The Australian dollar has fallen to its lowest level in more than three years, which, coupled with falling commodity prices and general underperformance from Asian and emerging markets, has left financial experts on edge about the fate of the country.
In 2013 alone, the Australian dollar fell more than 15 per cent against the pound. The US dollar, by comparison, slipped just 1.79 per cent against sterling.
Performance of currencies in 2013
Source: FE Analytics
Pidcock (pictured) says the lower Australian dollar should benefit rather than hinder investment as it will make the country more competitive. He adds that he doesn’t expect to see the currency fall further, although he admits the valuation slide from the middle of 2013 did come as a surprise.
Any further deterioration in the currency would be offset by rising equity prices, he claims. “If the Aussie dollar does fall further, we think then the equity market will go up by that amount and offset it. So we think there’s a natural hedge,” he said.
“We don’t think the Aussie dollar will fall because it’s being debased, it’s not. There’s no QE (quantitative easing) in Australia. There won’t be because national debt to GDP is very, very low. But the Aussie dollar is influenced by commodity price moves.”
The manager also thinks the country can benefit from its high exposure to commodities, in spite of depressed prices from the sector.
“Volumes of commodities coming out of Australia are still growing and gas exports will pick up considerably from next year, so we think Australia’s earnings from commodity sales will go up even if commodity prices fall a little bit,” he said.
“Of course if they come off a lot, then that’s not guaranteed,” he added.
Australia is the largest regional weighting in Newton Asian Income.
“We have 34 per cent in Australia in 18 different companies. Only one of those is a mining company,” he said, “and that’s BHP Billiton.”
The manager adds that these companies are exceptionally well managed compared with other firms globally, which he views as a positive long-term indicator for their growth.
“Most of the well-managed companies that I meet in the whole of the Asia Pacific region are found in Australia,” he said. “So there is an abundance of companies that succeed domestically and internationally.”
He highlights Amcor, one of the world’s largest packaging companies, and Sydney Airport, which is benefiting from increased tourism as a result of the lower Australian dollar.
“At the moment we’re favouring developed Asia rather than developing Asia,” he said. “We’re overweight Australia, Singapore and Hong Kong and we’re still actually slightly overweight New Zealand.”
He is taking a cooler view on countries that are traditionally seen as the growth engines of Asia and emerging markets – such as India, Indonesia and China – because he thinks there are still too many headwinds that can thwart growth in the medium-term.
The manager says there is potential for emerging markets in Asia to rebound in the latter half of the year, but he points out that any rally hinges on China.
“We still think China’s growth rate will slow. We’re not expecting a meltdown, but we do think that we’ll see a lower growth rate this year than last year, and last year was lower than the year before,” he said.
“If demand from China for materials exported by many other emerging markets is lower, then again, that will be a bit of a headwind. That’s not necessarily negative for all of the rest of Asia. Not all of the countries in Asia are commodities exporters.”
“And even for countries like Australia, which does have a sizable amount of commodity exports, there are plenty of other industries and sectors that can be more buoyant because of generally good consumption levels.”
The Newton Asian Income fund had a particularly difficult 2013, underperforming the FTSE Asia Pacific ex Japan index and the IMA Asia Pacific ex Japan sector, to end the year down 0.11 per cent, according to FE Analytics.
Pidcock explained the reasons for the fund’s underperformance in a recent interview with FE Trustnet.
Performance of fund vs sector and index in 2013
Source: FE Analytics
However, the fund’s longer term track record is strong, and Chelsea Financial’s Darius McDermott (pictured) continues to back it.
“I wouldn’t be concerned about one year of underperformance,” he said. “Asia and all Asian funds had a bad year and [Pidcock] was a couple of per cent behind. That’s unusual for him, but it wasn’t drastic.”
Although the £4.2bn fund has lagged behind the sector and index over the last 12 months, it has trounced both measures over three and five years.
Since launch in November 2005, the fund has made 154.1 per cent while the sector and index have made 108.66 per cent and 119.47 per cent, respectively.
Performance of fund vs sector and index since launch
Source: FE Analytics
Perhaps more important is the fund’s attractive 4.92 per cent yield, which is the third-highest in the sector behind Schroder Asian Income Maximiser and Henderson Asian Dividend Income.
Pidcock has 29.45 per cent invested in banks, insurers and financial services firms and 23.39 per cent allocated to the media and tech sector.
Hong Kong-listed firms are the next highest geographical allocation after Australia, at 18 per cent.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.16 per cent.