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Moneycube Talks with James Thom of abrdn New Dawn

The Asia-Pacific region has seen dramatic change over the last few years, from political change to prolonged lockdown, and heightened tension over Taiwan.  To understand investing in Asia Pacific, Moneycube talked with James Thom, investment director at Abrdn New Dawn Investment Trust.

Abrdn New Dawn is focused on investing in equities in Asia Pacific, excluding Japan, and has a market capitalization of around €350 million. The fund is up around 40% over the last five years. It’s a strong result, particularly in the context of ongoing lockdowns on China, one of its key regions, and the wider sell-off we have experienced in equities globally during 2022.

As a business, Abrdn as an asset manager has always had a strong focus on investing in Asia-Pacific, and James himself is based in Singapore.

Our conversation ranged from the prospects for Asia as a region, to the fund’s investment thesis and approach to portfolio decisions and a review of some key holdings, concluding on the outlook and opportunities for New Dawn in 2023 and beyond.

This is an edited transcript of the conversation, recorded in late September 2022.

James, how did you come to fund management, and investing in Asia in particular?

I’ve been based in Singapore for 17 years now. And my interest predates that move; I’ve long held a fascination with emerging markets, and Asia more specifically, and the huge opportunities from an investment perspective, from a growth perspective.

Asia, now more than ever, really is the engine of the world’s growth. And that makes it an extremely exciting place to be investing.

So I pursued that, initially as a private equity investor, and in the last more than decade, with Abrdn on the public equity side.

There are some fundamentals which drive growth in Asia, which are much more prominent than, say, Europe and North America, such as demographic change.

Yes. Asia is home to a huge swathe of the globe’s population – China with 1.4 billion people and India with another 1.4 billion. The demographics vary quite markedly across the across the region. Although China has a very large population, the demographics are on the cusp of working against it, with an ageing population.

In contrast, India has a so-called demographic dividend, still with a growing population and a very young population. Assuming that India can keep creating jobs for its millions of new individuals entering the workforce, that will continue to drive structural growth for many decades to come in that market.

Even if you look at China, it’s not pure demographics.  It’s also rising educational levels, rising middle class and income levels? You’ve invested in auto dealerships in China, for example. Is that part of the investment thesis?

Absolutely. So not withstanding a slowing or ageing demographic in China, your point around the middle class still emerging and still getting wealthier, is extremely valid, and is continuing to drive a real domestic consumption story in China.

The auto dealership is a great way of playing on that, as people aspire for marquee brands in the auto sector. And we see that right across the broader domestic consumer story in China and elsewhere. The fund is very much positioned around that.

There’s a similar argument when we think about our own society here in Ireland as it ages. Young people are driving the growth perhaps, but the wealth often resides in the older consumers.

Tell us a about the fund itself: its overall strategy and its approach to allocating investments.

It’s an Asia-Pacific, ex-Japan equity strategy. The objective is long-term capital appreciation. It does pay a bit of a yield, but it’s not explicitly targeting income. The strapline we use for the fund is: investing in locally-chosen, high-quality Asia-Pacific companies.

We have a long-term quality approach. It’s neither pure growth nor value.  What we’re trying to do is identify the highest-quality companies across the region, and build the portfolio from the bottom up around those companies, ultimately aiming for a reasonably diversified portfolio, both geographically and across sectors.

Abrdn New Dawn: ten largest equity holdings

Holding Country Weighting
AberdeenStandard SICAV I – Indian Equity
India 13.4%
Tiawan Semiconductor Tiawan 7.4%
Samsung Electronics Preference shares South Korea 5.3%
AIA Group Hong Kong 5.0%
Tencent China 4.1%
BHP Australia 3.8%
DBS Bank Singapore 3.1%
CSL Australia 2.8%
Bank Central Asia Indonesia 2.7%
Oversea Chinese Banking/ OCBC Singapore 2.3%
 Total top ten  49.9%

 

Here in Ireland, we’ve seen the sell-off in growth stocks, and arguably not as much as you might hope in terms of cycling into value stocks. But it’s worth keeping in mind that one of the best things you can do as an investment manager is avoid losses and miss bad opportunities, as much as capitalise on good ones. 

Some of the retail-oriented technology stocks you’ve either sold out of at a good time, or had a low exposure – the likes of Alibaba or Meituan in China, for example.

Instead, you have built a position more in business-to-business stocks, less prone to the vicissitudes of the market, but also to political risk in China. For example, you’ve taken a position in a lithium ion battery separation business and followed some themes around automation in industry.

We have some exposure to the Chinese internet sector. But we’ve been pretty cautious around that, for a couple of reasons.

The Chinese government has been trying to clean up that sector somewhat, and eradicate some of the anti-competitive practices that were happening. So we’ve been cautious there. And obviously, it’s tied to the broader growth story, and China’s been slowing lately.  So we’ve done well, as you say, to limit our exposure, there.

In contrast, when you think about the broader tech exposure in New Dawn, we have quite a bit of exposure to the semiconductor sector, and tech hardware. And that is cyclical as well.

There is absolutely concern around what the risk of global recession might mean for these companies, but two of our larger holdings in the portfolio are semiconductor businesses, and are, I think, amongst the highest quality companies in Asia and stack up very favourably on the global stage.

Our largest holding is a company called Taiwan Semiconductor company, or TSMC, which is by far the global leader, way ahead of Intel and other companies that you may have heard of in the sector, with north of 90% market share in its really advanced technologies.

It’s been a great long-term compounder for us, and whilst you have to reposition slightly around the cycle, we still think the medium-term opportunities for those companies are extremely robust.

Delving into slightly more niche pockets of the technology sector across Asia, we have invested in an industrial automation business in China. As China has become wealthier and more successful, wage levels have gone up and the cost of labour which used to be very cheap, is now rising. And that is forcing Chinese companies to automate their factory floors. This business plays into that theme. China is where possible trying to foster players that are homegrown versus being reliant on multinational companies. So this company is a play on that localization theme as well.

You mentioned the lithium ion battery separator business. That is a very niche, high-tech business in China. It’s a play on the electrification theme, that as the world accelerates its move towards electric vehicles – which by the way, China has been leading the world on – electric vehicle batteries are clearly a critical component there.

This company has a market leading position globally, not just within China, as a component provider into battery manufacturing. China is home to many niche, but globally competitive and sometimes leading component makers in in the technology space.

It sounds like the root of a lot of your investment decisions has been quite sector-led. And as you say, often there will be a market leader in China, which is rolling out globally.

So tell me a little bit about your investment process.  Where does it start?

One of the things that’s distinctive about the New Dawn fund is it offers a way to get exposure to markets that are less talked about around here: Vietnam, Indonesia, and so forth. Does it start from a geographical perspective, from a sector perspective? Is it opportunistic, meeting good management team, or where do you tend to begin when you’re looking at opening a new position?

I’ve got the great benefit of having a very large team within Abrdn on the ground in Asia. We’re more than 40 fund managers across seven offices in Asia. And that is a fantastic resource in terms of research generation and idea generation.

We have offices across the different geographies, but we also organise ourselves from a research standpoint, by sector. And we’ve got this research engine to generate ideas, both within specific geographies and within specific sectors.

Every two weeks, we run through a particular sector, both to review what we already have in the portfolio and the stocks we already hold, but also thinking about what new themes are there that we should be focusing on? Are there ideas and companies within the region that we can be investing in? That’s a really important driver for idea generation.

Ultimately, the caveat is: it doesn’t matter how exciting a particular thematic may be. If we can’t find a company that within that sector or niche that meets our fundamental quality criteria, we won’t invest. So that’s where the buck stops. It’s a bottom-up, quality-driven investment process.

We have sectors – education would be a great one in the context of the demographic discussion earlier.  There is great growth in that sector in Asia, and demand for education as families and households become wealthier. But for whatever reason, there are not many companies in the listed space and those that are listed, fail our quality criteria. So at the moment, you don’t doesn’t have exposure to that particular theme, although we’ve identified it as an attractive one.

You’ve invested in India via a holding in another Abrdn fund, which makes it your largest holding. Tell us about that and what it represents for the fund at something like 13% of the overall exposure.

Yes, I appreciate It’s a slightly unusual way of investing through a fund like that rather than going direct given we are stock pickers. The reason we did that is because there were tax benefits to investing indirectly, from a capital gains standpoint, versus going direct.

However, the India fund is managed by the same Asian equities team. I personally am very closely involved with the management of that portfolio as well, which tells you that it is run to the same investment process. It’s also a long-term quality focus, built from the bottom up with exactly the same rigour and  selection process. There’s no double-charging of fees. So in that sense, it’s entirely transparent.

Within the [India] fund itself, there are just under 40 holdings. It’s an active pretty high conviction portfolio, very much biased towards the larger top 10 holdings as with New Dawn, and it gives you a diversified exposure to the Indian equity market.

There are some sizable positions within the consumer sector as well as IT services. India is home to some of the world’s leading IT services companies competing head-on with the likes of Accenture and so forth. It has a large exposure to the financial sector, and banks in particular, which at the moment are doing very well in India.

It’s a nice way of getting a diversified exposure to a high-growth market, which is packed with really great quality companies, and has long been.  For New Dawn, we’ve always held a sizable position in India. And that gives you a sense for our view on the quality of the underlying companies there.

Here in Dublin, at the start of 2022 all the talk was of the roaring 20s as all the money we’d saved sitting at our kitchen tables would be spent in a big splurge on restaurants, and travel and many other things. Central banks were telling us how the inflation we were seeing was merely transitory.

Roll it forward nine months, it all looks rather different. It didn’t take long for war in Ukraine, which is firstly appalling from a human perspective, but also has had a major financial impact, particularly in Europe, and on energy costs. And then there’s inflation, and interest rate rises as central banks rush to catch up on it. 

From where you’re sitting in Singapore, maybe that looks a little different and there’s a different set of risks and opportunities. What is the overall mood, versus, here in Europe?

The mood in Asia is relatively cautious as well. Asia as a region may have a very different set of dynamics, and I’ll talk about that shortly. But ultimately, it’s still an interconnected world and Asia is very much dependent on the global economy and integrated with the global economy.

So I think fears around recession in the west and what that might mean for global demand and countries that are particularly dependent on exports are a concern. When you look at the market, certainly, Asian equities have not escaped a lot of these headwinds as well. They are broadly tracking similar to global equities at the moment.

But having said that, I do think that the underlying fundamentals in Asia are quite different. And the issues, whilst similar, are much less acute in Asia. To give you an example, we’re seeing double-digit inflation in the UK and in western Europe and more broadly.

In Asia inflation has been rising, but not nearly at the same rate. For the most part, it is trending at around the upper bound of central banks target ranges. We have seen central banks respond to that a little, and rates have gone up a bit. But there’s not the same  pressure to rapidly accelerate rates. And I think central banks just have a bit more headroom to do that in a more measured way, which will be less disruptive to growth in the near term.

China is cutting rates, it couldn’t be more different. Inflation’s about 2%, so a totally different set of dynamics there. And there is still growth. Notwithstanding that export linkage, and vulnerability to slowing global growth, Asia is still on course, to grow at 4-5% this year from the GDP standpoint. India is forecast to do 7-8% GDP growth this year.

And that filters down through to the companies. We’re still seeing earnings growth.  We are having downgrades come through; whereas the beginning of the year, maybe the expectation was for double-digit earnings growth this year, now we’re down to high single-digit earnings growth.  But nonetheless, still growth.

Those  structural undercurrents are still in place, and still helping to  drive a sustained level of growth. So in the round, yes, there are headwinds in Asia, and you need to be cognizant of those. But the situation is far at this point, far less acute than elsewhere in the world.

Finally, a question around where you see the opportunities for the New Dawn fund into 2023. and beyond. Tell us about the opportunities you’re considering and a general sense, whether it’s sector, geography, and so forth, and where you’re directing your time alongside your fellow managers.

For the balance of this year, and going into next year, we are a little bit cautious on China. We haven’t really discussed it, but this is a country that is still effectively closed to the rest of the world, still pursuing a zero-COVID policy, still seeing lockdowns in important cities and for large parts of the population. That is incredibly disruptive to economic activity.

When that zero-COVID policy gets reversed, perhaps towards the end of this year, we will see a meaningful rebound in the Chinese economy. As with all the countries that have finally emerged from the pandemic, there’s always huge pent-up demand, and I think China will be no different. So maybe turning a little more constructive on that into 2023, but at the moment, somewhat cautious.

In contrast, we are more constructive on India: an economy that’s going to do 7-8% GDP growth this year, and is home to so many great quality companies. It’s a very obvious  hunting ground for us.

So I’ve just been slightly increasingly the position to India lately, and we’ve been looking for ideas in southeast Asia.  We’re already well positioned there, across Singapore, Indonesia, the Philippines, and Thailand, but we’d like to find more opportunities there.

It’s a market or region that has being somewhat out of favour for seven, eight years, and is arguably finally getting its mojo back. It’s reopening post-pandemic, growth is picking up a bit, it’s a large population in aggregate, and has some very interesting consumer stories.

We’ve got quite a bit in the bank sector there and obviously those are nice hedges against rate rises and the inflationary risk. So those have done quite well for us and I’m still thinking outlook there into next year is quite constructive and positive.

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