Latest trust commentary

Performance overview

• Pacific ex-Japan equities fell in the fourth quarter, in sterling terms, in the face of a stronger dollar and higher US bond yields. The Federal Reserve cut interest rates by 25 basis points at its December meeting, but indicated that ongoing persistent inflation may mean there are fewer cuts in 2025 than previously anticipated, which caused markets to sell off.
• Korea was the weakest-performing market on the back of political instability after President Yoon Suk Yeol was impeached following his imposition of martial law early in the month. Indonesia, Australia and the Philippines also fell notably owing in part to dollar strength and rising bond yields. Chinese equities declined and underperformed mildly, following recent weakness and some lacklustre economic data.
• Taiwan and Singapore were the best performing markets, with both markets rising by more than 10%. Taiwan again benefited from strength in its technology sector, especially stocks linked to AI.
• The fund produced a negative return but outperformed the MSCI AC Pacific ex Japan index over the period.

Drivers of fund performance

• At the regional level, allocation had a positive effect, largely due to the overweight exposure to Singapore. Stock selection detracted, however, with the fund’s holdings in Singapore weighing on performance.
• In terms of sectors, the underweights to consumer discretionary and materials, and the overweights to information technology (IT) and financials proved to be beneficial. Selection had a negative impact, particularly in IT.

Outlook/positioning

• Asian equities ended 2024 on a generally softer note, with most markets falling in the fourth quarter in response to shifting expectations for US monetary policy and disappointing follow-through on the policy front in China.
• Although Donald Trump’s election victory triggered a rally in the US equity market, it also pushed the dollar and Treasury yields materially higher, and in turn, reduced expectations for interest-rate cuts through 2025. The new US administration is expected to enact fiscal and regulatory policies that will stimulate growth in the near term, and potentially put upward pressure on inflation. This has led to a tightening in US monetary conditions as we start the year. This shift in expectations has put pressure on Asian currencies and reduces the room for manoeuvre of regional central banks. Trump is also talking very forcefully about his intentions to hike import duties on goods from China and other markets, which could potentially be very disruptive to Asian exports over the medium term.
• The key issue for longer-term returns in China is whether any upcoming fiscal stimulus or other policy announcements are sufficient to really accelerate underlying economic growth, and thereby improve the earnings outlook. An improvement in domestic confidence – for both households and the corporate sector – is key to the growth outlook, while domestic policy support remains critical given the tough external backdrop. Market performance is therefore likely to be very policy dependent as we move into 2025. We remain underweight the China market, albeit partly offset by an overweight to Hong Kong.
• Korean and Taiwanese markets remain hostage to the performance of technology stocks, which dominate their indices. While AI-related revenue momentum looks very strong for many Asian technology stocks, the longer-term growth picture is less clear. Despite these near-term uncertainties, we remain comfortable with our positions in industry leaders in the technology sector.
• Although dividends have recovered with earnings, there are questions as to where near-term dividend payments will go, given the ongoing economic uncertainties and downward earnings pressure on stocks across the region. This will likely continue to have an impact on dividends in some of the more cyclical areas, as we have seen in resources. The performance of the pound will also affect the level of sterling-denominated dividends received by the fund, with strength over the last year a headwind, albeit this has now started to reverse. However, aggregate corporate balance sheets look relatively robust, and company profitability has recovered from the pandemic lows, meaning dividend payout ratios are not extended. In the medium-to-long term, dividends tend to follow earnings. 
• We continue with our bottom-up investment approach and look for good companies where we can clearly see a strong income case and potential for capital growth.

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• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China "A" shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund's investments and could cause the fund to defer or suspend redemptions of its shares.
• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.
• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.
• Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.
• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.
• Gearing risk​: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
• Operational risk​: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.
• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.