Asia: the impact of a sliding global economy

 

 
– Asia is emerging from the pandemic later, which is providing an economic tailwind.
 
– We can see a stable, if unexciting, economic picture for the twin giants of the Asian economy – China and India.

– The strength of the region’s economy is reflected in Asia’s corporate sector.
 
James Thom, Investment Manager, abrdn New Dawn Investment Trust plc
 

The global economy is in significant disarray. Inflation has reached a 40-year high for some economies, interest rates are rising and growth is slowing, or non-existent. For many of the world’s major economies, recession appears an inevitability. This will certainly have an impact on Asia, but should investors be fearful?

 
Asia cannot be immune to the weakness seen elsewhere in the global economy. However, it has certain elements in its favour that may mitigate the impact. The region is emerging from the pandemic later, which is providing an economic tailwind. Optimism in the corporate sector remains relatively high.

The risk to economic activity from inflationary pressures isn’t nearly as profound. In some parts of the region, inflation is more or less trending in line with central bank targets. That gives policymakers far greater scope to support their economies.
 

‘The region is emerging from the pandemic later, which is providing an economic tailwind’

 
The outlook for the region’s twin behemoths – India and China – is mixed. Growth in China has been slowing in response to the country’s zero-Covid policy with lockdowns continuing to have an impact on economic activity.

This weakness is likely to persist in the near-term, though in the longer-term, the country may see a wave of growth once new vaccinations and treatments emerge and the country reopens fully. The timing of this is difficult to judge with accuracy, but analysts are suggesting the second half of 2023

would be a realistic target. In the meantime, inflation in China is low, giving its central bank significant headroom.

India’s vulnerabilities are on the oil price and its impact on currency exchange rates. There is a risk that this will import more inflation. However, for the time being, inflationary pressures are not acute. Interest rates are higher, but not materially.
 

‘Asia remains the fastest growing region in the world, albeit in an uncompetitive field’

 
At the same time, the domestic economy is robust. It is experiencing a recovery after its Covid-related downturn. Core sectors such as housing, the construction and infrastructure sectors are all enjoying a strong recovery, underpinned by a supportive government framework.

Together, this builds to a stable, if unexciting, economic picture. Asia remains the fastest growing region in the world, albeit in an uncompetitive field.
 

Asia’s resilient corporate sector

 
The resilience of the region’s economy is reflected in Asia’s corporate sector. While earnings growth has been falling, and higher interest rates have inevitably affected margin, we still expect Asian companies to deliver resilient earnings growth for the year ahead, with some – such as the Indian market – particularly high. In general, Asian corporate balance sheets are strong, with lower debt. Valuations reflect many of the potential headwinds, with Asian markets trading below their 10-year average.
 

‘We still expect Asian companies to deliver resilient earnings growth for the year ahead’

 
Nevertheless, this is still an environment that requires prudence. At abrdn New Dawn Investment Trust, we continue to focus on those companies with visible growth, that can continue to thrive in a tougher global economic climate.

That has meant pulling back on some companies with more cyclical exposure or those that are export-led and putting even greater focus on quality. By quality, we mean those companies with a strong industry position, pricing power, good cash generation and strong balance sheets.
 

Portfolio weightings

 
Our focus on quality means a focus on the markets with the strongest companies. We have a large weighting in India. We believe the country has a strong trajectory of growth, and offers a wide choice of high quality companies. We also hold a number of banks, including Bank Central Asia, DBS and Oversea-Chinese Banking Corporation, which should benefit from rising interest rates. Equally, loan growth is resilient and asset quality remains healthy.
 

‘Activity may be subdued, but the region is not facing the extreme problems of its Western peers’

 
The portfolio has retained exposure to higher growth areas. The China ‘A’ Shares market, for example, continues to prove a fertile source of opportunities. We have a quarter of the portfolio in China. We are also

increasing our exposure to Vietnam, which has been a significant beneficiary of the re-engineering of global supply chains.

Technology is still a significant position, even though we have reduced positions in TSMC and Samsung. It is economically sensitive and we are conscious of that. However, these are high quality companies that will weather the cycle.

The corporate sector is robust, and there are fewer vulnerabilities, such as high debt. Across Asia, activity may be subdued, but the region is not facing the extreme problems of its Western peers.
 
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.
 
More information on abrdn New Dawn Investment Trust here >
 

 

Interview with James Thom of Aberdeen New Dawn

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