relative performance. And we have a fairly sizable exposure to the tech sector and to the healthcare sector with both of those sort of being relatively defensive through this period.
Interviewer: OK and did you make any adjustments to the Trust during the volatile market conditions?
James Thom: Yes we did, and really we adopted a two pronged approach here. So we've been both defensive and opportunistic in response to the market sell-off. Defensive in a sense that I think we have been focused on risk mitigation through this period of turmoil and really doubled down on quality stock. So we want to make absolutely sure that we are invested in those companies with the strongest balance sheet, the healthy cash flows, the strong market positions, and the companies that will survive or maybe even prosper if they're able to consolidate the market through M&A and so on through this period. That's been a big focus and we have kind of also weeded out companies where we had question marks really on that and the conviction was waning somewhat. So we’ve been through that process and made adjustments there. And then we’ve also been opportunistic so with the sell-off in markets we have seen value emerge in certain sectors and countries in stocks either that we already own and this has been an opportunity for us to buy more of those stocks where we have high conviction, or in stocks that we didn't own previously but we had done all of our homework on, done all of our analysis, felt that we wanted to be shareholders but we couldn't justify the valuation and we had them on our watch list. Well, this was an opportunity for us now to become shareholders in these companies. And so we've been pretty active on that front initiating eight new stocks into the portfolio, which is quite unusual for. We are typically long-term buy and hold investors in our approach and style, so to initiate eight new names in just a handful of weeks was somewhat unusual.
Interviewer: And have they been focused on any particular areas or are they diversified across different sectors and that kind of thing?
James Thom: So it's been relatively broad base, but I would say we've added several new holdings in China and that is a market where we have been historically light relative to the benchmark. We’ve kind of closed that gap a little bit by buying several new holdings in China as it sold off. And in Australia interestingly - another market historically we have had relatively little exposure to, but we did see an abrupt sell-off there. And some of these stocks, just to give you a sense, had sold off by about 50% so they'd lost half their value, which we thought was an overreaction and it was a great opportunity to buy into some of these higher quality names. So from a geographic standpoint, it’s China and Australia. We pulled back a little bit from India, from Hong Kong, and Southeast Asia. And from a sector perspective we've been adding quite a bit in the tech sector, and that's both within sort of hardware but also software and internet names and kind of, as I say, many of these been more resilient to the impacts of the virus outbreak and also in the healthcare sector which has interesting dynamics.
Interviewer: You mentioned valuations there. There’s obviously been a meaningful recovery in stock markets. Do you think that might have got out of whack with the economic prospects, or do you think markets are kind of fair value in terms of valuations now?
James Thom: Yes, it’s an interesting question. I think we are pretty cautious at this point. So whilst there absolutely was, in our opinion, value through the sort of core of the sell-off in late March and going into April, we've seen quite a strong rebound now in markets, and that seems to be very much at odds with the economic reality which is still very painful. I think value is now much less apparent and we've been, as a consequence, rather less active with the portfolio. The fear and concern is that markets have become propped up through the stimulus packages that various governments in this part of the world and obviously globally have come out with and an assumption that the easing of lockdown will be successful and we won't have a second wave of infections and the Asian economies will get back onto stable footing sooner rather than later. And I think whilst certainly, as I said at the outset, we've seen encouraging signs in China, where I'm based in Singapore has been a very different picture where we have had that second wave. And having avoided lockdown in the early phases of the outbreak we now find ourselves in an extended lockdown with all of the implications that has for economic growth. So I think whether it's fair value, or arguably even overvalued at this point, hard to say, but there’s certainly less opportunity in my view.
Interviewer: Ok and do you think there is further fiscal or monetary stimulus to emerge from Asian policymakers, or do you think that largely we are through that now?
James Thom: I think we've probably seen the majority of it. I hesitate slightly because I think if we do the second wave of infections, that's likely to prompt further stimulus and that's certainly been the case in Singapore. So there was an initial generous stimulus package announced by the government, but as this second wave has taken hold and the lockdown has been extended, government has recently come forward with further measures. And I suspect other governments would follow suit in that event. And certainly I think one of the positives for Asia is that governments are equipped financially for the most part, and there are one or two exceptions, to continue to provide stimulus both fiscal stimulus and monetary stimulus with rates still very much in positive territory in contrast to much of the world. So room to cut there and to keep supporting the economy if it needs be. But I suspect the majority is now done. I think the one big laggard in this region has been India, which had come out with a pretty underwhelming stimulus package initially, well under 1% of GDP, but have followed that up subsequently with a much more meaningful package in line with what we've seen from other governments across the region and the globe.
Interviewer: And looking at Asia in contrast with western economies, Asia is likely to emerge from this with substantially less debt, I mean it already had less debt. I mean, is that an argument for the continuation of the Asia growth story and are these economies likely to fare better in the longer term because of this sort of contrast?
James Thom: Yes, I mean I strongly believe that the long term kind of structural investment case, if you like, for Asia remains intact. Absolutely it looks pretty grim in the short term, but the underlying structural drivers of growth in Asia are still there. So if you think about the demographics of this part of the world, the rising wealth levels and the sheer size of populations here, all of that remains in place. And, as you said, debt levels generally speaking whether it's at a sovereign level or indeed a corporate level remain much lower than many parts of the rest of the world. And when I look at Asian companies specifically and obviously as a stock picker that's what I'm focused on primarily, I’m very encouraged by the low levels of debt that we see on balance sheets in aggregate across Asia. So I think Asian companies are generally well positioned to weather this storm. There will be casualties obviously, but for the most part most should survive. And once conditions normalise those structural drivers will continue to support growth for the longer term.
Interviewer: Okay, and just finally a little crystal ball gazing if we could? Do you think there will be any long term structural changes brought about by the outbreak - changes to the way people work, changes to technology, all those kind of things?
James Thom: Yes, absolutely, but I am not sure these will be specific to Asia, I think these will be global trends. And already in the conversations that we've been having with companies here in Asia, we've been asking these kinds of questions. And even the most sort of old, traditional kind of industries, I'm thinking of cement for example, we’ve heard management teams talk about the acceleration of digitisation of processes, moving to paperless offices, downscaling of office space as their employees will continue to work from home, far reduced headcounts in terms of operating plants that they have been operating there - the cement plants in this part of the world are at 30% of the usual headcount and that's been fine. So I think, absolutely there will be lasting implications for companies at the industry level. I do anticipate a degree of consolidation. Not all players will survive, the weak ones will, I suspect, collapse or be acquired so we'll see consolidation there. I think there will be changes to supply chains as well and I think the early stages of this outbreak revealed a heavy dependence on China across a whole raft of industry supply chains, and I think that will have to be addressed, and there will be winners and losers in that as well.
Interviewer: Great, okay thank you so much James for those insights today and to our listeners for tuning in. Please check into our website which is www.newdawn-trust.co.uk and please do look out for future episodes.
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