abrdn China 04 May 2022
This is a non-independent marketing communication commissioned by abrdn. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
To produce long-term capital growth by investing predominantly in Chinese equities
Elizabeth Kwik, Nicholas Yeo
Association of Investment Companies (AIC) Sector
China / Greater China
12 Month Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/ Premium (Cum Fair)
Daily Closing Price
abrdn China (ACIC) was restructured in November 2021 and given a new mandate under a new investment team headed by Nicholas Yeo. Previously known as Aberdeen Emerging Markets, the new strategy and portfolio have quickly been established to take advantage of a key megatrend in the world’s most populous country. Rising aspiration, digitalisation, environmental awareness, health and wealth effects are seen by the team as key drivers of China’s transition to a consumer economy. Nicholas and the team have created a high conviction portfolio by taking an assertive stance in stocks they believe are well-positioned for this transformation and will deliver long-term capital growth for investors.
In our recent meeting, Nicholas cited several key advantages the team has in being able to deliver for investors. These include a large team on the ground in China and Hong Kong, accessibility to company management teams and expectation of a Qualified Foreign Institutional Investor license which opens up a bigger investment universe. A long-term buy and hold approach, acting more as owners of businesses rather than just investors, and a strong focus on ESG matters are also expected to bring advantages, with high-quality companies finding their way into the portfolio.
With a long-term capital growth objective, the trust is likely only to pay a token annual dividend. ACIC’s discount to NAV has narrowed since the restructuring despite the weakness of the Chinese equity markets. The trust currently has a net cash position but has recently arranged Gearing facilities which could see it take on debt over time.
ACIC is a welcome addition to the Chinese equity investment trust sector. China is the world’s second-largest economy with the second-largest market capitalisation. While the trust is new to just focussing on Chinese equities, the management team is not, but is a large team of specialists with many years of experience. In the long term, we think having a rigorous and repeatable process increases the chance the trust will deliver alpha, and the focus on ESG is another potential source of returns.
There are a number of hurdles to overcome in the short-term, but the recent weakness in the Chinese market could be an opportunity: the MSCI China All-Share Index is showing a 2022 forward P/E ratio of 10.7x while the MSCI World and MSCI Emerging Markets are trading at 16.8x and 11.8x respectively (according to Bloomberg). However, there is a reason for the weakness, and there is likely to be a tussle in the short term between value and growth styles. In this regard the team are maintaining a degree of caution by taking a barbell approach with a balance between value and growth stocks. In line with their long-term strategy, they view this weakness as an opportunity, and are looking to buy quality companies on the dips.
While the Chinese market is volatile, it provides a good degree of diversification from developed markets. As the short-term clouds of the pandemic and Ukraine war lift, the reopening of the economy, stimulus policies and transition to a consumer economy over the long term could provide a firm base for investors seeking capital growth with ACIC worth considering for a well-structured and diversified portfolio.
- Locally- based management team with extensive experience of Chinese equities
- Aligned to long-term structural drivers of economic growth in China
- High conviction portfolio, not a benchmark hugger
- High single country risk, including political and regulatory risk
- Chinese markets are highly volatile
- Trust may use gearing which could amplify losses