Investment Trusts

Outlook 2019: Schroder Asian Total Return Investment plc

Robin Parbrook and King Fuei Lee, Co-Fund Managers, Schroder Asian Total Return Investment plc advocate a cautious approach to Asian equity markets as China increasingly finds itself in an economic quagmire.

14 Jan 2019

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To assess the investment opportunities in Asian equities, we start by looking at stock valuations at both the broad market level and at the individual company level.

Asian equities have fallen to a broad market level that would generally lead us to turn more positive from an investment perspective.

Unfortunately, our analysts are not yet finding enough stocks trading at a significant discount to fair value at the individual company level to indicate a strong buying opportunity overall. However, this could change if markets fall further.

We also play close attention to the fundamental factors that have an impact on valuations, including earnings, sales and dividends. Today’s cheap markets can look expensive tomorrow – even if prices are unchanged – if the fundamentals deteriorate significantly.

Forecasts for Asian company earnings are currently being downgraded and we could see downgrades rising and continuing for some time to come if previous challenging periods for Asia including the global financial crisis and the Eurozone debt crisis are any guide. At its worst around the time of the Asian crisis, Asian earnings almost halved over a period of four years.

China is increasingly finding itself in an economic quagmire, with the risks of either a currency devaluation or an economic recession rising. While we not think either of these is highly likely, if one or other does materialise it will be painful for Asia. Given the size of the Chinese economy today, and the amount of intra-regional trade, the region will be lucky to escape with just a cold, and not something a lot worse, if China sneezes.

Given this backdrop we recommend investors tread cautiously and watch economic trends in China very closely. Assuming the risks highlighted do not materialise, we will continue to gradually add to our favoured names on weakness. These are primarily in those markets offering the most upside on our long-term valuation models - Australia, Hong Kong and Singapore.

Discrete yearly performance (%)

 

Q3/2017 - Q3/2018

Q3/2016 - Q3/2017

Q3/2015 - Q3/2016

Q3/2014 - Q3/2015

Q3/2013 - Q3/2014

Share price

8.2

31.1

45.3

-2.7

8.6

Net Asset Value

6.2

24.5

37.7

0.7

9.8

Reference Index

4.9

16.8

37.7

-8.4

5.8

 

Past performance is not a guide to future performance and may not be repeated.

Some performance differences between the fund and the reference index may arise because the fund performance is calculated at a different valuation point from the reference index.

New manager and reference index from 15 March 2013. Source: Thomson Reuters. With effect from 15 March 2013, the Reference Index has been the MSCI AC Asia Pacific ex-Japan Index (sterling adjusted). Prior to that date, it was the MSCI AC Asia ex-Japan Index (sterling adjusted). The full track record of the previous index has been kept and chain linked to the new one.

Source: Schroders, with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP. Rebased to 100 as at the start of the 5 year period.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

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What are the risks?

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Investors in the emerging markets and Asia should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings.

The Company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.

The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.

The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the Company

The fund can use derivatives to protect the capital value of the portfolio and reduce volatility, or for efficient portfolio management.