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Post-pandemic recovery set to drive Asian growth

August 2021

Pruksa Iamthongthong, Investment Manager, Asia Dragon Trust PLC

Asian markets have become more difficult to navigate. Renewed outbreaks of Covid-19 – coupled with pandemic restrictions, regulatory pressures (notably in China) and concerns about policy tightening, inflation and rising interest rates in the US – have all weighed on market sentiment.

Nonetheless, at Asia Dragon Trust we see many reasons for investors to be positive on the asset class as they look ahead to the rest of the year. Despite Covid-related disruptions, we anticipate strong growth in company earnings.

Continued demand – both cyclical and structural – underpins the technology hardware sector (see ‘tech enablers’ below) above all, helping to insulate it against headwinds in the second half of 2021.

We expect Asian central banks to keep monetary policy loose for now, underpinning the recovery story. We think vaccination rates will pick up across the region over the next year as supplies come through, enabling Asian and emerging markets to reopen and narrow the gap to developed peers.

Geopolitics will likely remain a source of uncertainty, with US-China tensions showing few signs of letting up. This will add impetus to China’s push for economic self-sufficiency, which will present investors with opportunities.

We are positive on quality firms in areas of structural growth in China such as consumption, health care, technology and environmental sustainability. The latter promises much given the potential increase in renewable energy installations, with China committed to carbon neutrality by 2060.

While China’s internet sector is working its way through a round of regulatory tightening, we suspect regulators are playing catch-up with innovations over recent years. We’re confident they can strike a balance between promoting innovation and achieving their regulatory aims.

In terms of the broader regulatory landscape, we would view sectors that are more aligned to the central government’s objectives – such as public and social good interests like healthcare, affordability and availability – as being of relatively lower risk.

More broadly, pockets of Asia’s stock market have seen their share prices run up quite a bit. With the potential steepening of the yield curve in the US and its impact on valuations, we remain cautious on growth stocks with little or no profitability that have already rallied hard.

As long-term investors, we’re most positive on companies with strong cash flows in line to benefit from structural growth. They will be best placed to weather near-term uncertainties.

Additionally, Asia remains materially under-owned by asset allocators globally, with the region trading at an attractive discount to global markets despite robust earnings growth.

Most companies delivered upbeat forecasts for earnings growth in the latest round of quarterly reporting, and we expect dividends to improve as economies open up further.

Key investment themes

Aspiration: as Asia’s middle class continues to expand, we anticipate growth in premium consumption in areas such as travel, education, financial services and food and beverages.

Building Asia: population growth in urban centres allied to infrastructure needs improves the prospects for property developers and producers of materials, such as cement.

Health and wellness: Asia boasts leading global companies in biotech and medical device technology. We favour companies in contract research, respiratory and sleep care, vaccinations, pharmaceutical and diagnostic products.

Digital future: the increasing integration of technology worldwide provides tailwinds for Asian companies operating in gaming, internet, fintech and tech services like the cloud.

Tech enablers: we anticipate structural growth in established trends such as 5G, big data and digital interconnectivity – and Asian technology supply chains are well-placed to benefit.

Going green: with global policymakers committed to a lower carbon future, we see bright prospects for companies engaged in renewable energy, batteries, electric vehicles, related infrastructure and environmental management. We expect grid parity to be game-changing.

Important information

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can fall 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.
  • The Company may charge expenses to capital which may erode the capital value of the investment.
  • 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.
  • Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.

 

Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

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Risk Warning
Risk warning
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested. Please refer to the relevant Key Information Document (KID) prior to making an investment decision. Please be aware of scams that can affect investors.