Over Aberdeen Asian Income (AAIF)’s interim results period to 30 June 2020, the company’s NAV declined by (6.5%). By comparison, the MSCI All Countries Asia Pacific ex-Japan high dividend yield index was down by (7.0%) over the same period.
AAIF says that its performance was affected by its light exposure to China, which was the first country to emerge from lockdown. Given its core income focus, the company does not own internet companies such as Tencent and Alibaba, which surged over the period. This was partially offset by the holding in Yum China, the China-based franchise company behind the country’s KFC fast-food chain of restaurants.
Weakness in income-focused markets
Income-driven markets, such as Singapore and Hong Kong, also weighed on performance, particularly from AAIF’s holdings in the financial sector. Lenders, such as Singapore-based DBS Group and Hong Kong-based HSBC, were doubly hurt by concerns that lower interest rates would compress margins, as well as expectations of dividend suspensions to shore up capital.
Korean and Taiwanese tech and telecoms holdings emerge relatively unscathed
Holdings in the technology and telecommunications sectors, in South Korea and Taiwan, held up well with both sectors emerging relatively unscathed, over the period. This was owing to increased demand for electronic equipment and data stemming from the need to work-from-home. AAIF note that Taiwan’s e-commerce retailer momo.com and Taiwan Mobile particularly benefited as the lockdowns compelled a higher usage of data and online resources.
Mindful of the disconnect between stocks and economic fundamentals
On AAIF’s outlook, the trust’s chairman, Charles Clarke, notes: “While we have seen a rally in the second quarter of 2020, we have to be mindful of the disconnect between stock prices and corporate and economic fundamentals. We have yet to see a significant improvement in macro data and earnings that would justify valuations at these levels. I would not be surprised if markets reverse again. Governments are still walking the tight rope of having to re-open economies, while trying to avoid a resurgence in Covid-19 infections. Several countries have already changed direction, even though they know that a re-imposition of containment measures would stymie the fragile economic recovery. For example, at the time of writing, the state of Victoria in Australia has just re-instated strict lockdown measures in the wake of a significant rise in infections. However, we expect continued fiscal and monetary measures to help support economies and markets.
Broader geopolitical risks further complicate matters, with tensions between China and the US a recurring theme. The rift started with trade but has since broadened to other areas. This is most evident in the technology domain, where the US wants to restrict China’s global ambitions by limiting access to US technology. Your Manager is mindful of the potential repercussions, which could disrupt smartphone supply chains and delay the rollout of 5G networks. We also have an eye on the US presidential elections in November, which is shaping up to be an open race and with the outcome having a significant bearing on foreign policy.
In such a climate, it is no surprise that the outlook for corporate earnings has worsened. Many companies have lowered their profit forecasts, with dividend and capital spending being cut in certain cases. More recently, however, your Manager has been detecting marginally more positive updates among our holdings, even though the overall outlook is still muted and most still expect conditions to remain challenging through the rest of 2020.
Amid the uncertainty, it bears reminding that Asia continues to be well-positioned as the powerhouse of global growth. For one, we have the spending power of consumers in two of the world’s most populous nations – China and India.
The region is also at the forefront of many exciting and emerging technological advances, such as vehicle electrification, Internet of Things and cloud computing. The region has the potential to offer investors good returns for many more years to come.”
AAIF:Aberdeen Asian Income’s Korean and Taiwanese tech and telecoms holdings show resilience