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Modest outperformance from abrdn New Dawn despite difficult market conditions

221214 ABD

abrdn New Dawn (ABD) has published its interim results for the six months ended 31 October 2022. During the period, ABD provided an NAV total return of -12.7%, which is modestly ahead of the equivalent return on its benchmark, the MSCI All Countries Asia Pacific ex Japan Index, of -13.7% (all in sterling terms). The share price at the end of the period was 244.50p, representing a discount to the NAV of 13.0%. This outperformance has occurred during a volatile six month period where ABD’s markets were impacted by a number of headwinds. For example:

  • the rapid tightening of US monetary policy in response to rising inflation;
  • a sharp increase in commodity prices, caused mainly by the Russia-Ukraine war;
  • rising interest rates, which have led to forecasts of a global recession next year (although ABD’s chairman Donald Workman, comments that inflation in Asia has not been as high as in other parts of the world meaning that the region may see lower rate increases than elsewhere); and
  • the implementation of President Xi’s ‘zero-Covid’ policy and debt concerns in the real estate sector became a focus as their impact on the mainland economy was increasingly apparent (although more recently there has been some relaxation the ‘zero-Covid’ rules and the introduction of a number of support measures for the economy).

While much of this appears negative, Workman points out that the news for investors was not all negative over the period. Corporate earnings growth remained relatively healthy and the push for more renewable energy remained firmly on track. Particularly relevant for the Company is the move towards localisation, where companies find customers closer to their base of operations, and a trend towards greater self-sufficiency. While economic growth overall in China slowed significantly, Workman says that there was still an encouraging amount of activity in some sectors.

ABD’s board has declared an interim dividend for the year of 1.0p per Ordinary share, unchanged from last year, which will be paid on 10 February 2023 to shareholders on the register on 6 January 2023 (the relevant ex-dividend date being 5 January 2023). As in previous years, future dividends will depend on the level of income from the portfolio and the Board will decide on the level of the final dividend at the time of reviewing the outcome for the financial year.

Quality focus provides resilience

ABD’s portfolio proved to be more resilient than the wider market, which Workman says is thanks largely to the manager’s focus on finding quality companies. The financial holdings made a positive contribution to relative performance, especially the banking sector in South-East Asia. The companies in that sector include DBS Group and Oversea-Chinese Banking Corporation in Singapore, and Bank Central Asia (BCA) in Indonesia. Rising interest rates were beneficial to those companies, but Workman says that the appeal of these banks as investments goes much further than that – BCA benefits from a stable low-cost deposit base that funds its lending and DBS offers a very good return on equity thanks to a clear strategy, good digital infrastructure and the efficiency of its returns. The holdings in all three companies were increased over the period.

Good stock selection in China made a positive contribution to performance, as did the underweight position to the market. The latter proved to be a wise move given the significant weakness in that market over the period and the manager took advantage of that weakness and selectively bought shares at more attractive valuations. Renewable energy stocks, including Sungrow Power Supply, performed well due to expectations that demand for energy storage systems in China and overseas will be even higher than previously forecast. The localisation trend was evident in the positive contribution from medical instruments manufacturer Shenzhen Mindray Bio-Medical Electronics. The company is one of those in the healthcare sector to benefit from recent moves by the Chinese authorities to source more equipment from domestic suppliers. A new position was acquired in Meituan Dianping, which operates a food delivery and local services app and is seeing a strong increase in returns. Workman says that the company is well placed to benefit as the country moves towards a more service-driven economy and the online penetration of these services grows.

Unlike most of its peers, ABD has the option to invest in Australia and this proved beneficial during the period. OZ Minerals performed well thanks to its focus on copper, which is seen as a play on the global trend towards electrification. The company’s shares were also lifted by a takeover bid from BHP Group during the period, which was rejected. OZ Minerals has subsequently received approval for a large copper and nickel project in Western Australia that makes it an even more appealing takeover target. BHP has since come back with a revised offer that has the support of the OZ Minerals board. Workman says that this should stand a good chance of going through, assuming it receives the backing of shareholders.

The portfolio received shares in Woodside Energy through a share distribution as a consequence of the decision by BHP Group to sell its oil and gas assets to Woodside; the manager has since added to the position. Woodside has benefited from the significant rise in commodity prices but is the only oil and gas holding in the portfolio. The manager is conscious that the company is a big carbon emitter, but it has a very credible, and clear, carbon reduction strategy. It is also worth noting that, in overall terms, ABD’s own portfolio has a carbon footprint well below that of the benchmark index.

Investor concerns about the impact of a global economic downturn on the demand for electronic devices were behind the underperformance of the export-oriented, technology-heavy markets of Taiwan and South Korea. Geopolitical tensions between Taiwan and China were also a factor. Taiwan Semiconductor Manufacturing Company (TSMC) was not immune from these concerns, but, in the manager’s view, TSMC has an almost unassailable position in the sector and remains an attractive investment given its scale and technological leadership, while its shares already price in many of the headwinds.

The Indian market proved fairly resilient over the period. The portfolio is exposed to the country mainly through the Aberdeen Standard SICAV – India Equity Fund, but not having direct holdings in stocks such as Reliance Industries and Axis Bank, which have done well, weighed on performance. ABD says that it would like to be able to invest direct in Indian stocks but progress with the necessary formalities is slow.

The manager responded to market events and the changing macroeconomic outlook by adopting a more defensive approach, reducing cyclical investments and taking advantage of attractive valuations to initiate positions in quality companies that they have been monitoring for a while. A good example of this was the addition of Telkom Indonesia, which dominates the telecoms sector in its home country and should prove defensive through the current market uncertainty. Growth is being driven by the greater use of data, the roll out of 5G services, and the rising penetration of broadband.

A number of positions were sold during the period. A sharp fall in construction activity led to the sale of the holding in Shenzhen Inovance Technology. Xero, which is facing a challenging short-term environment in its key UK market, was also divested along with positions in Hangzhou Tigermed and Vinamilk.

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