abrdn Asia Focus has published results covering the 12 month period ended 31 July 2024. Over that period, its NAV total return was 7.9% and share price return 8.8%, both well behind the 14.1% return posted by the MSCI AC Asia ex Japan Small cap Index.
The trust’s annual dividend was upped very marginally from 6.41p to 6.42p. There is also a special dividend of 1.0p. This is lower than last year’s 2.25p figure.
The trust has gearing of about 11.9% of NAV provided by convertible unsecured loan stock (CULS). This matures in July 2025. The company is reviewing the current level of gearing, alongside opportunities for repaying or converting the CULS, and will update shareholders closer to the time. In the event that suitable opportunities are not available the board expects to repay the CULS using the proceeds of sales across the portfolio.
Extract from the chair’s report
Across small cap markets in Asia, we saw a sharp divergence in performance. At one end was India (28.1% of portfolio), the best performer by a large margin. A buoyant economy, growth in the corporate sector and substantial foreign capital inflows drove strong gains in the domestic market. There was an element of election jitters as Prime Minister Narendra Modi won a third term in office at the polls but had to settle for a coalition government with his allies. This proved short-lived, however, with investors quickly pushing the market to new all-time highs within days.
Another solid performer was Taiwan (14.4% of portfolio), as the technology-heavy market benefited from expectations of a trough in the semiconductor cycle and the rapid advance of artificial intelligence (AI) and related applications.
At the other end, however, was China (9.1% of portfolio), with a sharp fall in domestic markets. The country’s stalled economy and property woes weighed on investor sentiment, although the Chinese government stepped in and increased support with measures to bolster financial markets and the economy. There are also concerns over potential US tariffs and sanctions following the outcome of November’s US presidential election.
Extract from the manager’s report
The initial months proved challenging, due to unfavourable country allocation effects, but performance saw a significant improvement in the second half, led primarily by strong stock selection in India.
Looking at the key drivers of performance, we would naturally highlight India, where the small cap market was exceptionally buoyant, rising by 50% over the year. This market strength came at a time when the stars appeared to have aligned for the country. GDP growth has been averaging 6-7% annually. The government’s focus on structural reforms, particularly in infrastructure and the supply side of the economy, has boosted investor and corporate confidence. Also drawing in capital investment flows was the inclusion of Indian government bonds in JP Morgan’s emerging market indices in June 2024.
Political stability counts, too. While the result of the general election in India came as a surprise to many, Prime Minister Narendra Modi secured a third term in office, this time with a coalition government. The new government’s first budget presented in July showed that fiscal prudence was high on the agenda, with a continued focus on infrastructure development, albeit with some moderation in the pace of growth. There also appeared to be efforts to plug gaps in the economy around consumption, rural demand and employment – all of which was generally well received. Such a supportive economic and policy environment was reflected in strength at the corporate level, with solid earnings results especially in sectors like power and industrials. This generally upbeat mood has been supported by a domestic investor boom, with locals increasingly channelling their savings into the equity market.
We remain positive on India, as we have been since the inception of the Company almost 30 years ago, with the country representing a sizeable 27% of the portfolio at year-end, our highest country weighting. The small-cap benchmark, however, has an even higher allocation to India at 34%. While our relatively lighter exposure to India proved costly, this was more than compensated for by the strong performance of our holdings across a range of sectors. Notably, six of the portfolio’s top ten stock performers this year came from India. The best performer was Prestige Estates, which we believe is well positioned as one of the few quality, listed operators in the Indian property space. It has benefited from the ongoing upcycle in residential property. In the energy sector, Aegis Logistics continued to benefit from India’s shift away from fossil fuels towards cleaner energy, with demand for liquefied petroleum gas bolstered by its cost competitiveness relative to other gas alternatives. Elsewhere, in the healthcare sector, Vijaya Diagnostic Centre reported consistently good results, with organic growth that continued to be well ahead of industry peers. Organic growth was a result of a combination of existing centres continuing to grow as well as from new centres that were opened over the last two years.
The other key country to highlight is Taiwan, a market that is well represented in the small cap index. With global equity investors fixated on Nvidia and the rise of artificial intelligence (AI), this technology-heavy market did well. Indeed, Taiwanese corporates have benefited from both a cyclical upturn in semiconductor pricing and strong incremental demand for advanced chips. Throughout this, we have been bullish on technology, and the semiconductor sector specifically, although we have been highly selective, focusing our interest on businesses that we feel are true leaders in their field with clear and defensible business moats. As a result, we have averaged a significantly lower allocation to Taiwan over the year compared to the small-cap benchmark, which weighed on relative performance. In addition, several of our stocks lagged the benchmark’s rise despite still posting reasonable returns. Despite our underweight position, and the recent sell-off in technology stocks that we have witnessed since the end of the Company’s fiscal year-end, we continue to be confident in the prospects for high-quality technology and semiconductor stocks in the region. As evidence of this, we invested in Chroma Ate during the year, a company that is one of the top test equipment businesses globally, specialising in power testing across a range of industries, but also increasingly involved in system-level testing for semiconductors. We expect Chroma to be in a prime position to benefit from the structural growth trend in advanced semiconductor manufacturing.
Elsewhere, we also saw gains from the off-benchmark exposure that the Company has to Vietnam, which was about 7% of the portfolio as of end-July 2024. The country is seeing foreign direct investments pour into higher technology sectors, especially automotive and electronics as some multinational corporations seek to reduce their reliance on China and mitigate geopolitical risks. Here, the software service company, FPT, continued to deliver impressive earnings. Despite its share price gains over the year, we believe the company is still trading at an attractive valuation.
In South Korea, our lighter than benchmark exposure and stock picks were positive for performance. The domestic market lagged the region, as weak export demand and disappointing domestic economic growth weighed on capex and corporate earnings. In terms of our holdings, Korea Shipbuilding & Offshore Engineering (KSOE), which we had initiated during the year, performed well. We feel it is well placed to benefit from the industry’s long-term cycle of vessel newbuilds, due to the need to replace ageing ships and comply with emissions regulation. This offset weakness witnessed in Park Systems, a leading manufacturer of atomic force microscopy systems for scientific research, which lagged the broader strength in the technology sector and posted slightly lower than expected results.
In contrast, parts of Southeast Asia weighed on performance. Our overweight to Indonesia was a drag despite good stock selection. The market was weak on the back of a lack of catalysts and soft corporate earnings for the second quarter of 2024. Furthermore, the government’s budget plan for 2025 aimed to maintain economic growth above 5%, but the cut in infrastructure spending pulled down infrastructure-linked stocks and sectors, which together with a surprise interest rate increase by the central bank, worsened the overall market sentiment.
Another key detractor was Singapore’s AEM Holdings, a business that has lots of potential but saw its shares sell off on concerns over a shortfall in inventory, the resignation of its CEO and results that missed market expectations. On the back of these developments, we decided to exit our position to focus on higher conviction technology holdings elsewhere in the region.
AAS : Asset allocation weighs on abrdn Asia Focus returns relative to benchmark
