James Thom, Investment Manager, abrdn New Dawn Investment Trust plc
- After a tough year, 2023 starts on a more optimistic note for many Asian markets
- China’s reopening may fuel regional growth, while the interest rate cycle may support stock markets
- There will still be fragility in the year ahead and a focus on quality companies with resilient earnings will be crucial
2022 was a challenging year for global markets – and Asia was no exception. While a handful of markets bucked the trend, the weakness of China was a major headwind for the region as a whole. However, at the start of 2023, there are promising signs of change: China is reopening, the interest rate cycle may be turning and companies are showing significant resilience.
Asia has had face down global and domestic problems over the past 12 months. In particular, Covid lockdowns, political tensions and problems in its property sector have seen China act as a drag on regional growth. Countries with commodities exposure, such as Australia and Indonesia have been rare exceptions to the general weakness, with India also a surprise source of resilience during a tough year.
2023 begins more optimistically. Whilst it’s certainly true that a recession in the West may dent demand for Asian exports and weigh on growth, there are nonetheless noteworthy signs of a shift in the economic cycle within Asia. Most important is the potential for a shift in the monetary policy cycle across the region. Asian central banks have followed the lead of the US Federal Reserve, but inflationary pressures have not been as acute, and rate expectations are now peaking. This should support Asian economies in the year ahead.
Unlike many Western economies, there is still structural growth in Asia. Many mature economies have a growth problem that is likely to continue even as the interest rate cycle turns. Debt burdens built up during the pandemic may constrain economic activity in the near-term. In contrast, the long-term growth drivers for Asia are still intact – a growing middle class, rising consumer spending, low debt and innovation.
Finding the right opportunities
This stronger economic growth backdrop should support the Asian corporate sector. Companies across the region are undoubtedly seeing rising input costs and margins coming under pressure, though this eased in the final quarter of 2022. abrdn New Dawn Investment Trust has been focused on finding those companies with strong and leading market positions, giving them power in pricing and procurement. This has helped protect the trust against earnings downgrades. These have stepped up as economic growth has weakened
Markets have re-priced over the year, with valuations far lower than at the start of 2022. Valuations are now at a level likely to appeal to trade buyers and this may be a catalyst for merger and acquisition activity. Companies have sufficient cash to fund acquisitions if they find the right opportunities. India is the notable exception, where valuations are high after a resilient year for the country’s stock markets.
The China situation
China’s revival will be important in the year ahead. abrdn New Dawn has been underweight China but has made selective investments there more recently and is overweight Hong Kong. There has been a high profile shift in the government’s handling of Covid, with the country opening up travel and reducing quarantine requirements. There has also been some improvement in the country’s fragile property sector.
China is still home to a range of innovative companies and is an important driver for economic growth in the wider region. We have reinvested in online food delivery business, Meituan Dianping, which has resolved its regulatory concerns. We also hold AIA Group in Hong Kong, which should be a beneficiary of China’s reopening, while also benefiting from the interest rate cycle.
The wider portfolio
The financial sector should be a key beneficiary of the reopening in China and elsewhere, with demand for credit growth increasing and higher interest rates allowing for improved margins. The trust holds a number of banks in India, playing on the domestic growth theme, but also in smaller Asian markets where financial inclusion is increasing.
The abrdn Indian Equity Fund remains the largest single holding in abrdn New Dawn. India is dependent on imported oil, and oil prices have dipped in recent months, inflation remains benign and Indian companies continue to deliver strong earnings. The economy is also supported by a cyclical recovery in infrastructure, increased government spending and credit growth.
Regional giants, such as TSMC and Samsung had a tough year in 2022, but a recovery in the memory sector is likely in the year ahead as supply chains unlock and demand revives. Valuations also look more attractive. The trust retains exposure to the sector, albeit at a lower level than at the start of 2022.
2022 was a tough year. 2023 should be a better year, but with global recession risk looming, it won’t be plain sailing. However, Asia is in a better place to the rest of the world and a focus on quality companies should bring resilience.
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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