Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Invesco Asia. 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.
A contrarian investor is an independent thinker who cares about the price they pay for an investment. They don’t mind going against market trends and sentiments, and typically buy assets that are out of favour, while selling those that are popular.
When you buy into businesses or industries that are facing temporary challenges, you increase the odds of buying them for much less than they’re worth. This can sometimes feel uncomfortable, but we believe focusing on the balance sheet strength of a company, for example the balance between outgoings versus income, can offer reassurance that there is some mitigation against potential risk of loss in an investment. Meanwhile, the potential return from capturing emerging trends or turnaround stories before others do can be very rewarding.
It’s about getting value for your money
Valuation is our number one priority when considering an investment. When there’s lots of negative news around, it can often be a good time to buy, which might seem counter-intuitive.
But just like buying branded clothing when it’s on sale, this doesn’t mean investing in bad companies. Quite the contrary – we simply acknowledge that companies go through cycles, and human psychology or emotion can push the market into overly negative territory, where perception is, we believe, a far cry from reality. In other words: markets are often irrational, and herd mentality can cause assets to be mispriced.
The importance of a well-established philosophy and process
Being a contrarian investor requires patience and a willingness to go against the market. It also needs a deep understanding of the market, the specific asset, and the underlying fundamentals.
We do the fundamental work and speak with company management to gauge where consensus is wrong. This gives us the confidence to lean into this perceived risk and buy potentially mispriced assets. The other side of the same coin is to avoid expensive assets during periods of euphoria.
The more complex and unpredictable the market backdrop, the more volatile and favourable the environment can be for contrarian investors. This is what we think makes Asia and emerging markets such a particularly fertile hunting ground for opportunities.
The economic cycle and inflation
Another investment factor that differentiates Asia is where it is in its economic cycle. Inflation in Asia is at its lowest in economic history compared to the developed world. Despite being used to dealing with inflation, they aren’t facing the same pressures of the US and Europe this time around.
This makes the potential financial risk from excessive tightening of monetary policy, or more simply when a Central Bank raises interest rates with the aim of reducing inflation, particularly low. Therefore, leaving China and other Asian countries more room to encourage economic growth.
The abandonment of China’s Zero Covid Policy, its support for the property sector, as well as the economic policy shift to ‘pro-growth’ signalled at the annual Central Economic Work Conference in December, were some of the main reasons behind China’s market strength earlier this year. Reassuringly, China’s household savings ratio, or the proportion of disposable income not used for household consumption, is at its highest level in a decade. We believe this bodes well for consumer spending as confidence is restored.
Investors need to consider many things when investing in Asia or emerging markets. While becoming hotbeds of consumption and innovation following decades of rapid industrialisation, investors must still be mindful of geopolitical risks and the global economic cycle. But as economies such as China continue to re-open and governments across the wider region get behind industry with pro-growth reforms and supporting measures, we believe the region to have some of the most exciting investment opportunities in the world.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
The Invesco Asia Trust plc invests in emerging and developing markets, where difficulties in relation to market liquidity, dealing, settlement and custody problems could arise.
The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.
The Invesco Asia Trust plc uses derivatives for efficient portfolio management which may result in increased volatility in the NAV. In addition, some companies are suspending, lowering or postponing their dividend payments, which may affect the income received by the product during this period and in the future.
Data as at 26 July 2023 unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
For more information on our products, please refer to the relevant Key Information Document (KID), Alternative Investment Fund Managers Directive document (AIFMD), and the latest Annual or Half-Yearly Financial Reports. This information is available on the website.
If investors are unsure if this product is suitable for them, they should seek advice from a financial adviser.
Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.