Disclaimer
This is a non-independent marketing communication commissioned by Schroder Investment Management. 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.
After a challenging period of performance, Asian equity markets have sprung into life in recent months. The removal of zero-covid policies in China appears to have rejuvenated prospects for the entire region, with pent-up demand being unleashed and investors suddenly waking up to a regional opportunity that has an improved near-term economic outlook, as well as positive longer-term structural foundations.
On the face of it, valuations in Asia look appealing, particularly compared to other regions such as the US (When the S&P 500 is compared against the MSCI Asia Pacific ex Japan index between 2013 to 2023)
Indeed, after a decade of outperformance, investors appear to have taken last year’s correction in the US stock market as an opportunity to re-appraise the attractiveness of that market when compared to other regions. According to a recent Bank of America Global Fund Manager survey, allocations to US equities have fallen by the most since records began and now stand at their biggest underweight since October 2005.
From an economic perspective too, the fundamentals look to be improving in Asia, while North America and Europe remain at risk of recession. The same survey suggested that global fund managers are becoming more optimistic on the economic growth outlook for Asia. As a proxy, more than 90% of respondents said they expected a stronger Chinese economy, up from 13% in November last year.
What’s happening in China?
Regulatory crackdowns, geopolitical worries, a property market crash, and the extended zero-covid policy have all weighed on sentiment and economic activity in China over the last couple of years. But some of these clouds do appear to be lifting. The removal of covid restrictions in December has been seen by many as the catalyst for the recent improvement in Asian equity market performance. It may lead to an “exit wave” of new covid infections, as has been the case in other regions that have emerged from lockdown, but on balance, recent developments in China are seen as an economic positive, with Schroders economics team now anticipating growth of more than 6% in 2023 compared to just 3% last year. That is a modest rate of growth compared to what we’ve regularly seen from China over the last 30 years, but it looks attractive in comparison to what developed economies are expected to deliver in 2023.
Nevertheless, considerable risks remain. China no longer benefits from the positive demographics that have assisted growth in recent decades and youth unemployment is a growing problem. Many commentators also fear that the government’s more interventionist policy stance will continue in the years ahead, to the detriment of its private sector. Meanwhile, on the global stage, the ongoing trade war between the US and China as well as geopolitical tensions over Ukraine and Taiwan has continued to strain relations between these two powerful nations.
As a result of all this, Schroders’ fund managers are generally cautious on China. The near term economic outlook has clearly improved, but longer-term structural concerns linger. Fortunately, Asia has a much broader opportunity set, and you don’t need to be invested directly in China to be exposed to some of its positive attributes.
Beyond China
Other Asian economies can benefit from the improved outlook for China and look capable of delivering decent growth in the years ahead. Neighbours Taiwan and South Korea are just a short hop away and possess global industry leaders in key Asian export sectors, including technology stocks such as Samsung Electronics and TSMC that have favourable long-term secular growth drivers. Valuations in these markets tend to be even more appealing than they are in China. Meanwhile, several financial companies in Hong Kong, Singapore and other parts of Southeast Asia should be beneficiaries of higher interest rates and offer attractive valuations and yields.
Other economies such as India, Vietnam and Indonesia, have helpful demographics and relatively low debt burdens, which should lead to decent long-term economic growth, and interesting company specific opportunities as domestic consumption increases.
Overall, Asia looks to offer plenty of exciting opportunities for experienced stock pickers to capture. Asian equity investing has always been a core strength for Schroders, with bottom-up stock picking at the heart of its historic success. Schroders runs three pan-Asian investment trusts, each of which targets a specific opportunity within this diverse and attractive region.
Schroder AsiaPacific Fund plc (SDP)
The Schroder AsiaPacific Fund offers exposure to quality companies that are well-placed to take advantage of the long-term structural growth on offer across Asia’s diverse economies. Portfolio managers Richard Sennitt and Abbas Barkhordar look across the ideas developed by Schroders’ team of 39 Asian equity analysts and select the stocks that they believe are best placed to deliver high returns and long-term growth. The team has a strong track record and currently has an overweight exposure to Hong Kong, where stocks tend to trade at more attractive valuations than Chinese ones, and the local economy looks poised to benefit from increasing travel from the mainland. It is also well exposed to the attractive dynamics of economies in South East Asia, including Vietnam, and elsewhere such as India.
Schroder Oriental Income Fund Limited (SOI)
The Schroder Oriental Income Fund is also managed by the highly experienced Richard Sennitt, but has an additional focus on dividend income alongside capital growth. With the same portfolio manager at the helm, there is a natural similarity between the SOI and SDP portfolios. However, the bias towards income results in a focus towards companies with solid balance sheets, resilient earnings and an attractive dividend proposition. It currently offers a yield of 4.1% and has delivered a growing dividend each year since its launch in 2005. The focus on income has also led to less volatility in returns, but the track record is no less impressive.
Schroder Asian Total Return Investment Company plc (ATR)
The Schroder Asian Total Return Investment Company seeks to protect and grow wealth through all market conditions. It has been managed since its launch in 2013 by Robin Parbrook and King Fuei Lee, who employ an unconstrained, low turnover approach to bottom-up stock selection. This is coupled with a top-down hedging strategy that aims to reduce country specific risk, particularly in times of volatility. The approach tends to lead to a bias towards quality companies, which has been successful over the longer-term. Shares are currently available at a discount to net asset value, having regularly traded at a premium over the last five years.
Conclusion
Given the views on China outlined above, it should come as no surprise that the three pan-Asian Schroders investment trusts are significantly underweight in China. The portfolio managers favour a more diversified approach to capturing the opportunities available across Asia, focusing their stock-picking skills on the merits of individual companies with attractive prospects.
One final factor worth mentioning when looking at the outlook for Asia is the US dollar. As the chart below suggests, there has been a strong negative correlation between the US dollar and the relative performance of emerging vs developed markets. After more than a decade of dollar strength, there are now signs that the buck may be weakening, which if that were to continue could usher in a period of better performance from emerging markets, Asia included.
Stronger growth prospects, lower valuations and an abundance of opportunity all add to the region’s attractions, at a time when global investors appear keen to diversify away from the US. Whilst geopolitics remains a risk, investor views on the global opportunity set have evolved rapidly in 2022, it is, therefore, little wonder that investors are looking towards Asia with renewed interest for 2023 and beyond.
The importance of the US dollar for EM equity performance
Source: Refinitiv Datastream, MSCI, Schroders Strategic Research Unit. Data as at 30 November 2022.
Past performance is not a guide to future performance and may not be repeated.
Risk disclosures
Schroder AsiaPacific Fund plc
Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.
Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely impact the performance of the company.
Gearing risk: The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the risk of the issuer of these instruments defaulting on paying the capital back to the company.
Schroder Oriental Income Fund Limited
Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.
Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely impact the performance of the company.
Gearing risk: The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the risk of the issuer of these instruments defaulting on paying the capital back to the company.
Distribution risk: As a result of fees being charged to capital, the distributable income of the company may be higher but there is the potential that performance or capital value may be eroded.
Schroder Asian Total Return Investment Company
Derivative risk: The company can use derivatives to assist with efficient management of the portfolio. A derivative may not perform as expected, and may create losses greater than the cost of the derivative
Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.
Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely impact the performance of the company.
Gearing risk: The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the risk of the issuer of these instruments defaulting on paying the capital back to the company.
Distribution risk: As a result of fees being charged to capital, the distributable income of the company may be higher but there is the potential that performance or capital value may be eroded.
Important information
This article is a marketing communication.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.Exchange rates may cause the value of investments to fall as well as rise.
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.
