Asia and the influence of the US, 5 Nov 2024 08:33

Eric Chan, Manager, abrdn Asian Income Fund

• September’s US interest rate cut should be good news for Asian markets
• However, there is still potential volatility surrounding the US election
• On the abrdn Asian Income Fund, we are responding by raising the quality of the portfolio and structural domestic themes

The world’s financial markets had been on tenterhooks ahead of the US Federal Reserve’s interest rate decision in September. The news of a 0.5% rate cut was warmly received by Asian markets, which have outpaced global markets in the wake of the decision. The Dollar had been weakening in expectation of a cut, which has also provided a boost for the region’s economies.

US monetary policy remains influential for Asian markets. Even if the region is becoming increasingly self-reliant and intra-Asian trade is increasing, the US remains a key destination for Asian consumer goods and commodities.  At the same time, loosening financial conditions in the US usually provide a tailwind for Asian currencies. 

Typically, US rate cuts have favoured a higher growth approach within Asian markets, but there are a number of reasons why a more income focused approach may be appropriate in this cycle for those with a total return mindset. On the abrdn Asian Income Fund, we believe it is more important than ever to prioritise companies with quality characteristics to manage some of the risks emerging.

Election volatility

In particular, the US election still has the capacity to create waves for Asian markets. Both Democrats and Republicans are threatening to raise tariffs on imported goods, particularly from China. Under a second Trump presidency, those tariffs could extend across Asia. While this risk is well-understood and reflected in the share price for Asian companies, it may continue to create volatility.

At the same time, there is a valuation argument for a different approach. As with many other countries, market leadership across Asian markets has been very narrow. This has created opportunities and risks. It has left overvaluation in some areas, but it has also left some markets looking unusually cheap. There are now a broader range of options open to income investors across the region, but they need to be carefully navigated.

The Chinese market is a good example. In spite of slowing growth, the China story is not broken and some renewed risk appetite and monetary easing from the Chinese central banks has led to a revival of the country’s financial markets. Even considering the recent rally, valuations for Chinese stocks still appear attractive and there are now some Chinese companies offering some appealing yields which is a feature that was otherwise absent in the past. We see particular opportunities in Chinese banks and insurance groups, which are well capitalised, pay attractive dividends, and are well positioned to participate in the market recovery. In China, investors could potentially earn an attractive yield while also participating in the capital appreciation that would come with the China growth story.

Investing in quality markets

Even though there are more opportunities within China, the Chinese market, along with India, remains an underweight position in the trust. India and China are relatively low yielding countries relative to Singapore and Australia which have higher average yields.

Australia has always been an attractive income market because of the mature retail investor industry with well-established pension funds creating a steady demand for income compared to emerging market Asia. It is also a high-quality market, with good standards of corporate governance. Australia’s economy has weathered the global economic slowdown with little disruption.

Our holdings in Australia include several real estate stocks and Australian banks. With global interest rates set to decline, a clear beneficiary will be the real estate sector and Australian property companies are well positioned in this respect. They also fundamentally have high quality portfolios and strong development pipelines which will provide growth even if rate cuts get delayed. Furthermore, the banks have gone through a very difficult period in the last year from a macroeconomic and competition perspective but have largely proven resilient through one of the most difficult times in their recent history. This speaks to the quality of their organisations and strength in their franchises which will allow them to sustain their dividends and provide investors with appealing total returns.

In Singapore, we have holdings in the region’s high-quality banks, which have proved very stable. They have expanded overseas and continue to produce a high and stable yield for the portfolio.

Finding domestic champions

While the outcome of the US election is uncertain, we continue to find opportunities in domestic Asian themes which will continue independent of who becomes president.  Favourable demographic trends in emerging Asian markets, the impact of reshoring in South-East Asian economies, the growing premiumisation of consumption, continued infrastructure development in developing economies, and decarbonisation solutions are amongst the thematics we look to invest in.

The potential US impact on Asian markets is complicated but there are opportunities for investors who can navigate the uncertainty.  We continue to see ways for investors to gain by raising the quality of the portfolio, finding domestic champions and hunting out well-valued opportunities in unloved markets.

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.

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.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• 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.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher-than-average risk of loss.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at www.abrdn.com/aaif or by registering for updates. You can also follow us on social media: Facebook, X and LinkedIn.

Issue Date: 05 Nov 2024