Overview

As Shareholders are more than aware, the last 12 months have been another challenging and, at times, turbulent period for investors, with macroeconomic and geopolitical risks coming to the fore. While Asian markets have proven more resilient than those of other emerging markets, the region could not entirely avoid the global concerns of rising inflation, recession risk and conflict in Europe. Against this backdrop, the MSCI AC Asia ex Japan fell 7.1% over the 12 months, while the Company’s net asset value (NAV) also declined, down 8.4%, on a total return basis.

The Company’s long term performance record remains intact, outperforming its benchmark and recording a gain, in NAV terms, of just under 30% in the five years to 31 August 2022.

Covid-19 again dominated the early part of the period under review, as further lockdown measures hampered recovery. However, as 2022 has progressed, most economies have begun to reopen, as governments ramped up vaccinations and loosened Covid restrictions. As a result, improving tourism and increasing consumer spending, due to the release of pent-up demand, have aided economic recovery. This has particularly benefited the Company’s holdings in the ASEAN region, with positions in Indonesia, Singapore, and off-benchmark holdings in Vietnam among the strongest performers. In China, however, the ‘zero-Covid’ policy has continued, dampening domestic activity and impacting global supply chains. This has also put further pressure on an economy already struggling with a weak property market and tighter regulatory conditions. As a result, China was among the market’s worst performers, albeit your Company’s holdings have fared better in such a difficult landscape, reflecting your Manager’s focus on quality and opportunities with long-term structural growth prospects.

At the time of writing, China’s 20th Party Congress has just ended with a new seven-strong CPC Politburo Standing Committee being established. Xi Jinping has clearly cemented his control of the party and the extent of this has surprised the market. The Manager discusses this more in their Review.

Russia’s invasion of Ukraine also contributed to global inflationary pressures through the disruption of oil supplies, driving Brent crude above US$100 per barrel at one point. Supply fears boosted share prices and made Asia’s energy sector one of the top performers over the period. This was negative for the Company’s relative returns, as we have no exposure to the sector. With the global transition to renewables and growing need for new energy sources, abrdn (Asia) Limited (the Manager) favours pockets of opportunity within this segment, especially the various parts of the supply chains for solar and auto electrification, including the hardware required for developing renewable energy.

One of the key themes impacting Asia has been tightening US monetary policy, exacerbated by the build-up of global inflationary pressures. The US Federal Reserve implemented four interest rate increases over 2022, which continued to drive a de-rating of expensive growth stocks and a rotation to value for much of the period. While inflation is lower in most Asian countries than elsewhere, many central banks, including those in Indonesia, India, and Korea, have also begun to raise interest rates. The notable exception here is the People’s Bank of China, which cut several key lending rates to support the economy amid significant domestic growth challenges. As I said in this year’s interim report, prudent policies mean that most Asian policymakers have monetary and fiscal room for manoeuvre, which mean they are better able to mitigate any serious slowdown in growth.

Given the global backdrop, your Manager has assessed the portfolio to ensure that it includes high-quality stocks that should prove more resilient to volatile markets, consolidating exposure into companies that are best able to withstand tougher operating conditions and seize longterm structural growth opportunities. Environmental, social and governance (ESG) factors are also considered in all investment decisions, and also at Board level, where ESG integration has become an increasingly important part of our discussions over the course of the year. The Trust’s portfolio is ESG AA rated by MSCI, which is higher than the benchmark rating of A.

You can find more detail on performance and portfolio activity in the Investment Manager’s Review, and our approach to ESG in the ESG report.

Gearing

The Board believes that the sensible use of modest financial gearing should enhance returns to shareholders over the longer term. At the beginning of the financial year the Company had in place a £75 million three-year loan facility with Scotiabank Europe plc, of which £25 million was fixed and fully drawn down with a further £40 million of the revolving £50 million facility drawn down. The facility expired in July 2022 and the Board was pleased to announce that it had entered into loan facilities totalling a commitment of £60 million with The Royal Bank of Scotland International Limited, London Branch. The facilities, which are unsecured, consist of a two-year fixed facility of £25m, which is fully drawn, and a two year £35m multi-currency revolving credit facility which has also been fully drawn.

At 31 August 2022, the Company’s net gearing position was 9.0%, compared to 7.9% at the end of August 2021.

The Investment Manager continues to monitor closely gearing levels and bank covenants. As at 28 October 2022, the Company’s net assets stood at £490m and net gearing was 11.3%. These levels remain comfortably within the covenant limits.

Discounts and Share Buybacks

The discount level of the Company’s shares is closely monitored by the Board and the Investment Manager and share buybacks are undertaken when appropriate. During the year ended 31 August 2022, 5.1 million shares were bought back into treasury at a cost of £24.0 million (2021: 1.6 million shares were bought back into treasury at a cost of £7.7 million). Since 31 August 2022, a further 651,351 shares have been bought back into treasury at a cost of £2.7 million. The discount at the financial year end was 13.1% (2021: 9.6%). As at 28 October 2022, the discount was 13.3%.

Revenue Account

The Company’s revenue return per share was 6.38p for the year to 31 August 2022 (2021 – 7.36p). As reported in the last annual report, the Company adopted a new policy for the allocation of management fees and finance costs during the financial year to 31 August 2021. The new policy, to allocate 25% to revenue and 75% to capital, continues to apply to the Company.

The Board has declared a final dividend of 6.5p per Ordinary share (2021 – 6.5p). The Board has taken the decision to draw on revenue reserves in order to maintain the level of dividend to be paid to shareholders. The dividend, if approved by shareholders at the Annual General Meeting, will be paid on 16 December 2022 to shareholders on the register on 11 November 2022.

The Board

The Board regularly undertakes a review of its performance and structure to ensure that it has the appropriate mix of relevant skills, diversity and experience for the effective operation of the Company’s business. Having served nine years on the Board, the Board was sorry to see Kathryn Langridge retire at the AGM in December 2021. However, we were delighted to welcome Matthew Dobbs as a non-executive Director with effect from 1 February 2022. Mr Dobbs is a renowned Asian and Small Companies investment expert and brings a wealth of knowledge and experience to the Board.

Annual General Meeting

In a return to the familiar format before the onset of Covid-19, the AGM will, once again, be held in person. The AGM in 2021 was held in Edinburgh and the Board has agreed that the AGM in 2022 should be held in London.

The AGM will take place on Friday, 9 December 2022 at 12.00pm at the offices of abrdn plc, in Bow Bells House, 1 Bread Street, London EC4M 9HH.

The AGM provides shareholders with an opportunity to ask any questions that they may have of either the Board or the Manager. I look forward to meeting as many of you as possible over refreshments which will follow the AGM. Shareholders, whether attending the AGM or not, are encouraged to submit questions for the Board and/or the Manager, in advance, by email to asia.dragon@abrdn.com.

Online Shareholder Presentation

In order to encourage as much interaction as possible with our shareholders, we will be hosting an Online Shareholder Presentation, which will be held at 11:00am on 21 November 2022. At this event there will be a presentation from the Investment Manager followed by an opportunity to ask live questions of the Chairman, Senior Independent Director and the Investment Manager. The online presentation is being held ahead of the AGM to allow shareholders time to submit their proxy votes after the presentation but prior to the deadline for submitting proxies for the AGM should they so wish. Full details on how to register for the online event can be found at https://www.workcast.com/register?cpak=3501849254509496.

Outlook

Given the background I referred to above, the macroeconomic position and geopolitical turbulence are unlikely to make the overall investment backdrop less volatile. Asia, however, is still less vulnerable than other emerging markets, given better economic and corporate fundamentals. It also has yet to experience the surge in inflation on the scale seen in the more developed markets like Europe and the US.

Furthermore, the region is home to companies aligned with strong long-term structural growth themes, among them the move to decarbonisation as policy makers globally commit to a greener future. Other themes include rising affluence in Asia, increased urbanisation and an infrastructure boom, and the growth in 5G, big data and digital interconnectivity.

While it cannot be immune to the global picture or to geopolitical pressures, the Board remains convinced of the long-term outlook for Asia and the types of businesses favoured by your Manager; we support the Manager’s view that the current environment should see companies with strong balance sheets and sustainable earnings prospects well positioned to emerge from the current difficult period.