This article was written and originally published by Citywire Investment Trust Insider.

• With a young middle class expanding across Asia, there are opportunities for investors to play this secular growth story
• How to capitalise on the spending habits of the young Asian middle class

As demographics reshape Asian consumer preferences and patterns, innovative retail models and healthcare businesses are best placed to thrive, according to Adrian Lim and Pruksa Iamthongthong, co-managers of Asia Dragon Trust.

The pair use a broad thematic outline to construct the portfolio around secular growth trends in the region: health and wellness, in a broad consumption sense, is an area of long-term focus, and one that requires careful handling.

‘We’ve identified growth themes in the region: within these, we expect industries to evolve in ways that will provide opportunities for companies that are well run and well managed to optimise gains from the broad trends,’ said Lim.

In Lim’s terminology, health and wellness can include consumer consumption as well as more niche areas such as medical services, drugs and healthcare products. ‘Asia houses great consumer companies as well as a diverse range of leaders in areas such as biotech and medical devices,’ he said.

Amid the recent volatility, however, Asia Dragon Trust’s managers have trimmed some of the fund’s biotech holdings and focused on stocks likely to remain resilient in the face of inflation and potential rate rises.

Overall, the theme is a play on the demographic trends reshaping the region. ‘Asia has a relatively young demographic, with a large proportion of its population under 35. It’s a demographic pyramid where the younger people are coming of age as consumers,’ Lim said.

‘But it’s not just about numbers: across the region, there is growing and more widespread affluence. This growing middle class has greater aspirations and increasingly sophisticated demands. This allows us to identify a wide spectrum of companies that we believe will feed into this sustainable and elevated level of demand. We see this as a theme that will play out over the next two or three decades.’

On the consumption side, the theme includes consumer goods in India. Here, Lim and co-manager Iamthongthong like fast-moving consumer goods company Hindustan Unilever, a listed subsidiary of Unilever that has been operating in India for decades. ‘This means it can draw on international brands, but also understands the local marketplace very well. Its understanding is based on knowledge of local distribution channels, and this has allowed the company to establish one of the most extensive and effective distribution networks in India,’ Lim said.

Products are customised to local demands, which may be unique to South Asia, he said. ‘Hindustan Unilever achieves this via advertising and promotional work that resonates with the local customer base. Products are packaged and delivered in forms that the local consumer can identify with. Over the years, the company has been able to leverage that distribution network alongside its portfolio of international and local brands to make sure it has a resilient business model. Its strong positions in personal care and household products form the core of its business in India.’

In China, the fund is finding diverse opportunities from tourist and travel services, as well as more traditional branded luxury items such as Kweichow Moutai, which produces branded spirits – in particular baijiu, which has limited production and thus is highly sought after.

Although Asia still has world-leading biotech companies, recent volatility has led to the Trust cutting some of its positions. ‘There are many things we would like to buy at the right price but one key position in this area is WuXi Biologics, a drugs and medicine developer and manufacturer that has an extensive presence in China,’ Lim said.

The Trust also holds Hangzhou Tigermed. The company operates clinical research services for local and foreign pharmaceutical and healthcare companies, giving them adequate data to measure the efficacy of their drugs.

‘These two companies form the core of our exposure in the space. Amid the recent volatility, we have looked to trim the portfolio and make it leaner: we think these two ideas will have the strength to weather the current volatility in markets,’ Lim said.

Lim sees choppy waters ahead for markets. At the least, the war in Ukraine is likely to push commodity inflation expectations higher. Even before the war broke out, global rate rises had been expected. ‘Asian markets had been somewhat insulated from inflation, but we expect to see some elements of inflation coming through this year.’

As a result, the Trust’s positions in companies within the health and wellness theme are designed to be resilient in the face of both inflationary pressures and rate rises. ‘All have strong brands and margin resilience. That means that even with rising cost structures – whether they’re structural or cyclical in the shorter term – they should be able to pass on most of the rise in costs to their customers.

‘If they aren’t able to do that, we believe they should at least weather inflationary pressures quite comfortably because their operating margins are relatively healthy.’

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.

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