The six months to 28 February 2023 was another challenging period for stock markets, including those in Asia. Amid the on-going Ukraine war, rising inflation led to fears that central banks would continue to raise interest rates and a global recession could soon be at hand. The end of China’s strict ‘zero-Covid’ policy raised hopes of the start of an economic recovery and Asia continued to be supported by strong, long-term structural drivers. As a result, Asian equity markets recovered some lost ground in the second part of the period.
Against this backdrop, the Company’s net asset value (“NAV”) fell by 7.2% over the period, underperforming the MSCI All-Country Asia ex Japan Index (the “Benchmark”), which declined by 5.7% (both in sterling and total return terms). The share price decreased by 6.5% as the discount to NAV per share narrowed from 13.1% at the end of August 2022 to 12.6%.
The review period saw the dominance of a few key overarching global themes which held sway over market sentiment. Investors were worried not just about continued tightening of monetary policy across most developed economies, but also its duration, with concerns that major central banks would keep interest rates higher, and for longer, to combat persistently high inflation, thereby potentially triggering a global recession. In the US, for instance, although the annual rate of inflation began to abate initially, subsequent buoyant US economic data signalled a potential delay in loosening monetary policy. The US 10-year Treasury yield touched almost 4% in February, not far off its near 14-year high of 4.3%, recorded last October.
Developments in China also featured prominently. As the 20th Communist Party Congress drew to a close in late October, the increased centralisation of power caused some market unease. Investor sentiment improved from November, however, as the government eased stringent Covid-19 curbs and rolled out economic support measures. Aside from buoying up Chinese equity prices, China’s faster-than-expected reopening in December also lifted the export-oriented markets of Taiwan and South Korea.
Performance and Portfolio Activity
The main reason for underperformance in the period was the Company’s exposure to China and Vietnam. In China, this was mainly a result of holdings within the internet sector, which have been particularly volatile during the review period.
When it comes to investing in companies, environmental, social and governance (ESG) criteria are deeply embedded in your Manager’s investment process. As a result, the Company had no exposure to India-based Adani Group’s stable of listed companies which were sold off heavily on the back of a US short-seller’s report alleging fraud at the conglomerate. Your Manager has avoided Adani entities on governance concerns and the lack of exposure contributed materially to performance in the current period.
For the six months ended 28 February 2023, the revenue account recorded an increased return on ordinary activities after taxation of £1.5m, representing 1.29p per share, compared with a return of £1.2m for the six months to 28 February 2022 (0.97p per share). The Company does not pay an interim dividend.
The Board believes that the sensible use of modest financial gearing should enhance returns to shareholders over the longer term. The Company has two loan facilities which have been provided by The Royal Bank of Scotland International; the first is a £25 million fixed rate loan which has been drawn in full and fixed for two years to July 2024 at an all-in rate of 3.5575% and the second is a £35 million multi-currency revolving credit facility under which £30m had been drawn down at the period end. At 28 February 2023 the net gearing position was 9.6%, compared to 9.0% at the end of August 2022. At the time of writing net gearing now stands at 8.1%.
Discount and Share Buybacks
The discount level of the Company’s shares is closely monitored by the Board and Investment Manager and the Board seeks to manage the discount in line with the peer group. During the six months to 28 February 2023, 2.8 million shares were bought back at a discount for treasury. Since 28 February 2023, a further 1.0 million shares have been bought back into treasury. Shares held in treasury can be reissued at a future date, at a premium to NAV per share, should a suitable opportunity arise.
Within a global context, several themes continue to favour Asia as a region. Compared to much of the developed world, many Asian economies have been late in reopening after the easing of Covid-19 restrictions. We are also seeing continued policy support in the region. These positive moves are helping to bolster a recovery in consumer spending and your Manager expects an improved earnings outlook for companies exposed to this domestic demand theme. Meanwhile, both current account and fiscal discipline have improved in Asia since the 1997 Asian Financial Crisis which has increased the region’s resilience to economic downturns.
James Will, Chairman
26 April 2023