Asian markets have been mixed as the weakness of the Chinese economy has rippled across the region. However, economies in the region may yet emerge stronger than their Western peers. They have less debt in their government and corporate sectors, fewer structural imbalances and stronger potential growth. Prioritising quality companies may help investors steer a path through the volatility and uncover long-term growth.

While Asian economies are not immune to the pressures of inflation, higher interest rates and slowing growth, the problems are not as acute as for many Western markets. Yoojeong Oh, manager of the abrdn Asian Income Fund says: “Inflation is lower and there is a better underlying growth story from domestic consumption and favourable demographics. That positions Asia relatively well to grow faster.”

In Japan, monetary policy remains loose. Small amounts of inflation are, potentially, a net positive, with rising wages and improvement in demand boosting the economy. Hisashi Arakawa, manager of the abrdn Japan Investment Trust, says: “The Japanese economy has returned to pre-Covid levels and is supported by firm demand overseas. Inflation is ticking up, but is still low compared to other markets. For years, Japan was seen as an economy with deflationary pressure, but now we are seeing companies raise prices and pass on costs. It is a time of change.”

China is the elephant in the room. There are two key issues – its zero Covid policy and the property market. Gabriel Sacks, manager of abrdn Asia Focus, says Covid is still prompting lockdowns, creating a stop-start situation, but the government is unlikely to change tack ahead of the Party Congress in October. He adds: “The authorities have been trying to rein in excesses in the property market. Property is such an important sector for the economy and for the wealth of households. It is affecting consumption in China.” That said, there has been some easing of monetary policy, which has supported the economy.

Stock markets

Asian markets have been hit by the same combination of inflationary pressures, interest rate hikes and slowing demand that has hurt Western markets. Sacks says: “The start of the year saw commodities companies doing well alongside financials, on expectations of rising rates. In the second quarter, as the narrative shifted more towards recession, these sectors came down again. One consistently strong sector has been energy, particularly smaller energy companies, while IT has done consistently badly.”

In this environment, abrdn managers have sought to lean into the recovery seen in some countries and to capitalise on lower valuations. Oh says: “We have been bringing down exposure to the large Taiwanese and Korean chip manufacturers, rotating them into companies with greater exposure to the reopening story across the region. That includes Kasikornbank bank in Thailand – which is both a strong digitalisation and Environmental, Social and Governance (ESG) story”.

Sacks says: “We’ve been capitalising on some of the market weakness we’ve seen in China and Korea. We hope we’ve seen the market bottom for China, and have introduced two new, domestically oriented holdings there. We are trying to take advantage of cheap valuations to bring quality businesses into the portfolio.” He says there are risks around earnings, given slowing growth, but companies are delivering on expectations for the time being.

Arakawa says that he is focused on a number of key themes: “Automation is important, and demand remains firm for robotics We also favour those companies benefiting from supply chain diversification. Where US companies are bringing production back home from Asia, for example, they need new automation. We also see good demand around the energy transition theme. This includes energy saving air conditioners or heat pumps that can help homeowners.”

Resilience through quality

However, all agree that a quality overlay is vital, given the uncertain environment. Oh says: “We favour businesses with balance sheets that don’t face refinancing risks and business models where there is pricing power, where margins are more resilient, where your customers really need your products.” Dividends are also important, she adds: “Dividends have already passed pre-Covid levels on a US Dollar basis. Quality companies that haven’t taken on additional financial risks should benefit from dividend growth when there is a recovery.”

Arakawa says he has reassessed the Japan portfolio to concentrate on higher quality names: “They are in a better position to navigate supply chain issues and stay ahead of the current risks. We’re seeing this in earnings - high quality companies have demonstrated their ability to manage through difficult times.”

In the short-term, says Oh, there is always something to worry about, from supply chain risk to geopolitics. “We try and mitigate those risks by understanding the businesses we invest in.” Arakawa agrees, saying good management teams are capable of navigating these difficult times.

Sacks says he is cautiously optimistic for the year ahead: “There are pockets of weakness in some markets, but there are also companies that keep investing, keep expanding, that are becoming deeper entrenched in their niche and protecting their market position.”

After the turbulence since the start of the year, valuations across Asian markets are now more appealing. There are plenty of opportunities across Asian markets, but some volatility is likely to continue and investors are unlikely to escape. Quality companies with strong balance sheets, predictable dividends and strong management teams are likely to prove more resilient through this period of volatility.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

Find out more at:

abrdn Asian Income Fund Limited

abrdn Japan Investment Trust

abrdn Asia Focus

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