Staying with Asian equities for good long-term reasons

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‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.’ Famous words written about an earlier period of upheaval. But they could just as well be describing the contradictions in Asian markets this year.

Investors may be confused, and with good reason. On the one hand, reform-minded leaders are at the helm of many of the region’s biggest economies; government finances are in better shape than they have been for some time; while cheap oil has boosted consumer sentiment and delivered an unexpected windfall for many countries.

On the other hand, economies struggle to grow; maritime disputes in the South China Sea are stoking political risk; and the prospect of US Federal Reserve policy pushing the dollar even higher threatens to curtail returns for many foreign investors.

Some Asian markets are on a tear. The MSCI Indonesia Index returned some 16.9 per cent in sterling terms during the year to April 14, after dividends were reinvested. The MSCI India gauge delivered a total return of some 42.2 per cent over the same period, while so-called A-shares (A-shares are shares in mainland China-based companies, denominated in Renminbi and traded on a Chinese stock exchange) trading in Shanghai and Shenzhen returned 126.3 per cent in sterling terms. Shares of Hong Kong-listed Chinese companies returned some 11.9 per cent in the three days following the long Easter weekend.

For the region as a whole, the MSCI Asia Pacific (ex-Japan) Index returned 24.3 per cent over the past 12 months in sterling terms, although currency gains would have accounted for most of that performance. Investing in Asia seems like a lottery.

So what are investors to make of all this? For a start, this seems like a good time for caution because there is precious little correlation between corporate earnings and stock prices. For example, it’s getting harder to justify Indian share prices at current levels without an improvement in revenues. Prime Minister Narendra Modi has pledged to sweep away entrenched obstacles to growth, but stock prices reflect changes he has yet to deliver.

Indonesia, like India, is another ‘fragile five’ country that benefited from investor goodwill following the election of a ‘pro-business’ leader. However, reliance on foreign funding means President Joko Widodo must maintain the pace of reform to satisfy heightened expectations. While cheaper oil has brought benefits (policymakers have cut costly fuel subsidies), lower commodity prices are also hurting this exporter of natural resources.

Political stability may have helped shares in Thailand achieve a total return of some 27.8 per cent in sterling terms over the past year, but this has come at the expense of political freedoms. The country’s post-coup military rulers maintain a tight grip on the economy, which struggles to gain traction even as tourism shows some signs of recovery.

Elsewhere, Chinese share gains are the envy of the world as the nation’s retail investors, starved of attractive alternatives, flock to the stock markets amid speculation Beijing will do more to cushion a slowing economy and support asset prices. Last month’s decision to permit mainland mutual funds to trade Hong Kong-listed shares via Shanghai has channelled some of the euphoria into the semi-autonomous former British colony.           

While the long-term investment story for Asia remains intact – rising wealth, younger populations and pent-up demand for consumer goods – the immediate outlook is unclear. That’s because share prices have been inflated by speculation and, in an operating environment that remains tough, company revenues are often flattered by foreign exchange gains when dollar-denominated overseas earnings are booked in a weakened home currency.

Then there’s the impact of US monetary policy to consider. Policy ‘normalisation’ this year may be a good thing because it points to US economic strength and weans markets off speculative capital, but the prospect of a rate hike could compel fund outflows from Asia in the near-term, damaging investor confidence.

Another concern is the collapse in commodity prices. Lower oil prices may have brought benefits to the region but cheaper commodities also hurt Asian economies that rely on sales of natural resources. A reduction in Chinese demand is largely to blame, as Asia’s biggest economy balances the need for growth with essential reforms designed to fix structural imbalances and boost sustainability.   

While a slowing China is a worry for everyone, policymakers there at least have the financial resources to cushion the economy from a so-called ‘hard landing’ as well as safely deflate any asset bubbles.

This may prove to be a watershed year as the US central bank plots an exit from the emergency measures that followed the global financial crisis, even as policymakers elsewhere remain committed to the stimulus that has boosted asset prices.

Given these uncertainties, investors would do well to go back to basics: Embrace businesses that are easy to understand; look for companies with broad regional exposure, established franchises and solid finances; seek out firms that respect minority shareholders. Then when all the boxes are ticked, don’t overpay.

These are tried-and-tested strategies that the fund managers of our Asian investment trusts have employed for more than two decades to deliver returns through repeated cycles of boom-and-bust. They may help your investments survive through a time when nothing seems to make sense anymore. 

Key POINTS

  • Some Asian markets are on a tear, others more volatile
  • Little correlation between corporate earnings and stock prices
  • Long-term outlook is intact, but short-term outlook unclear
  • Investors should embrace businesses that are easily understood
  • ‘Back to basics’ shares is our policy

The value of investments and the income from them can fall and investors may get back less than the amount invested. Please remember that past performance is not a guide to future results.

Find out more about the Aberdeen Asian range of investment trusts at invtrusts.co.uk/asia

Aberdeen manages six investment companies in the Asia-Pacific (excluding Japan) region:

  • Aberdeen Asian Income Fund Limited
  • Aberdeen Asian Smaller Companies Investment Trust PLC
  • Aberdeen New Dawn Investment Trust PLC
  • Aberdeen New Thai Investment Trust PLC
  • Edinburgh Dragon Trust PLC
  • New India Investment Trust PLC

The views and opinions contained in this article are those of Aberdeen Asset Management. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.

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Written by:
Hugh Young

Hugh Young is a main board Director of Aberdeen Asset Management PLC, its global Head of Equities and Managing Director of the Group’s Asian business. Hugh joined Aberdeen in 1985 to manage Asian equities from London, having previously held posts at Fidelity International and MGM Assurance. He founded Singapore-based Aberdeen Asia in 1992 and since then he has built the company into one of the largest and most well-respected managers of such assets globally. Hugh holds a BA (Hons) in politics from Exeter University.