Market and Portfolio Review

Asia Pacific equities declined over the 12 months to 30 April 2023, amid the uncertainty that weighed on markets globally. A combination of higher inflation, accelerated by the ongoing conflict in Ukraine, tightening monetary policies, rising input costs and recent banking sector events in the West have sparked fears of a global economic recession. Against this backdrop, the Company’s net asset value (“NAV”) and share price, both in total returns terms, declined 6.8% and 7.3%, respectively, and lagged the benchmark, which declined by 5.2%. However, as shown on page 16, over the past three and five years, the Company’s NAV and share price total returns have done better than the benchmark, highlighting the support from our high-quality holdings. In terms of performance, the portfolio’s direct exposure to China was the main detractor, which was partly offset by the position in Hong Kong. Chinese authorities announced an unexpected U-turn from their “zero-Covid” policy to a complete re-opening in late 2022.

However, the negative impacts from prolonged lockdowns and regulatory pressures, especially on the property sector, could not be quickly undone. While many of the holdings in the portfolio, especially in the technology and consumer discretionary sectors, stand to benefit from the re-opening, we have yet to see corporate earnings increase meaningfully. To this end, gaming company Sands China was a key performer, being a direct beneficiary of the re-opening and easing travel restrictions. Its recent quarterly results were ahead of the market’s expectations. Insurer AIA Group and beer company Budweiser Brewing added to returns amid a recovery in the Hong Kong market. We view both as high-quality exposures to China’s growth. The exposure to Chinese renewable energy companies was not beneficial to performance, with poor share price performances from Yunnan Energy New Material and LONGi Green Energy Technology, partly as investors chased opportunities from the re-opening. Yunnan’s shares were volatile after an announcement of a probe into its chairman and vice chairman. We subsequently sold the position as our conviction in the company diminished. Having said that, on a positive note, the holding in Sungrow Power Supply was beneficial following robust results, especially in the most recent quarter. China’s strained relations with the US was another aspect over the period that affected investor sentiment. Pharmaceutical company Wuxi Biologics, a company that has fundamentally performed well, detracted due to a series of regulatory hurdles where two of its subsidiaries were temporarily added by the US to a trade restriction list before being removed by the end of December. Meanwhile, the Chinese government announced further supportive measures to help the property sector recovery and appears to be easing its regulatory scrutiny into technology companies. These changes, together with investors moving towards value, benefited technology companies later in the financial year. However, while technology companies, including Tencent, have started to benefit from the re-opening, online retailer JD.com underperformed due to concerns around slowing growth and high competition.

A combination of higher inflation, accelerated by the ongoing conflict in Ukraine, tightening monetary policies, rising input costs and recent banking sector events in the West have sparked fears of a global economic recession.

In terms of portfolio positioning and strategy, we added more positions in China over the year as we remain confident in the holdings and the turnaround potential post the re-opening, especially in the technology sector. We therefore added to several internet and consumer holdings such as Tencent and Kweichow Moutai that should benefit from an increase in consumer confidence and spending. In the healthcare sector, we initiated Aier Eye Hospital, China’s largest domestic private eyecare hospital chain. Its demand is supported by the ageing population, rising living standards, and government policies to improve the accessibility and standards of drugs and healthcare. We also bought Chinese food delivery and local services app company Meituan Dianping, which we regard as a long-term growth story which should benefit from China’s shift towards a service driven economy and increasing online penetration. Against these additions to the portfolio, we exited the industrial automation business Shenzhen Inovance Technology. It is a highly cyclical business and felt the impact of a sharp drop in property construction, while rising raw material and freight costs weighed on its margins. 

The portfolio’s exposure to India, through the Aberdeen Standard SICAV I - Indian Equity Fund, did not do well this year, as the market was dominated by one conglomerate throughout the period – Adani Group. The Indian Equity Fund does not hold any Adani companies as we consider the group to be low quality, but this event had an impact on the market as a whole. 

In terms of portfolio positioning and strategy, we added more positions in China over the year as we remain confident in the holdings and the turnaround potential post the re-opening, especially in the technology sector.

Elsewhere, in Vietnam, the holding in Mobile World lagged the benchmark. In South Korea, LG Chem performed well as markets expect increased demand for its petrochemical business after China’s re-opening. We think the momentum of its electric vehicle batteries business is attractive. The Australian holdings also benefited performance as mining companies such as BHP performed well, benefiting from the spike in commodity prices. During the year, we also received shares in the oil and gas company Woodside Energy from a corporate action. The Company’s holdings in the information technology (“IT”) sector weighed on performance, driven in part by the market’s negative sentiment towards the sector. The portfolio’s positions in Taiwan Semiconductor Manufacturing Company (“TSMC”) and Samsung Electronics lagged the benchmark, while the holding in ASML was beneficial. While ASML’s shares rose in value due to a gradual improvement of the macroeconomic outlook and better visibility of the semiconductor cycle, an escalation of US-China tensions partly weighed on the share price performance. A case study on this holding is included on page 34. Over the year, we responded to the looming fears of a global recession and soft demand outlook for IT by reducing exposure to internet companies. We remain optimistic for a sector-wide turnaround within the next financial year and continue to gradually add back to the semi-conductor and hardware positions. Elsewhere, the consumer discretionary sector also weighed on performance due to relative weakness in consumer confidence and spending. However, as mentioned above, we expect a turnaround in consumption, especially with the re-opening in China. Meanwhile, in the banking sector, the collapse of two US regional banks and the takeover of Credit Suisse by UBS in Europe raised concerns of contagion effects. However, the Company’s holdings in Asians banks were not directly impacted by these events and remain well insulated, with strong balance sheets, while also benefiting from increasing net interest margins. On that note, Indonesia’s Bank Central Asia and Oversea-Chinese Banking Corporation and DBS Group Holdings in Singapore contributed positively to performance. Meanwhile, we maintain the overweight and well-diversified exposure to the healthcare sector as we expect a turnaround in consumer spending to benefit those holdings. Environmental, Social and Governance (“ESG”) ESG remains a core focus area as we continue to invest in high-quality companies. We are convinced that companies with strong ESG practices are more resilient, especially during turbulent times. To that end, we have invested in our resources to ensure we continue to identify strong stewards of ESG. For instance, when investing in Woodside Energy, we considered the effect of its decarbonisation strategy.

We frequently engage with investee companies to review their progress in ESG matters and ensure they meet our standards. For example, during the year we engaged with Tencent to better understand its policies and progresses around data security and privacy. Tencent provided a comprehensive multi-vector analysis of its data security and privacy management and noted the limited instances where data might be shared with the government and its protection policies around this process. Subsequently, we noted it had published several privacy and data security policies on its website, following our suggestions to improve disclosure. Tencent had also applied to become a United Nations Global Compact signatory, highlighting its commitment to ESG. Furthermore, it has removed the mandate to re-issue repurchased shares and reduced its general issuance mandate from 20% to 10%. It is also committed to achieving 30% female representation on its board by 2030, which we are monitoring. 

Meanwhile, we continued our long-standing engagement with Samsung Electronics by attending its annual general meeting (“AGM”) in person in Suwon, South Korea. While we had a one-to-one discussion with management ahead of the AGM to engage on agenda items and enhanced disclosures, the AGM provided an opportunity to meet the directors and show our support for the company’s ongoing efforts to make progress on governance and disclosure. The table below sets out the MSCI ESG rating of the portfolio compared to the benchmark. 

Outlook

Investors continue to navigate uncertain times due to global macroeconomic challenges and geopolitical volatility. That said, inflation is more benign in Asia, especially in China, providing support to the region’s economic health. Furthermore, Asian banks have not had any direct impact from the banking sector events in the US and Europe. While China remains a challenging market, we expect its re-opening to increase consumer confidence and consumption, as well as support Southeast Asian economies. 

The technology sector would benefit from re-opening tailwinds and an increase in consumer spending. We think the technology cycle will bottom out in the near future and see the potential for a meaningful recovery in this calendar year. While there has been a lag of re-opening tailwinds translating into earnings growth, markets expect technology companies to produce higher earnings in the next financial year. Therefore, we are confident of the portfolio’s sizable exposure to the sector and continue to add to companies with strong fundamentals and potential for outperformance. Elsewhere, we are optimistic that a surge in consumption would support the holdings in the consumer discretionary and healthcare sectors. 

Amid the ongoing uncertainty, we believe our focus on investing in quality companies with solid fundamentals will prove beneficial over the long term and help your Company navigate challenging market conditions.

Within India, we expect the holdings in the commodities and financials sectors to benefit from cyclical tailwinds and policy support. In Australia, the inflationary effects on commodity prices should continue to help mining and energy companies, despite a challenging macroeconomic backdrop. Amid the ongoing uncertainty, we believe our focus on investing in quality companies with solid fundamentals will prove beneficial over the long term and help your Company navigate challenging market conditions. 

James Thom and Xin-Yao Ng abrdn Asia Limited 16 August 2023

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. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.