This article was written and originally published by Citywire Investment Trust Insider.
“A lot of our stocks are geared towards aspirational products and services that tap into this wave of rising wealth”
Adrian Lim, manager of abrdn’s Asia Dragon Trust
“Our way of dealing with rising inflation is to stick with companies best placed to manage inflationary pressures: those with resilient pricing power, those that have experienced strong demand because of the products they offer, and those that have the talent and capital to stabilise their production capabilities”
Adrian Lim, manager of abrdn’s Asia Dragon Trust
Supply chain disruption due to long-term US-China geopolitical tensions – and exacerbated by Covid-19 – has not derailed the Asian growth story, which has been driven largely by rising demand from the expanding Asian middle class.
Maintaining an effective and efficient supply chain may require some adjustments, which is why abrdn’s Asia Dragon investment trust invests in companies with the ability and resources to make those adjustments, says manager Adrian Lim, speaking on the ground in Singapore.
Careful stock selection is also vital in mitigating another challenge – rising inflation.
“Over the last 24 months we have seen stresses on supply chains, particularly in the tech sector, both hardware and software, but it is also spilling over into other manufacturing clusters,” Lim says.
The roots of the problem stem from geopolitical tensions that were already established pre-Covid. The US-China trade rivalry that is likely to shape global trade over the coming decades, and which escalated under the administration of former US President Donald Trump, saw tariffs and limitations put in place. This left companies that had been sourcing their production in Chinese territories or jurisdictions needing to diversify, according to Lim.
“On the hardware side, companies such as TSMC [Taiwan Semiconductor Manufacturing Company] and Samsung have been expanding their production base: TSMC has recently announced it will invest billions over the next few years to manufacture more in North America.
“This is a good illustration of the steps well-managed companies can take to stabilise their supply chains. TSMC has the ability to do this as it has the bargaining power that comes from market-leading technology in its manufacturing processes and massive economies of scale. It has the labour force and expertise, and also has the balance sheet to invest in new production.”
While there is less direct impact on the software side, protectionist measures even before the pandemic have seen some of the Indian software companies that could work onshore with North American clients struggling to obtain visas or travel as freely. Lim points to Tata Consultancy Services as a company whose capabilities for offshore, nearshore and onshore software services mean its engineers have greater flexibility.
That said, Asian businesses are less dependent on the West now that the growing affluence of the Asian middle class is leading to a rise in regional consumer demand.
“A lot of our stocks are geared towards aspirational products and services that tap into this wave of rising wealth,” Lim says.
A good example is the financial services sector, where the trust holds Hong Kong-headquartered AIA Group, which has a presence in 18 Asia Pacific markets.
“AIA is a regional life insurer that also offers wealth management and investments. It has a very strong and competitive agency force and solid fundamentals in terms of its balance sheet and risk management. In many of the markets in which it operates, AIA is the top or near-top foreign provider of life insurance products to locals.”
The trust also holds India’s Housing and Development Financial Corporation, the largest provider of mortgages in India.
“This company is very efficiently run, with a very low cost structure, an effective distribution network and good risk management,” Lim says.
Another play on rising Asian consumption is drinks manufacturer Kweichow Moutai, China’s leading manufacturer of baijiu, a rice liquor.
“It is used for celebrations, to mark milestones or simply for gifting. It’s often seen as a luxury product but it’s also a consumer discretionary product, although demand for it has been much more resilient than it has for other consumer discretionary products.”
Kweichow Moutai is also an example of the type of holding Lim and his Asia Dragon Trust co-manager Pruksa Iamthongthong are using as a hedge against rising inflation expectations. While the pace of inflation in Asia has lagged behind that in Europe, there are now fears that pressures could start to mount.
“The effects of supply chain disruption and Covid-19, along with rising materials costs, are seeing a rise in inflation expectations and production bottlenecks throughout the Asia region. Our way of dealing with the situation is to stick with quality companies best placed to manage inflationary pressures: those with resilient pricing power, those that have experienced strong demand because of the products they offer, and those that have the talent and capital to stabilise their production capabilities by diversifying geographically or working closely with supply and logistics partners.”
These companies are bolstered by a mixture of brand, strong marketing, good-value products, effective distribution and after-sales service. Two such companies, Lim says, are Samsung, whose strong global brand in white goods, consumer electronics, phones and IT products has made it a highly effective consumer play, and TSMC, which has mitigated inflationary pressures through its leading technology, service and products.
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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