Performance

The benchmark index fell by 5.7% during the period under review; this disguises the volatility during the period. During the period the Company’s NAV fell by 7.2%. This underperformance was mainly due to our holdings in China and Vietnam.

In China, the volatility within the internet sector provided buying opportunities for us and we selectively added to our holdings in the period where we believe that the fundamentals continue to remain supportive and the valuations attractive. Moreover, inflation is less of an issue in China and the rest of Asia than it is elsewhere in the world, allowing the People’s Bank of China to cut interest rates, whereas other major central banks outside Asia are still increasing them. Overall, we remain positive on China’s longer-term growth potential, especially around the themes of aspirational spending, digitalisation, health, renewable energy, and wealth.

In Vietnam, although the Manager had reduced the Company’s exposure, it is still a non-benchmark position, and this proved costly during the period due to concerns over the health of its banking and real estate sectors. That said, we believe that the fundamentals remain largely intact and we added a new holding in the period.

Portfolio Themes

We continue to believe that rising affluence in Asia will underpin strong growth in premium consumption in certain areas, including financial services, personal-care products and food and beverages. In particular, the portfolio has a sizeable exposure to the financial sector. For instance, we hold Hong Kong-based AIA Group, one of the biggest insurance companies in Asia, where investors welcomed the potential for the company to kickstart its performance with growth in China, a key market for the group. In addition, we continue to favour well-capitalised banks with strong retail deposit franchises. Examples of these include OCBC and DBS, in Singapore, and Bank of Central Asia, in Indonesia.

The second theme that we seek to benefit from is the widespread adoption of technology and the growing integration of Asian economies. We believe that this should result in a bright future for companies providing gaming, internet, fintech and technology services, such as cloud computing. The current macro environment has hurt the technology sector, although we are seeing a recovery in demand in some areas, such as the consumer sector. We therefore prefer to gain exposure to the sector through quality companies, such as Tencent and Alibaba in China, TSMC in Taiwan and Samsung Electronics in South Korea. Meanwhile, Asian supply chains are well-positioned for long-term structural growth related to the rollout of 5G, big data and digital interconnectivity. Taiwan-based Andes Technology, which designs and licenses CPU processor cores for use in electronic devices, is a beneficiary of these trends.

The other major theme we seek to benefit from is increasing commitment by policymakers, globally, to a greener and lower carbon future. In this regard Asia is leading the way. Companies exposed to renewable energy, batteries, electric vehicles, related infrastructure, and environmental management should all benefit significantly. Achieving grid parity – where the cost of energy from renewables becomes as cost-effective as that for energy sourced from fossil fuels – will be a key event on the path towards decarbonising the world and moving closer to achieving net zero by 2050. Examples of green energy names held in the portfolio include Sungrow Power Supply, which provides solutions for solar power projects, and Longi Green Energy Technology, a manufacturer of high-efficiency solar products.

Notable Holdings

A number of the above-mentioned companies were among the key positive contributors to performance but, in China, a key stock laggard during the period was Yunnan Energy. As a supplier of advanced materials to electric vehicle battery manufacturers, the company very much matches the above-mentioned theme but its share price weakened substantially amid a probe into the chairman and vice chairman. Following engagement with management, although still recognising the company’s strength in the overall battery supply chain, we chose to exit the stock. Other holdings in JD.com, GDS and Contemporary Amperex Technology retreated on profit-taking following a strong rally previously. In Vietnam, our holding in Mobileworld was indirectly impacted by the aforementioned concerns regarding the real estate and banking sectors.

During the half year, we sold out of positions in India-based global IT services provider Infosys, Hong Kong-based power tools manufacturer Techtronic Industries, and Indian logistics company Delhivery, all in view of better opportunities elsewhere.

New Holdings

FPT is a Vietnam-based diversified technology group with a fast-growing software outsourcing business. FPT also owns a telecommunications unit and an electronics retailing company, as well as having interests in other sectors, such as education. We are positive for the profitability prospects of FPT’s various segments, especially given the company’s entrepreneurial management.

Autohome is the dominant online destination for automobile consumers in China. It delivers comprehensive, independent and interactive content to automobile buyers and owners. The core business benefits from the powerful network effect characteristic of a classifieds business. In this instance, leadership in content drives high quality user traffic, which benefits advertising and, in turn, leads to the generation of higher revenues.

Aier Eye Hospital Group is China’s largest domestic private eyecare hospital chain, with demand supported by the ageing population, rising living standards and government policies to improve the accessibility and standards of drugs and healthcare.

Outlook

China’s faster-than-expected reopening post-Covid bodes well for the Asian region’s prospects in 2023. Global geopolitical risks remain while economic risks appear to be more focussed upon Europe and the US. That said, despite earlier fears, investors now expect the US Fed’s monetary policy tightening cycle to come to an end later this year. Moreover, Asia is in a demonstrably better position than developed economies in the West, with relatively strong consumer and corporate balance sheets, and more solid government finances in most of the region.

At the company level, it now appears that earnings downgrades in the Asia ex-Japan region – particularly in the technology sector – are close to bottoming. Just as Asia was the first region to see earnings forecasts being revised lower, it is likely to be one of the first to come out of the downgrade cycle.

We believe that we have positioned the portfolio to weather near-term risks, while keeping in mind the strong long-term secular trends across Asia. The focus remains on quality companies with sustainable business models, robust finances and access to structural growth drivers. We continue to favour fundamental themes like consumption, technology and green energy, with the firm belief that these will deliver positive long-term results for shareholders.