Capturing the opportunity in ASEAN markets

As investors in Asian equities, we are fortunate to operate in a rich and diverse opportunity set. Although the continent is dominated by the economic and geopolitical might of China, there are many other interesting parts of Asia with distinctive characteristics. Indeed, some of these markets may benefit, to an extent, from being somewhat out of the limelight. The ASEAN markets, for example, continue to personify many of the attractive features that investors often associate with the Asian region.

The Association of Southeast Asian Nations (ASEAN) is a regional organisation comprising ten Southeast Asian countries, promoting political and economic cooperation, peace and stability in the region . The Schroder AsiaPacific Fund plc portfolio is currently overweight this region, for the reasons we explore below, with particular emphasis on Singapore, Thailand, Vietnam, Indonesia and Philippines.

Attractive valuations

Perhaps as a result of the focus that many investors place towards Asia’s larger economies, we often find interesting valuation anomalies in the overlooked corners of the market. Currently, several of the ASEAN markets fall into this category, with markets like Indonesia and the Philippines looking increasingly attractive in valuation terms. As the charts below clearly illustrates, after a long period of decline, returns on equity have generally been improving in these markets over the last couple of years. This improvement in returns has not yet been reflected in valuations, so this is an area we have been increasing exposure to on a selective basis. The same trend is evident in several other ASEAN markets, which could bode well for future performance.

Source: Bloomberg, Schroders, as at October 2024

Sensitivity to US interest rates

Meanwhile, there has historically been a relatively close association between the performance of the ASEAN markets and the US interest rate cycle. Higher Federal Reserve rates tend to attract capital back to the US, causing outflows from regions like the ASEAN markets which in turn can cause their currencies to depreciate, unless domestic rates are also raised, potentially impacting economic growth. Meanwhile, many ASEAN nations have US-dollar denominated debt, so higher rates make borrowing more expensive.

On the other hand, when US interest rates are falling, we tend to see better performance from ASEAN markets, as it potentially allows an easing of domestic monetary conditions. Given where we are currently in the US interest rate cycle, we believe the ASEAN markets are relatively well placed and have been keen to capture this opportunity in the Schroder AsiaPacific Fund portfolio.

Indeed, we are already seeing the benefit of this, with better relative performance from the likes of Thailand, Indonesia, Malaysia and the Philippines in recent months. This has coincided with the Federal Reserve’s first interest rate cut since March 2020 and expectations of more to follow.

Economic growth drivers

With the benefit of lower US interest rates and positive capital inflows, the ASEAN economies look poised to deliver above average economic growth in the years ahead. The region benefits from relatively positive demographics compared to the rest of the region. Indonesia and the Philippines in particular have a young, fast-growing population that is boosting the labour force and driving consumer demand. This demographic advantage is complemented by the benefits that come from being part of the ASEAN community, which advocates more cross-border trade, investment and supply chain connectivity. Together, these factors foster a dynamic environment for sustained growth, attracting investment and creating new economic opportunities.

Within the portfolio, we look to harness this growth through positions like Vietnamese retail business, Mobile World and Philippine property developer, Ayala Land (held as at July 2024)

Advancing financial inclusion

Furthermore, the rapid growth potential that we see in ASEAN economies also drives another theme we are looking to capture in the portfolio. Economies at this stage of their development tend to see a long-term trend of rising financial inclusion as economies move towards middle income levels. This means a greater proportion of the population utilising bank services and accessing other financial products for the first time such as loans and insurance.

Clearly, the best way to access this for the portfolio is through ASEAN financial services businesses, as at July 2024, the trust has positions in Singapore-based DBS, Bank Mandiri in Indonesia and Kasikornbank in Thailand.

Source: Swiss Re, 3/2023: World Insurance: stirred and not shaken

Navigating the future

For a variety of reasons, including those outlined above, we are optimistic about the outlook for ASEAN markets over the next few years and have positioned the Schroder AsiaPacific Fund to capture this potential through stock specific opportunities. Individually, some of these positions are small in the context of the overall portfolio, but this reflects their relative maturity and a degree of liquidity risk which is always evident in less well-traded markets such as those in the ASEAN region.

Nevertheless, as a collection of high quality, high potential businesses, we are confident our exposure to the ASEAN economies can add value over the long run, particularly in an environment where US interest rates are now falling, and as part of a balanced portfolio strategy that provide attractively diversified exposure to the rest of Asia.

Overall, therefore, the Schroder AsiaPacific Funds overweight position towards ASEAN markets should ultimately spell good news for shareholders.

Risk considerations: Schroder AsiaPacific Fund plc

• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China "A" shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund's investments and could cause the fund to defer or suspend redemptions of its shares.
• 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.
• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.
• Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.
• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.
• Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
• Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.
• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.

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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.

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