For most of the year, markets were remarkably resilient despite the impacts of several major events, from the collapse of three US banks, rising interest rates amid elevated inflation, and conflict in the Middle East.

For Henderson Far East Income Limited (HFEL), while it has been a difficult year from a capital growth perspective, the trust has again been able to increase its dividend, to 24.2p per share for the 2022-23 financial year, up from 23.8p per share in the 2021-22 financial year. This represents a compound annual growth rate of 5.3% since 2006, compared to 4.6% for the FTSE All-World Asia Pacific ex Japan index.

China’s troubles

Asian markets underperformed relative to global benchmarks, largely due to a stronger US dollar and multiple economic issues affecting China.

In general, our Chinese holdings did not perform well this year, against a backdrop of local government indebtedness, youth unemployment and a collapse in property sales volumes and foreign investment. Our exposure to consumer-facing businesses in China suffered as the lifting of pandemic-related restrictions did not translate into greater confidence or higher spending, and trends in this area remain weak.

These headwinds for China also mean we have changed our view on companies that are relatively sensitive to the Chinese economy’s performance, such as manufacturing businesses. Even though these kinds of companies can pay good dividends, we believe it will take some time before the economic issues are resolved. As a result, we have reduced our overall exposure to China in favour of positions in markets with higher economic growth prospects and fewer issues that could affect growth.

Australia is now the biggest geographical exposure in the fund, making up 17.1% of the portfolio at the end of October, with China the second largest at 14.4%. The China weighting marks a reduction of 4.3 percentage points since the end of August.

Recession or no recession?

The strength of the US dollar remains a significant risk factor for Asian economies, as historically this has led investment flows away from Asia and could also be a challenge if it leads them to implement higher domestic interest rates to strengthen their own currencies. Inflation and the possibility of a recession in developed markets are also concerns as they would likely impact Asian companies and consumer confidence. The pace of economic recovery in China will also have an impact on the wider region.

If inflation remains stubbornly high, consumer spending and consumption more broadly could be negatively affected. If this leads to a recession, North Asian markets such as South Korea are most vulnerable given that they have a large number of exporting companies. We have a low weighting to these markets and would expect to retain this in a recessionary environment.

However, if the US avoids a recession and we see evidence that interest rates are past their peak, we believe there could be significant opportunities within Asian markets, particularly those in which inflation is significantly lower and rates are not rising. We will look for companies with valuations that are both attractive relative to global markets and correlated to the potentially improving performance of export partners in developed markets.

Opportunities in South Asia

We are less concerned about our South Asia exposures in either scenario. The economic performance of countries such as Indonesia and India will be shaped largely by domestic consumption trends. This means they could be useful defensive plays against a weak global market backdrop.

We have already increased our exposure to Indian companies in the past 18 months, from less than 2% at the end of August 2022 to 11% as of 31 October 2023.

There are several strong long-term investment themes playing out in South Asia, including India, that we believe present exciting opportunities for investors. These include the continuing development and expansion of infrastructure, efforts to improve financial inclusion in under-banked areas of the region, and emerging domestic consumption champions.

There are also opportunities throughout technology supply chains in Asia, which support global innovation in areas such as artificial intelligence and cloud services.

For these reasons, we remain particularly positive on Indonesian banks, Indian utility companies, Taiwan technology players and emerging Chinese domestic brands – despite our relative underweight position in Chinese companies compared to the benchmark.

Discrete year performance (%)	Share price (total return)	NAV (total return)
30/09/2022 to 30/09/2023	-8.5	-4.2
30/09/2021 to 30/09/2022	-3.5	-5.8
30/09/2020 to 30/09/2021	4.4	7.6
30/09/2019 to 30/09/2020	-11.1	-11.1
30/09/2018 to 30/09/2019	7.2	6.2

Past performance does not predict future returns.

Disclaimer:

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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Henderson Far East Income Limited is a Jersey fund, registered at IFC-1 The, Esplanade, St Helier JE1 4BP, Jersey, and is regulated by the Jersey Financial Services Commission