Commentary - Private Investor

Our trusts

Introduction

Performance

Commentary

Documents

Governance

Q2 Commentary: As of 30th June 2018

Market summary

Asia ex Japan equities gained slightly in the second quarter in sterling terms, despite global trade concerns serving to increase risk aversion. The MSCI AC Asia ex Japan Index underperformed the MSCI World.

India and China were among the better-performing countries in the index. The Indian market held-up in part due to significant underperformance in Q1, as well as support from domestic mutual fund inflows. In China, the central bank cut the reserve ratio requirement for banks by a total of 1.25% over the quarter to encourage lending and support growth. However, a combination of slowing domestic growth momentum and global trade uncertainty contributed to weakness later in the quarter and the currency depreciated relative to the US dollar.

ASEAN[1] markets were among the weakest index countries, while Korea also fell. This was despite positive developments with regards to peace on the Korean peninsula; an Inter-Korea Summit in April saw leaders from the South and North pledge to agree a formal end to the war between the two sides. US President Trump subsequently met with North Korean leader Kim Jong-un in Singapore in June. In Malaysia, the market declined after the unexpected election victory of Mahathir Mohamad’s Harapan alliance ended the ruling coalition’s 60 years in power.

[1] The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic, political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

Investment outlook

Following an extended period of low interest rates, the US Federal Reserve continues to maintain a hawkish stance with further tightening of monetary policy. Rising bond yields and a strengthening US dollar remain potential headwinds for equity markets in the near term in a move towards normalisation. In contrast to previous “taper tantrums”, however, Asian emerging markets generally look better placed today from a macro perspective. Current account deficits have reduced, with most Asian countries running a surplus. Currencies have already weakened in recent years and inflationary pressures in the region remain benign outside of India and the Philippines. While we may still see “risk-off”-driven selling of assets and foreign exchange [FX] in some countries in response to any sharp US dollar moves, we do not expect this to escalate or cause any systemic problems on the ground in Asia.

More recently, with escalating trade tensions between US and China, politics and protectionism have taken centre stage as key drivers of markets and investor sentiment amidst a sense of heightened uncertainty. Even with the first set of tariffs having taken effect, our base case remains that a wide ranging, very destructive trade war is not in anyone’s interest. The risks of a full-on trade war lie in the longer term, with China’s strategic industrial policy blueprint and a Sino-US technology arm’s race at the heart of US’s protectionist stance. China has already shown its willingness to reduce import barriers and further liberalise its domestic markets to find a better balance to trade.

Meanwhile, the direct exposure within our portfolios to Chinese companies that export to the US is limited. Our Chinese stocks are far more geared into domestic consumption trends, although complex supply chains within the tech hardware sector mean that the second order impacts of a trade war could be more widespread in these industries. We continue to monitor these issues closely and have been discussing with companies their contingency plans in the event they face much higher tariffs or other trade obstacles.

As long term investors, we have not made any dramatic changes to our strategy in light of current market uncertainty and portfolio turnover remains low. We remain geared towards secular growth trends including consumption and services-related areas like internet and e-commerce, travel, healthcare and education. In China, over the years we have preferred to focus on areas with strong secular tailwinds rather than try to trade the shorter term mini-cycles in investment spending, which are far more vulnerable to shifts in policy stances.

Quarterly overview

The fund (NAV) finished broadly inline with the benchmark over the second quarter.

The main contributor to returns geographically was stock selection in China, though selection and our overweight in Hong Kong and our non-index exposure to Australia also contributed.

On a sector basis, our stockpicking in consumer discretionary was the primary driver of performance, but stock selection in real estate, financials and materials were also positive.

Stock selection in the information technology sector proved less fruitful, and was the main drag on returns. Meanwhile on a country basis, India was the main detractor.

[1] The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic, political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

Discrete yearly performance (%)

	Q2/2017 - Q2/2018	Q2/2016 - Q2/2017	Q2/2015 - Q2/2016	Q2/2014 - Q2/2015	Q2/2013 - Q2/2014
Share price	11.9	41.0	8.6	12.5	1.1
Net Asset Value	10.3	39.0	10.7	12.3	0.3
Reference Index	8.1	30.6	3.9	13.2	3.5

What are the risks?

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.

Portfolio holdings

Download

Never miss an update

To receive regular notifications, please register for our email updates.

Register for email updates

Select a region

Select a country/region

Select a site

Retail Investors

Retirement Services

Mutual fund investment

Asset Management

Private Investor

Asset management

Wealth management

Select a region

Select a country/region

Select a site

Retail Investors

Retirement Services

Mutual fund investment

Asset Management

Private Investor

Asset management

Wealth management

Schroders in the UK

SCHRODERS Global

LATEST CAREERS

LATEST NEWS

Sustainability

Multi-Asset Solutions

Investment trusts

Global Investor Study

Economics

investIQ

Investment Trusts

Related Search

Schroder AsiaPacific Fund plc

"I think the old should invest in the young and nowhere is that more relevant than in Asia today."

Matthew Dobbs

Asian Equities Fund Manager and Head of Global Small Cap

Q2 Commentary: As of 30th June 2018

Market summary

Investment outlook

Quarterly overview

Discrete yearly performance (%)

What are the risks?

Portfolio holdings

Never miss an update

Latest insights

Learn more about our approach to managing investment trusts and access the latest ideas and opinions from our investment teams.

Contact Schroders

Important Information