abrdn: ‘China capitalism not dead’ amid crackdown

A manager of the Asia Pacific focused £410 million Aberdeen New Dawn Investment Trust plc has said that “capitalism is not dead in China” despite a regulatory crackdown by Beijing that wiped more than $560 billion in market value off Hong Kong and mainland China stock exchanges last week alone.

Aberdeen New Dawn investment director James Thom said Beijing wants “to strike a good balance between promoting innovation and achieving its political goals.”

The abrdn investment trust aims to offer its shareholders a high level of capital growth through equity investment in Asia Pacific countries, excluding Japan.

Some funds have moved away from certain stocks in China amid uncertainty about which sectors regulators will target next.

Sectors targeted by regulators so far have included technology, property development, steelmaking, e-commerce and private education.

Thom’s views came in a regular outlook update from Aberdeen Standard Investments (ASI) investment trust managers around the world.

Aberdeen Standard Investments is part of Edinburgh-based investment giant abrdn, which manages global assets of around £532 billion.

“Despite renewed outbreaks of Covid-19, regulatory pressures, particularly in China, as well as niggling worries over inflation and rising rates, we see reasons to be optimistic about Asian equities,” wrote Thom.

“While regulatory risks persist, we believe that capitalism is not dead in China, and that Beijing would want to strike a good balance between promoting innovation and achieving its political goals.

“We continue to prefer high-quality companies that have strong links to domestic consumption.

“Being in line with the strategic aims of Chinese authorities, the sector should be better positioned to withstand regulatory headwinds.

“Meanwhile, US-China geopolitical tensions will continue to drive China’s push for self-sufficiency, which in turn presents investment opportunities, whether in the domestic consumption sector, tech, or green energy.

“We continue to position our portfolio around structural growth themes such as these that will weather the near-term uncertainties.

“Lastly, despite coronavirus-related disruptions, corporate earnings growth across Asia remains likely to rebound this year, led in particular by the robust tech hardware sector.

“Vaccination rates are now accelerating across the region and should gradually lead to easing restrictions and further economic reopening.

“This would help mitigate inflationary pressures tied to near-term supply chain bottlenecks.

“As stock-pickers, we remain focused on companies with pricing power and the ability to pass through cost pressures.”

Meanwhile, Charles Luke, investment director of Aberdeen Standard’s £1.1 billion Murray Income Trust plc, which aims for high and growing income with capital growth, wrote that “a fair proportion” of the fund’s portfolio companies may be vulnerable to takeover and that “it is noteworthy that private equity purchasers often look for attractive quality characteristics in potential acquisitions that dovetail with our investment criteria.”

Luke wrote: “We expect that the global economy will experience several years of above-trend growth as it emerges from the pandemic, aided by the vaccine rollouts and accommodative fiscal and monetary policy settings.

“However, divergence and asynchronous recoveries are likely to characterise this future period with disparities reflecting early and late vaccinators, developed and emerging economies, and manufacturing and services industries.

“For the UK, in particular, the backdrop both economically and politically is supportive with significant pent-up demand, a stable government, a fast vaccine rollout and Brexit concerns now in the rear view mirror.

“Given this generally supportive backdrop, we are increasingly sanguine about the potential for the holdings in the portfolio to perform well while continuing to deliver an appealing and sustainable income stream.

“Moreover, valuations of UK-listed companies remain attractive on a relative basis.

“As an example, the dividend yield of the UK market remains at an appealing premium to other regional equity markets let alone other asset classes.

“Indeed, we believe that in many cases the attractiveness of our holdings is not reflected in their share prices, particularly given the underlying strengths of the businesses.

“We think a fair proportion of the portfolio may be vulnerable to corporate activity and it is noteworthy that private equity purchasers often look for attractive quality characteristics in potential acquisitions that dovetail with our investment criteria.

“Furthermore, international investors remain underweight to the UK providing a further underpin.

“Therefore, we feel very comfortable maintaining our investments in high quality companies capable of growing their earnings and hence their dividends over the long term.”

Fran Radano, senior investment manager of Aberdeen Standard’s £420 million North American Income Trust plc, which looks for US companies with higher income potential, said ASI maintains its ‘house view’ that that Federal Reserve will implement its first interest-rate hike in the second half of 2023 at the earliest and that “we have reached the peak in the inflation scare.”

Radano wrote: “Rising Covid-19 case counts and higher transmission risk from ‘breakthrough infections’ among the vaccinated has prompted the Center for Disease Control (CDC) to reinstate face mask guidelines.

“With the US vaccination rate having stalled at around at 59% of the eligible population (those aged 12+), infection  rates are rising sharply.

“Thus far we have not seen any lockdown-type response from US states, but at the margin, we view this development as having the potential to aggravate ongoing global supply-chain disruptions.

“However, these potential outbreaks are not expected to meaningfully derail what has been blockbuster US economic growth or completely reverse the full reopening seen at the vast majority of US states.

“The labour market remains an economic bottleneck due to rapid easing of restrictions, but continues to slowly see relief as vaccination rates progress and unemployment support runs off.

“In the short term, labour shortages continue to pose risk of inflation, which has surged due to disrupted supply chains and reopening pressure.

“The US Federal Reserve (Fed) continues to view these pressures as transitory, and Aberdeen Standard Investments’ (ASI) in-house economists believe that we have reached the peak in the inflation scare.

“The Fed also has suggested that it wants to avoid any sharp measures at the risk of unsettling markets.

“Therefore, while the interim data has been more volatile than expected, ASI maintains its ‘house view’ that that Fed will implement its first interest-rate hike in the second half of 2023 at the earliest.

“The second-quarter earnings season thus far has indicated continued momentum that we’ve seen for the year to date.

“Companies have by and large delivered strong results and are raising their full fiscal-year guidance.

“While companies have noted higher input costs (especially in certain commodities), this has broadly been surpassed by confidence in their ability to pass on additional costs.

“If anything, there are improving margin outlooks attributable to strong operational gearing to volume growth coming out of the cycle. Many companies also have taken aggressive pricing actions to offset inflation.

“We think that this dynamic should provide sufficient support for earnings growth in 2021.

“Beyond this year, we expect the market’s focus to shift towards sustainability of growth as the cycle normalises.”

Georgina Cooper, investment manager of ASI’s £450 million Dunedin Income Growth Investment Trust plc, which invests in a diverse portfolio of UK and overseas companies, wrote: “Our outlook remains consistent with past months.

“As we progress through 2021 we are seeing a strong rebound in global aggregate demand and corporate earnings as we lap the very weak figures of early 2020.

“However, we are seeing increasing signs that investors are becoming more cautious on the prospects ahead given a combination of slowing rates of growth from current very high levels and the impact of new strains of the virus.

“As a result we remain happy to keep a balance to our overall positioning giving ourselves the potential to perform in a range of market environments: looking to protect capital on the downside while aiming to participate in any upside that may develop.”

Amanda Yeaman, investment manager of the £80 million Aberdeen Smaller Companies Income Trust plc, which invests principally in the shares of small companies and UK fixed income securities, wrote: “We remain positive, but with the caveat that for now it will be a period of less news flow from companies.

“In this environment, top-down economic news can dominate, and this does bring short-term risks.

“We have been pleased with the earnings momentum and good results across our holdings and the UK IPO market continues to be busy.

“While we are coming across many companies of mixed quality, there are, however, some gems to be discovered that offer attractive long-term investment.

“Longer term, we remain confident about the outlook and the long-term discipline that our investment process provides.

“Small- and mid-cap companies tend to lead a market recovery, and this gives us a supportive environment over the coming periods.

“While a value rally may re-emerge, we believe it is over for now.

“When we look at value shares, many of these businesses fundamentally have uncertain outlooks, challenged balance sheets and valuations that seem to be pricing in a lot of recovery in their earnings.”

Iain Pyle, investment director of ASI’s £78 million trust Shires Income plc: “We are increasingly sanguine about the potential for the portfolio to perform well on both a relative and absolute basis while continuing to deliver an appealing and sustainable income stream.

“The backdrop both economically and politically is highly supportive and valuations of UK-listed companies are cheap with international investors considerably underweight.

“We believe that the attractiveness of our holdings is not reflected in their share prices, particularly given the underlying strengths of the businesses, and we think a fair proportion of the portfolio is vulnerable to corporate activity.

“Therefore, we feel very comfortable maintaining our investments in good quality companies capable of growing their earnings and hence their dividends over the long term.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.