The recent wobbles in the US technology sector have been a reminder that paying too much for good companies can be as painful as buying bad ones. The ideal for any investor is to find growth opportunities at lower cost, where the market is underestimating the potential for a company’s prospects to improve. Asia has been out of the limelight, leaving plenty of these opportunities to explore.
Asia has been overlooked by international investors. The region’s markets are cheap relative to their US and international peers, and allocations to Asia by international investors are at their lowest level in a decade. On the Asia Dragon Trust, our discount to net asset value – a key indicator of sentiment – is still low relative to its history.
This neglect seems anomalous, given the growth available in Asian markets. For example, Asia remains the heart of the semiconductor industry, home to some of its largest and most powerful companies, with a vast ecosystem of technology hardware alongside it. It remains a long-term growth story, with demand from artificial intelligence expected to galvanise demand. The recent volatility in the semiconductor sector has provided an opportunity to add to our holdings in the sector at lower prices.
It is also home to dynamic young economies. India, for example, goes from strength to strength, as reform and infrastructure development boost economic growth. Indonesia shares many of the characteristics of the popular Indian market, but hasn’t had nearly the same attention. It has a huge population, strong demographics, and good growth.
In India, investors need to be cautious on valuations, but we can still find pockets of growth trading at attractive valuations. For example, the passenger vehicle cycle is in a sweet spot, particularly for SUVs. We, having initiated a position in Mahindra & Mahindra, alongside holding Matuti Suzuki, which makes a popular economy sedan, but have recently brought exposure to the SUV market into the Asia Dragon Trust. The country is also in the early stages of electric vehicle adoption, which is creating opportunities.
Another sector we like in India is real estate. There has been a significant improvement in prices within the sector over the last two to three years. We have direct property holdings, but also a number of home improvement companies. We also hold a cement company as a proxy for real estate demand and infrastructure growth, plus an engineering contractor building roads and powerplants.
Indonesia’s market has been less fashionable, but is also home to a range of exciting companies. The country is one of the world’s largest consumers of data, with over 200 million internet users. We have Telkom Indonesia in the portfolio, a leading telecoms operator. We are also keeping a close eye on opportunities in the consumer economy, which is set to become the fourth largest in the world by the end of the decade.
The China question
China is a difficult area, but its unpopularity with global investors has seen plenty of growth opportunities overlooked. A turnaround in the Chinese economy has proved elusive. While US/China relations have improved, China is still seeing an impact on its economy as companies re-configure their supply chains. Nevertheless, the latest GDP data showed some improvement, and there is better data on areas such as international and domestic travel.
This is where we are focusing our attention. We find companies that are thriving, even amid weak consumer confidence. One of our recent purchases has been an online travel agency, tied to the recovery in outbound and domestic travel. The recovery has been a long time coming, but should deliver improvements in earnings and profitability.
Catalysts for change
What might see value realised across Asian markets? Flows from international investors into Asia stock markets are reviving. In March, the region saw its best quarter for foreign inflows in over three years, according to Reuters. Data from major stock exchanges across the region showed foreigners bought a net $8.5bn of regional equities in March, and $18.6bn over the quarter. This is the highest since December 2020, with India, South Korea, Taiwan and Indonesia the most popular markets.
While we are not predicting any rapid revival in the Chinese market, it does appear to have hit a capitulation point. There are still risks – the property sector remains problematic, there are ongoing geopolitical tensions – but there are also some green shoots. This may reassure investors, or at the very least, enable them to look beyond China to the opportunities elsewhere in the region.
Improving earnings may also help revive Asian markets. Earnings for Asian companies are expected to accelerate this year, having been flat in 2023. This may draw investors’ attention to the value on offer, particularly in comparison with the frothy US market.
We are also taking steps on the Trust to encourage investors back to the sector. The board undertakes share buybacks, which help narrow the discount. The recent merger with abrdn New Dawn is designed to give a higher asset base, leading to lower fees and potentially improved liquidity. The combined trust will be able to allocate to Australasia for the first time as part of the allowance of up to 30% in non-benchmark positions. This should improve diversification and bring in new opportunities.
Investors do not have to wrestle with US technology to find growth. There are growth opportunities across Asia at a fraction of the price with similarly exciting prospects. As the limelight shifts from the US, investors may start to rediscover the growth available elsewhere.
Important information
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. The fund Key Information Document is available at this link.
Both companies are authorised and regulated by the Financial Conduct Authority in the UK.
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