• Economic outcomes for Asian economies remain difficult to predict, with potential contagion from weakness in Europe and the US
• Focusing on companies with sound financial fundamentals, plus a clear pathway of growth, is vital
• In targeting key growth areas, investors can harness the unique characteristics of Asian markets

2022 was a rudderless year in Asian stock markets. The two behemoth economies of China and India headed in opposite directions. China was laid low by its tough Covid policy and problems in its property market, while India was resurgent as recovery gathered momentum and its reform agenda continued. Across the region, sentiment was unpredictable and often out of step with company performance.

Looking ahead, much of this uncertainty remains. Economic outcomes remain difficult to predict, with the contagion on inflation and interest rates from Europe and the US unclear. It is possible that the Chinese economy will stage a recovery as it eases Covid restrictions. This would help consumption and support growth but may lead to inflationary pressures that Asia has largely managed to avoid to date. China’s recovery would help other countries in the region: the Thai tourist sector, for example, is heavily dependent on China. 

The Indian economy looks well-placed. It is relatively neutral on Ukraine and has side-stepped the US/China rivalry. It continues to see strong consumption, driven by domestic demand. It has also avoided the worst of the global slowdown: removing fuel subsidies has left it less vulnerable to high oil prices, and it hasn’t been as affected by food inflation or rising labour costs. However, this needs to be set against high valuations in the stock market and relatively high expectations for economic growth. 

Against this backdrop, looking at the fortunes of individual companies rather than trying to make broad-brush allocations based on macroeconomic factors is likely to be more productive. At Asia Dragon Trust, we look to keep a balance across countries and sectors, along with a mix of value and growth characteristics, with stock selection as the main driver of returns. 

Nevertheless, we recognise that the uncertain economic environment brings pressures for companies. Asia may not be subject to the same inflationary difficulties as Western economies, but it cannot avoid them completely. There is still some inflation in areas such as soft commodities, and rising US interest rates is a consideration for all central banks around the world. 

Growth amid uncertainty 

In this environment, companies need a strong business model, a clear competitive advantage, plus balance sheet strength and reliable cash flows. Access to funding is not as easy as it has been in recent years. Companies with superior financials are in a better position to grow and build market share in a difficult environment. 

These characteristics bring resilience, but companies also need to have a clear pathway of growth. As the region starts to recover, investors need to participate in that recovery. The growth of an aspirant domestic consumer, technology innovation, infrastructure development plus the growing green agenda are all areas of structural growth across many Asian economies. 

In targeting these growth areas, investors can harness the unique characteristics of Asian markets. There are some areas in which Asia excels, where its expertise is not matched anywhere else in the world. The region is well-positioned for the changing energy landscape, for example. South Korea-based LG Energy Solution, for example, is a battery maker with production facilities across Europe, the US and China and is now the country’s second most valuable company. China-listed Sungrow Solar has built on its solar expertise and now offers electric vehicle (EV) charging stations and renewable hydrogen production systems. China’s commitment to net zero by 2060 creates a strong pathway for companies that can help steer the country away from fossil fuels. 

Within the consumer theme, there are companies such as Chinese spirits maker Kweichow Moutai, a local favourite and beneficiary of the trend for local luxury goods names, but also Bank Central of Indonesia, which is geared to the fast growth of India’s large and young population.

Balancing defensiveness and growth 

In India, the trust holds stalwarts such as outsourcing group Infosys and banking group HDFC. These are reliable, mature businesses with strong management teams and a long history of cash generation. However, this is balanced with investments in a number of smaller, fast-growing businesses that are recent entrants into the market – insurance marketplace PB Fintech, for example.  

Technology was a tough place to invest in 2022, but market leaders with pricing power should emerge stronger. Companies such as Tencent and Alibaba have had a difficult year, but have built up strong innovation and know-how, and valuations are compelling. They should be less vulnerable to a rising interest rate environment than earlier-stage technology companies with the majority of the value in unproven future earnings. 

This balance of defensiveness and growth is a natural outcome of the trust’s focus on quality. It means that companies should show strength during a downturn, but also participate in a recovery when it comes. At a time of significant uncertainty, when the economic outlook is unclear, finding 20-30 companies with these unique characteristics is a compelling way to participate in the long-term growth of Asia. 

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

• 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 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.
• 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.
• 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 abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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