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
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 strong gain of 18.3% over the second quarter, but marginally underperformed the MSCI AC Pacific ex-Japan Net TR GBP index, which gained 18.7%.
On a country basis, overweight exposure to Hong Kong and Singapore were the main detractors from performance. This was largely offset by positive stock selection in Korea. Stocks selection in China also detracted although this was offset by our underweight.
On a sector basis, stock selection in communication services and consumer discretionary detracted. So too did an overweight in real estate. However, stock selection in financials and materials was positive.
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.
It is worth mentioning that although we are overweight Hong Kong in the portfolio we had been reducing our exposure to economically sensitive domestic property, conglomerate and banking names. Even within those property names the majority have good growth prospects driven by their Chinese exposure.
In light of the worsening Covid-19 pandemic, there has been increasing news flow over dividend cuts and suspensions by corporates, be it mandated by governments or otherwise. Therefore, it was perhaps surprising during the recent results season how few companies used the current crisis to cut dividends, perhaps driven by a motivation to move cash upwards in the case of State-Owned Enterprise’s and family controlled entities. Here the region as a whole is helped by its relatively low starting payout ratio and listed corporates relatively low gearing ratio.
This contrasts markedly with some other regions where payout ratios and gearing are already high. Unsurprisingly, in economies where governments have aggressively stepped into support companies dividends have been cut or cancelled. One could argue that the crisis is allowing corporates more broadly there to reset payouts down to more ‘sustainable’ levels. This is not to say that Asia Pac is immune to cuts and if one looks at Australia and New Zealand their payout ratios are high by regional standards and unsurprisingly, given the macro backdrop, there have been some cuts to dividends including in the more cyclical and financial related areas. Although in Hong Kong and Singapore authorities have largely followed a non interventionist approach to the payment of dividends by banks, New Zealand has called for their suspension and in Australia the regulator has said that they should be at a materially reduced level (and this was seen in their interim results). However, more broadly across Asia it is the trajectory of earnings that will be the likely driver of dividends. So with earnings being revised down across the region this year dividends will likely be under pressure with more cyclical areas of the market clearly at risk from cuts as well as banks (particularly those with high payouts) given the likely rise in credit costs and fall in margins. The crunch point for dividends in Asia will likely come post interims in the summer by which time there hopefully will be a bit more clarity as to the impact on growth and earnings from the virus.
Our philosophy has always been about assessing the longer-term fundamentals underpinning future dividend streams, the appropriateness of the current dividend policy against the market environment, and the regular
|Q1/2015 - Q1/2016||Q1/2016 - Q1/2017||Q1/2017 - Q1/2018||Q1/2018 - Q1/2019||Q1/2019 - Q1/2020|
|Net Asset Value||-1.5||32.8||4.4||5.5||-17.2|
|MSCI AC Pacific ex-Japan Net TR GBP||-8.6||35.8||8.5||3.0||-9.3|
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 amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Some performance differences between the fund and the index may arise because the fund performance is calculated at a different valuation point from the index.
Source: Morningstar, net income reinvested, net of ongoing charges and portfolio costs and where applicable, performance fees, in GBP.
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 Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts, companies and funds that invest in larger companies.
The Company 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 Company 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.
Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting. Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded.
As a result of the fees being charged partially to capital, the distributable income of the Company may be higher, but the capital value of the Company may be eroded.