THIS IS AN ADVERTISING FEATURE
By Hugh Young, Managing Director of Asia Pacific Region, Aberdeen Standard Asia Focus PLC
China has been in the spotlight for investors, with trade conflict and a slowdown in its extraordinary growth story. But Asia isn’t just about China, says Hugh Young, lead manager of Aberdeen Standard Asia Focus PLC (formerly Aberdeen Asian Smaller Companies Investment Trust PLC), and the trust often finds more attractive smaller companies in other countries in the region.
While China’s economy dwarfs most other countries in Asia and - despite its recent slowdown - continues to grow at rates that are the envy of Western economies, there is much more to Asia’s dynamic story.
Rising incomes are driving domestic consumption growth across the region, with India and Indonesia, as well as China, having huge consumer markets. Asia’s rapid adoption of technology is about more than the Chinese tech titans Baidu, Alibaba and Tencent (the so-called BATs). India, for example, has created the world’s biggest biometric database, covering more than 1.1billion of its population, and is also among the global leaders in solar power. Meanwhile, the US-China trade conflict has accelerated moves by companies to diversify production away from China to other parts of Asia, which is also fuelling trade growth within the region.
At Aberdeen Standard Asia Focus (formerly Aberdeen Asian Smaller Companies), we invest on a bottom-up basis in smaller companies across the region - and we frequently find more attractive investments outside China.
The impact of the US trade conflict has been a particular concern for investing in China recently, but finding smaller companies that stack up well compared with what’s available elsewhere in Asia can also be a big challenge.
We look for quality companies that combine strong businesses and management, attractive prospects, and good corporate governance. And in our view, China has a dearth of these high-quality, well-run smaller companies. Many Chinese firms continue to have inadequate corporate governance, for example.
As a result, while China comprises nearly 30%* of the main regional stock market index, the MSCI Asia Pacific ex Japan, the trust has less than 1% in China and generally gets its exposure through Hong Kong, where nearly 12% of the portfolio is invested.
By comparison, in many of the region’s other markets including Thailand, India and Malaysia, the trust has become “overweight” relative to the index - because this is where we have been finding the quality stocks that we want to own.
Tapping into consumer growth in India and Indonesia
Many of the companies that the trust invests in offer exposure to Asia’s megatrend of rising domestic consumption.
In India, for example, we hold Godrej Agrovet, a diversified agri-business which stands to benefit from rising protein consumption among Indians. Likewise in Indonesia, we have invested in Ultrajaya, a dairy company with a strong brand and reputation for quality, which is well-placed for growth in domestic milk consumption.
Banks and other financial businesses, as providers of loans and consumer credit, are also geared into Asia’s consumption story.
Among the portfolio's biggest holdings is Indonesia’s Bank OCBC NISP. In a country where many people have not had bank accounts, this subsidiary of Singapore’s OCBC Bank is a play on long-term growth as demand for credit increases.
In Thailand, we are invested in AEON Thana Sinsap, one of the country’s leading consumer finance companies. It offers hire-purchase loans for household products such as appliances, electronic equipment and furniture, and has the largest share of the personal loan market.
Transforming technologies
With technologies from electrification to cloud computing transforming a wide range of industries across Asia, the trust has been increasing its exposure to innovative smaller companies in the tech sector.
In South Korea, we have invested in Douzone Bizon, an IT services group that helps SMEs (small and medium-sized enterprises) automate human resource and other back-office functions. We see a lot of room for growth in the Korean market, where Douzone is the leading supplier of tax software.
We have also invested in Citadel, an Australian software and technology company. Its scalable “software-as-a-service” solutions operate under long-term contracts in sectors with favourable structural tailwinds, including national security and healthcare.
Meanwhile, India’s Cyient is a well-run provider of engineering, research and design outsourcing services, mostly to hi-tech, high-value western engineering companies. Competing primarily on quality of service, Cyient has an impressive track record of maintaining profitability supported by steady cash flow generation.
Trade war winners
The US-Chinese trade conflict has been seen as a negative for Asia because many companies across the region are suppliers to Chinese manufacturers. But the friction with the US has also fuelled a stronger dollar, which has benefited dollar-earning exporters in the region such as Thailand’s Hana Microelectronics, a leading electronics assembly firm and long-term holding of the trust.
With the trade conflict as well as rising labour costs making China a less competitive manufacturing base, Hana’s plants in Thailand and Cambodia could also be among the beneficiaries of production shifting away from China.
*As of 31 October, China comprised 28.5% of the MSCI AC Asia Pacific ex Japan Index (currency adjusted), while 0.6% of Aberdeen Standard Asia Focus was invested in China. Source: Aberdeen Standard Investments
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