Richard Sennitt joined Schroders in 1993 and has managed the successful Schroder Asian Income Fund since its 2006 inception, with a strong track record of investing in Asian markets. As well as managing Income mandates, Richard has managed funds focused on growth alongside Matthew for 13 years
Abbas, having joined Schroders as a graduate, has been at the firm for 13 years, where he has been a highly-successful member of the Emerging Markets team under Tom Wilson, initially as an EM strategist and, most recently, a Frontier Markets Specialist
Asia ex-Japan equities recorded a strong return in the second quarter of 2020, in sterling terms, although they advanced by slightly less than the MSCI All-Country World index. Markets were buoyed by fresh stimulus from major central banks, ongoing normalisation within the region and the reopening of economies across the world, which began to exit Covid-19 lockdowns.
Indonesia, Thailand and Taiwan outperformed the regional index. Indonesia also benefited from strong currency appreciation and Taiwan due to buoyant demand for IT products. India and South Korea both outperformed, too. A better-than-expected earnings season boosted the South Korean market, as did the announcement of additional economic support from the government.
By contrast, Hong Kong underperformed amid increased geopolitical tensions. China announced the imposition of a national security law in Hong Kong, which came into effect on 30 June. Singapore and, to a lesser extent, Malaysia underperformed. China slightly underperformed, after strong outperformance in the first quarter. The government announced further fiscal support at the National People’s Congress in May. However, geopolitical concerns increased as the US-China confrontation expanded beyond trade and technology issues.
The fund (NAV) posted a gain over the second quarter of 21.5% and outperformed the MSCI AC Asia ex Japan (NDR) index, which gained 17.1%.
Stock selection drove the fund’s performance over the quarter. On a country basis, this was particularly the case in China, Singapore, Hong Kong and – to a lesser extent - Korea. On a sector basis, stock selection was particularly successful in the financials, communication services and IT sectors. An off-benchmark exposure to Australia was also beneficial.
Stock selection in India and an underweight to healthcare detracted slightly.
After treading water through May, Asian equity markets performed strongly in June, continuing their snap back from the lows in March. The rally reflected growing optimism about a return to more normal economic activity as lockdowns continued to ease across many developed economies and much of North Asia. Although consumption, investment spending, trade, travel and many other measures of activity are still well below their pre-Covid-19 levels in most countries, broader Asian indices are now back to within 7-8% of their highs for the year. The real fuel for this dramatic rebound in markets has been the unprecedented levels of fiscal and monetary stimulus provided by authorities around the world, which has, in turn, dramatically reduced bankruptcy risks. This reduced solvency risk has allowed investors to look through the current slump in earnings towards a more normal operating environment into 2021, in order to justify current valuations.
In addition to the strong liquidity support for markets, equities have continued to be led by the ‘lockdown winners’ – sectors such as e-commerce and online gaming, healthcare, cloud computing and technology more broadly – where earnings are benefiting from an accelerating shift in consumption patterns. These are global trends, most obviously illustrated by the strength of the NASDAQ index and the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks in the US]. The Chinese market’s heavy exposure to online companies helps explain its superior performance in recent months, as many of these stocks have benefited from a similar upward re-rating in valuations.
The strength in markets has come against the backdrop of heightened geopolitical tensions in the region, due to the deterioration in the relationship between the US and Chinese governments. Notably, the US has further tightened restrictions on the sale of technology products to Huawei and other ‘government-linked’ corporate groups. This makes it harder for both US and non-US companies that use US equipment as part of their manufacturing or design process to supply these businesses. Meanwhile, China has completed the introduction of controversial national security legislation in Hong Kong, bypassing the local legislature. This move has drawn criticism from the US and other Western countries, and prompted Washington to suspend Hong Kong’s special trading status. These moves have increased uncertainty towards regional technology supply chains and Hong Kong’s role as an international financial centre. As we approach the upcoming US elections, it seems likely that the anti-China rhetoric will remain elevated in the US as these issues appear to have bi-partisan support, so we should expect continued volatility as these moves play out.
Given the lack of visibility on the timing of an end to global lockdowns and travel restrictions, and the shape of the subsequent recovery in activity, it is no surprise that companies are providing little concrete guidance on their outlooks for 2020. In our interaction with managements, it has been more important to understand what measures they have been taking to deal with the crisis and how well-placed they are to ride out the downturn – operationally and financially. For many companies, this year’s earnings are likely to be something of a write-off, so it is less important to focus on the outlook over the next few months. Markets will be willing to look through this crisis as long as there is scope for a healthy recovery next year to a more ‘normalised’ level of profitability. Our attention is, therefore, more focused on establishing the medium-term prospects for the businesses in which we are invested.
After the market rebound, aggregate valuations for the region have risen to slightly above-average levels, whether on a price-to-book or price-to-earnings basis. This is clearly already pricing in a large part of the recovery in earnings expected into 2021. However, it is not unreasonable given the scope for a snapback in activity in the second half of 2020, and the ultra-low level of interest rates and bond yields around the world. Underneath the surface, there is a very wide spread of multiples, such that some of the sectors with strong momentum this year – notably selected healthcare, e-commerce, gaming, 5G, electric vehicle-related and other popular A-listed shares – are now trading at much more stretched levels. We are also seeing some signs of froth emerging in the strong flows of new initial public offerings in Hong Kong and the high levels of retail participation in these deals. Although not yet at worrying levels, this sort of optimism does leave the markets more vulnerable to disappointment.
In terms of strategy, we believe that the impact of the virus and economic lockdowns has been to further accelerate many of the pre-existing macroeconomic trends, rather than turn the investment world on its head. For instance, the online businesses that were already gaining share before the crisis, have received a further boost during the lockdowns, while the weaker offline retailers have been pushed even closer to the brink. Demand for many technology hardware products has also received a further boost from the increased demand for cloud-based computing and remote access during the lockdowns. Meanwhile, at the other end of the spectrum, the banking sector in many countries has performed poorly since the global financial crisis. This has partly resulted from falling returns on equity, which has been pressured by higher capital ratios, stricter regulation and depressed interest rates. The latest moves to further slash interest rates globally, encourage banks to cut dividends and allow debt moratoriums for struggling borrowers in many countries, just heightens uncertainty for the banking industry. Further, it has led to valuations in the sector plumbing new lows in many cases. Given these trends, our focus remains very firmly on identifying the stronger businesses that are best placed to survive, indeed thrive, in this hostile macroeconomic environment. This is our preference, rather than necessarily looking for depressed headline valuation multiples, as these are often aligned with the weaker franchises in the market.
We believe China has moved ahead of the curve during this year’s troubles. It possesses a very large, diverse domestic market that, in many cases, is relatively insulated from overseas problems. With this in mind, we have added to several of our preferred consumer stocks that have pulled back to more attractive levels during the market sell-off. Given the long-term supportive trends of demand within the technology sector, we have also felt comfortable increasing weighting to this area. Much of the optimism around the 5G roll-out in 2020 has now deflated, and with expectations and valuations more realistic, we see scope for upside again over the medium term.
Valuations in Southeast Asia and India have been hit very hard in the recent sell-off, and headline multiples for these markets have reached the lows seen in previous crises. However, we are still reluctant to increase weightings in this area. This reflects the very heavy exposure of these equity markets to more vulnerable banks and energy-related stocks. It also points to the difficulty of bringing the virus decisively under control in populous countries such as India, Indonesia and the Philippines, with their weaker healthcare infrastructure. With interest rates being cut dramatically to support growth, and credit risks increasing as economies enter recession, bank earnings and returns on equity are likely to be under pressure, both structurally and cyclically. Additionally, the outlook for oil prices remains inherently unpredictable, given the geopolitics that are driving the supply side of the market at present. Share prices in the smaller number of better-quality domestic consumer companies have started to correct as well, but valuations are not yet compelling.
|Q1/2015 - Q1/2016||Q1/2016 - Q1/2017||Q1/2017 - Q1/2018||Q1/2018 - Q1/2019||Q1/2019 - Q1/2020|
|Net Asset Value||-6.1||41.9||16.5||0.8||-11.1|
|MSCI AC Asia ex Japan (NDR)||-8.7||35.3||12.2||2.0||-9.0|
The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Past performance is not a guide to future performance and may not be repeated.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings.
The trust holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.
The trust Invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts that invest in larger companies.
The trust may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Investments such as warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the fund.
Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so. Investments such as warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the fund.