Macro backdrop

Asian equities finished the month flat despite a sharp rally in global markets, with the weakness in China offsetting gains in other Asian markets. China witnessed a pick-up in COVID-19 cases along with weak property sentiment as transaction volumes remained weak. However, in general markets were supported by the fall in commodity prices such as oil and copper during the month, which dampened expectations of higher inflation, along with a more dovish US Federal Reserve (Fed) interest rate hike outlook. This supported the strong move in India, a key importer of oil, which was one of the best performing market over the month.

By sector, consumer discretionary and information technology (IT) were the strongest performers, although this did not extend to China where technology companies came under further pressure from renewed concerns around US ADR delisting and China’s deteriorating diplomatic relationship with the US. Real estate was the weakest sector having been impacted by a number of interest rate rises, which tend to be negative for asset values, but was primarily impacted by the weakness in China where property companies were very weak over the month following concerns that purchasers would stop making their mortgage payments.

Trust performance and activity

The portfolio returned 0.0% while the MSCI Asia Pacific ex Japan High Yield Index fell 0.1% and the FTSE All World Asi a Pacific ex Japan Index returned 0.0% (in sterling terms).¹

The Fund was a beneficiary of not owning Chinese property companies given the sector’s general weakness during the month. Positions in Macquarie Group and TSMC were the key positive contributors to relative performance following a rebound after a period of weakness, and both remain high conviction positions with a strong yield. The most significant detractors were all of the Trust’s Chinese holdings following the weakness in that market as Li Ning, Industrial Bank and Citic Securities were negatively impacted.

In terms of activity, we reduced the Trust’s exposure to Mediatek in Taiwan given the expectation of weaker demand for consumer electronics, and we added Bank Mandiri to the portfolio following good results and an improved outlook for Indonesia.

Outlook/Strategy

The weaker outlook for the consumer given stubbornly high inflation might create some risk for corporate earnings and the possibility of more earnings downgrades in an already volatile environment, with investors already dealing with the prospect of significantly higher interest rates and tighter liquidity from central banks. However, Asian equity valuations continue to look attractive relative to global equities in our view. Inflationary pressures also remain less pronounced in the region. We are more confident about the outlook for dividends considering the excess cash being generated and the low level of dividends paid out compared to earnings. We remain focused on domestic-orientated companies with strong cash flows and sustainable and growing dividends.

¹Source: Bloomberg as at 31st July 2022.