Asian markets faced more challenging conditions in 2018 with headwinds from rising US interest rates, a strong US dollar and the ongoing trade dispute between the US and China. However, most emerging Asian economies are better placed to cope with challenges of this nature than they have been in the past.
Asian markets faced more challenging conditions in 2018 with headwinds from rising US interest rates, a strong US dollar and the ongoing trade dispute between the US and China. However, most emerging Asian economies are better placed to cope with challenges of this nature than they have been in the past: current account deficits have been reduced; local currencies have weakened to competitive levels; and inflationary pressures in most countries remain benign. China has also demonstrated a continuing responsiveness to changes in the market environment, loosening monetary policy and implementing selective stimulus measures following signs of a gradual economic slowdown that began before increased US trade tariffs started to have an impact.
On the valuation front, Asian equities in aggregate now trade close to the levels seen during the last period when regional markets experienced a downdraft in late 2015 and early 2016. At this level, they are beginning to offer some value.
Despite the trade issues, we are still finding a number of good opportunities among selected Asian exporters. We like companies that deliver a high level of added value with their products and that have complicated supply chains. This makes it is very difficult to source alternatives for their products elsewhere.
Promising investment opportunities are also showing up among a number of domestically-focused growth stocks in sectors like leisure, healthcare, internet services and education. Following the market falls of 2018, these have come back to attractive levels.
We also still like a number of the banks across the region. These are very strongly capitalised, meaning they look capable of absorbing losses if they need to. We don’t expect to see a significant increase in losses due to non-performing loans, when payments are being missed, but an attractive combination of solid growth and undemanding valuations.
Given the uncertain environment, Asian management teams are generally being selective in their capital spending decisions at a time when balance sheets (at least for companies we prefer) look robust. Consequently, free cash flow generation is running at historically high levels, which should underwrite resilient dividends.
Schroder AsiaPacific Fund plc discrete yearly performance (%)
Benchmark
Past performance is not a guide to future performance and may not be repeated.
*In January 2011 the MSCI AC Asia ex Japan (NDR) replaced the MSCI AC FE ex-Japan Net (TR). The full track record of the previous index has been kept and chain linked to the new one.
Some performance differences between the fund and the benchmark may arise because the fund performance is calculated at a different valuation point from the benchmark.
Source: Morningstar, with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP as at 30 September 2018.
Schroder Oriental Income Fund Limited discrete yearly performance (%)
Past performance is not a guide to future performance and may not be repeated.
Some performance differences between the fund and the reference index may arise because the fund performance is calculated at a different valuation point from the reference index.
