Scottish Oriental Smaller Companies has published its interim results for the six-months ended 29 February 2016. During the period the trust’s NAV per share increased by 5.9% in total return terms, while the MSCI AC Asia ex Japan Index recorded a sterling adjusted increase of 3.1 per cent and the MSCI AC Asia ex Japan Small Cap Index a rise of 5.4 per cent on the same basis. The Trust outperformed the FTSE All-Share Index, which fell by 1.2 per cent in total return terms over the six month period. During the period, the trust provided a share price total return of 2.0%, reflecting a widening of the discount during the period.
In terms of performance, the company says that Asian stock markets performed poorly during the period but that significant sterling weakness resulted in positive returns for the Trust. In terms of individual countries, Indonesia registered a strong performance over the period with interest rate cuts and government stimulus boosting sentiment. Malaysia was the next best performing market with its economy performing robustly despite the weakness in hydrocarbon prices and political uncertainty. Both China and India performed poorly. India was the worst performing stock market with earnings growth failing to meet market expectations. China was the second worst performing market with the slowdown in its economy seeing reduced investment activity and significant capital outflows. Overall, Asian smaller companies outperformed their larger counterparts. This company says that this was especially notable in China, Malaysia, Singapore and Taiwan.
In terms of outlook, the company says that the outlook for Asian markets remains uncertain. In their view, 2015 was a year of disappointing corporate earnings caused by the weak global economy and there seems little evidence that 2016 will be any different. They say that one argument being made for better prospects in 2016 is that emerging market economies could not possibly perform any worse than they did in 2015 and that this shows there is not much to be positive about. Asia remains relatively dependent upon exports for economic growth and export conditions are challenging. Although weaker Asian currencies should help exporters, these companies are all chasing the same customers so the benefit across the region is marginal. Furthermore, in their opinion, weak currencies do nothing to bolster long-term export competitiveness and hinder the growth of domestic economies. They believe that low interest rates have made borrowing, particularly in US dollars, an apparently attractive proposition and there is a sizeable segment of Asian companies that are vulnerable to interest rate rises. However, the company says that it continues to have an emphasis on well-managed consumer companies with strong franchises and that, in the long-run these businesses should continue to grow given Asia’s demographics. The Trust has significant exposure to both India and Singapore but they say that growth is scarce and where it exists valuations are full. As such, they say that the trust will remain conservatively positioned and continue to look for sustainable franchises at reasonable valuations for the benefit of longer term returns.
Scottish Oriental says sterling weakness outweighed poor performance of Asian markets : SST