Disclaimer
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- In the 12 months to 07/11/2024, Schroder AsiaPacific (SDP) saw its NAV increase by 16.8% on a total return basis, which compares to the trust’s benchmark, the MSCI AC Asia ex Japan Index which returned 17.8%.
- Over the long term, SDP’s relative performance has been strong, the trust having delivered a NAV total return of 33.9% over the five years to 07/11/2024, versus 21.9% for the benchmark.
- The managers highlight improving sentiment in the region as a contributor to their good absolute returns over the past year. This has primarily been driven by easing fiscal conditions, with the Federal Reserve cutting interest rates, though more recently, the region has been buoyed by the announcement of a series of stimulus measures in China. This has improved investor sentiment towards the region, though Richard and Abbas believe the impact on the Chinese consumer will determine how impactful this will be long term.
- Gearing has been used intermittently in the trust’s history and has been increased to 4.1% as of the end of October 2024, one of the highest levels in the past five years according to data from Morningstar.
- SDP has traded at a discount for much of the past five years. The current discount level is c. 12.7%, just over one standard deviation wider than the five-year average of 10.3%.
Performance
Richard and Abbas utilise the full strength of the global Schroders network to help manage Schroder AsiaPacific (SDP). This resource includes over 40 analysts from across six regional offices and provides the managers with on-the-ground research which supports their bottom-up approach. With this in mind, it should be expected that stock selection will be the primary driver of performance. This has certainly been the case over the long term, however, more recently, the trust’s country and sector allocations have had a notable impact on returns.
Markets across Asia are up in the year to 30/09/2024, in part due to the positive impact of rate cuts in the US, and latterly due to a pickup in sentiment towards the region after the announcement of a series of stimulus measures in China.
Over the course of the year, the managers’ long-standing underweight to China was beneficial to returns. On a country level though, Taiwan was the biggest contributor to performance, thanks mostly to stock selection. A considerable driver of this has been the allocation to tech companies such as TSMC and MediaTek which enjoyed a strong period especially earlier on in 2024. The Philippines and Singapore markets also delivered double-digit returns over the year. Both markets are overweight allocations, and stock selection in the Philippines proved particularly positive, making the country the second-best positive contributor to performance. A key contribution to the Philippines came from International Container Terminal Services. India was the biggest detractor from performance over the year, with stock selection being the primary reason. There were some highlights in India though, with one of the trust’s best relative performers being Oberoi Realty.
In the third quarter of 2024, the Chinese government announced a raft of new stimulus measures to help revive its struggling economy. This led to a change in market conditions and a significant market rally in China as well as the wider region. In this near-term period, the managers’ underweight allocation to China, due to structural concerns over the country, actually proved a drag on relative returns. The strong performance of state-owned enterprises was particularly impactful. However, Richard and Abbas’ overweight allocation to Hong Kong was a positive here, somewhat offsetting the underweight to China.
Whilst stimulus hopes in China dominated the headlines, the announcement of stimulus measures in Thailand, including direct payments into citizen’s digital wallets and a first rate cut since 2020 has meant the country has been the best-performing market in the region in the third quarter of 2024, up 21.5%. This was also helped by currency movements.
In contrast, both Taiwan and Korea struggled in the third quarter of 2024 due to their high weightings in tech companies which investors used as a source of capital to fund additions to China. However, Taiwan is still up nearly 40% over the year to 30/09/2024 despite a negative final three months of the period. Also, Richard and Abbas’ underweight allocation in Korea provided positive attribution in the quarter due to the market fall, although this was somewhat offset by negative stock selection.
Despite the short-term relative headwinds, the trust has still delivered strong absolute returns and was ahead of the index until the most recent quarter. As a result of optimism over potential further rate cuts from the Federal Reserve, and the prospect of a recovery in China due to the introduction of stimulus measures, markets in the region have been buoyed. The rally has been strongest in areas such as state-owned enterprises in which the managers have long been underweight, which has led to the trust marginally underperforming over the past year to 07/11/2024, having returned 16.8% versus 17.8% for the benchmark. However, over the long term, this has far from affected the story, with SDP significantly ahead of the MSCI AC Asia ex Japan Index over five years, for which we have used an ETF as a proxy in the chart below.
FIVE-YEAR PERFORMANCE
Past performance is not a reliable indicator of future results
Positioning
Richard and Abbas have long had an underweight to China. This has continued in the past year, with the trust’s 18.6% allocation 13 percentage points below the benchmark weight as of 30/09/2024. The managers have been narrowing their underweight during the year though; by selectively adding to holdings they have identified from a bottom-up basis. Whilst their outlook remains cautious due to structural concerns, they have identified several companies that exhibit upside potential based on the medium-to-long term. The managers remain overweight Hong Kong though, which provides similar exposure to the success of China, whilst offering better corporate governance. The third quarter of 2024 was a good demonstration of the benefits of this approach, as Hong Kong also benefitted from the stimulus-driven rally which somewhat offset the headwind of being underweight China.
As discussed in our previous note, the managers continue to be underweight India, with the portfolio having 17.1% in the country as of 30/09/2024, versus the benchmark weight of 22.2%. This has been driven by the managers’ valuation discipline. On a forward P/E basis, the Indian market is at its highest valuation point since 2010, and whilst the managers believe the Indian economy remains well supported by structural growth drivers and strong domestic fund inflows, valuations are elevated hence they have tempered their allocation. Despite this, the country is still the portfolio’s third-largest allocation.
The managers are also overweight several countries in Southeast Asia (ASEAN), the most notable being Singapore and the Philippines on valuation grounds, whilst they continue to have an off-benchmark position in Vietnam. The managers believe ASEAN markets are likely to benefit from more dovish Fed policy contributing to a weaker US dollar, as was the case in the third quarter of 2024. This backdrop could lead to inflows into the region as well as allow local central banks more flexibility to begin lowering rates. This has been the case in the Philippines, which cut rates in August and October, and Indonesia which cut rates in September. However, we note that the election of Trump in the US has raised concerns this effect may stall under his new policy approach.
On a sector basis, the managers have key overweight allocations to financials and technology. The tech overweight has benefitted from strong performance over the past year adding considerably to outperformance, though this did prove a slight drag in Q3 2024. Despite this near-term pullback, the managers remain confident in their holdings’ outlook due to their approach of focussing on industry leaders in their sectors.
The managers continue to be underweight companies exposed to consumer spending. This has led to the two largest underweight sectors being consumer discretionary and consumer staples. In the case of the consumer staples underweight, the managers are concerned about overvaluations, believing that investors have bid up share prices in many cases due to their perceived defensiveness in a period of broader economic concern.
Outlook
The managers believe macroeconomic conditions have been improving for Asia. An environment where the Federal Reserve is cutting rates is usually a good backdrop for Asia, as well as contributing to a weaker dollar which is also typically supportive for Asia. The managers have highlighted more dovish commentary from the Fed, indicating further rate cuts in the coming 12 months which should lead to more accommodative conditions for Asia and other emerging markets. However, we note that the recent re-election of President Trump in the US may impact this.
China’s recent stimulus measures have also led to a pickup in investor sentiment. This has been felt the keenest in state-owned enterprises, though the managers believe the real test of the outcome of these measures will be in whether it affects Chinese consumer sentiment. If so, this should help drive a recovery in the real economy. The managers have been selectively adding to their China holdings on a bottom-up basis throughout the year, though we understand they will need to see signs that the stimulus measures are having an impact on key metrics such as consumer sentiment before they commit further.
The managers also highlight aggregate valuations, which remain reasonable versus their long-term averages for the broad region, although the picture is more diversified when looking at individual countries. India, for example, is towards the higher end of its historical ranges, whereas the Philippines is towards the lower end. The managers believe that earnings will be important in justifying some of these valuations and could have a material impact on share prices from here. As such, they remain very selective, especially in the context of uncertainties that the region faces from a political point of view.
Kepler View
In our opinion, Richard and Abbas have presided over another period of robust performance, having posted strong returns of nearly 17% in the past year. This reflects the better sentiment in the region, aided by a better macro backdrop, but also the prospect of stimulus measures reigniting the growth story in China. The managers are underweight China, which was a drag during the strong Q3 rally, but despite this, relative returns have been remarkably resilient, performing broadly in line with the benchmark over 12 months.
The managers’ overweight to Hong Kong has contributed to this performance, which has been taken in part to help mitigate the risk of being underweight China. We believe this is a testament to the managers’ approach, as the allocation has supported returns in the short term, whilst stock selection has helped drive long-term outperformance. As such, we believe SDP offers investors exposure to the ongoing growth trends in Asia with the potential for long-term alpha, whilst also potentially being a lower-risk way of capitalising on a recovery in the region due to the quality focus and valuation discipline.
The current discount could also offer a compelling entry point in our opinion. The trust’s share price has failed to keep up with the good absolute NAV performance, leading to the discount on the trust widening slightly over the past few months. Whilst, along with much of the peer group, SDP’s discount has traded in a narrow range for the past few years, we don’t believe the current level reflects the improving prospects for the region. Emerging markets typically perform well when the Federal Reserve is cutting interest rates as they have been recently, plus there is the potential for stimulus to reinvigorate the Chinese economy, which could lead to better sentiment towards the region as a whole.
