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What next for Asian Markets?

May 2020

Hugh Young, investment manager
Aberdeen Standard Asia Focus PLC

We have seen Asian markets rebound from their recent lows over the past few weeks , helped by a “whatever it takes” stimulus stance from the US Federal Reserve and other major central banks. At the same time, we are seeing clear signs of success in tackling covid-19 in much of Asia , notably China , Koea and Taiwan, although it is clear that various restrictions will continue to apply for the foreseeable future. Below are some further observations:

  • Global financial markets continue to be shaken by the ramifications stemming from the spread of the coronavirus. The rise in case numbers in the West is moderating , albeit the toll has been frighteningly high, and while they appear stable in China in elsewhere, cases continue to rise slowly across the rest of the Asia Pacific.
  • Strict containment measures already in place suggest that cases should not accelerate in advanced Asia. However, under-reporting in emerging Asia is a risk.
  • The coronavirus shock on China now appears much larger than initially thought and data elsewhere in the region indicate a sharp economic slowdown.
  • India has also had to put in place social distancing measures. Schools, universities and major retail outlets have been shut down. The effect of these measures is already being seen in the economy. Government policy response has been slow but we expect more.
  • Alongside more aggressive measures put in place in the US and Europe, policy across the Asia Pacific generally continues to be more supportive. Most central banks in advanced Asia have now cut to their lower bands, while temporary dollar swap lines have been established with the Fed.
  • In emerging Asia, central banks have been more cautious, largely reflecting concerns about capital outflows and forex depreciation

What does this mean for the holdings of Aberdeen Standard Asia Focus PLC?

In the latest corporate results reporting season, we have seen companies give cautious guidance across the region in terms of the outlook for earnings. Some sectors have been more resilient than others, in particular the IT sector in China and Taiwan. Still, we are cautious because global growth and supply chain worries amid the covid-19 outbreak and subdued domestic consumption make the earnings expectations vulnerable to further cuts. We would expect 2020 to be a challenging period for earnings and volatility in markets to remain elevated.

While we are cautious given the weak economic backdrop, as long-term investors, we are sticking to our approach rather than resorting to knee-jerk responses. We have used the opportunity to add to a few names we like but haven’t made any dramatic changes to the portfolio. Part of our confidence comes from the knowledge that while the viral outbreak may be a very severe disruption, it is likely to be temporary, and our companies typically have very strong balance sheets and robust cash-flows to weather the storm. Furthermore, Asia, which bore the initial brunt, is closer to the path of recovery than the rest of the world. Where we have had lower conviction for a while, we haven’t been afraid to sell but this is very much at the margin of the portfolio.

Overall we would expect this year to be a challenging one for the Trust’s performance, not least because of our focus on smaller companies which by their nature are more illiquid and can therefore sell-off more aggressively at times like these. Encouragingly, governments and central banks across Asia have been quick to respond with easing measures and fiscal stimulus. There remains room to loosen policy further and expand fiscal support where needed. Decisive responses from policymakers, including the Federal Reserve’s pre-emptive rate cut and the US’ US$2 trillion virus stimulus bill, should help cushion the impact somewhat.

Looking further out, we remain confident about the opportunities arising from the structural trends that will shape Asia’s growth, be that in terms of consumer demand, new technological advancements, and infrastructure development. Our holdings’ solid balance sheets, clear competitive edges and healthy cash flows will help buffer against the current shock.

Important information

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.
  • The Company invests in the securities of 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 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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