abrdn China 04 May 2022

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.