The threat of a trade war between the US and China has created considerable volatility in Asian markets in recent weeks. Investors fear that it poses a continued threat to the growth of Asian companies and, potentially, to Asian economic growth. These concerns are valid, but – to our mind – demand greater scrutiny.
An important point to note is that this volatility may feel uncomfortable, but it is not unusual. It comes after a sustained benign period in markets and volatility levels have only moved back to where they were in mid-2016 (https://www.hsi.com.hk/eng/indexes/all-indexes/volatilityindex) and remain at around half of their five year peak. While periods of low volatility are enjoyable while they last, the volatility we’re seeing today is a more normal pattern for stock markets.
However, that doesn’t mean - as investors in Asia - we shouldn’t examine the underlying causes of that volatility. In this, we can place the blame squarely at the mounting trade war between the US and China. Trade wars seldom end well and can be inflationary for the countries involved. There are understandable fears that the dispute will knock China’s economic growth off course, at a time when it already has some vulnerability because of its high debt levels and economic transition. In this respect, until the situation is resolved, the volatility may be justified.
We therefore need to decide whether these trade tensions could have longer-term repercussions for growth in the region. In this, a key consideration is where the new tariffs are focused. For the time being, they have been relatively narrow, focused on steel and aluminium on one side, and whisky and soybeans on the other. If it ends here – and there are no guarantees – the threats may be contained. Asia has long been trying to move away from its manufacturing past, to a greater reliance on consumer spending and these sectors are not as important in the context of the Asia of the future.
At the same time, the US is not necessarily the most important market any more. Intra-Asian trade is growing and developing. New markets within Asia are emerging as countries move up the economic development scale. They too have need for infrastructure and provide fertile new markets to replace that of the US. China, perhaps realising this, has been relatively moderate in its response to date.
The question is, what happens next? This apparent victory for Donald Trump may be enough for him to declare a triumph to the US electorate and back away before it provokes domestic inflation, or it may galvanise him into bolder plans. The fear is that this trade war will spread, moving into more structurally important sectors. After all, Asia has started to become a greater threat to the US on technical innovation. This is arguably a far greater long-term risk for the US than a few steel imports. Alibaba and TenCent may have started as similar to their US equivalents of Amazon and Facebook, but they have taken a different development path. Certainly if the trade war escalated, we would become more concerned.
At the moment, our focus in the Aberdeen Asian Smaller Companies investment trust is firmly on ‘new Asia’. We have a relatively low weighting in China and have not considered it necessary to shift our positioning. The trust is weighted to domestic growth stories – car distribution, healthcare, microelectronics – who draw their revenues from one country or a group of countries in the region.
We felt the domestic economy was the source of exciting growth stories in the region long before Donald Trump decided to Make America Great. On a broad level, much of Asia has strong demographics, with a large population and rising income levels. Consumption is strong and there is an emerging middle class in the region. This supports stable growth for many companies.
There are also specific areas of structural growth. For example, there is the shift from 4G to 5G, which is creating opportunities for companies such as Sparton International who is helping to create the necessary infrastructure. Local convenience stores are seeing strong growth, which we tap into in the portfolio through our holding in Convenience Retail Asia. We hold the owner of the Uniqlo brand, Giordano International.
If anything, we are finding more opportunities for the trust amid the recent market rout. The result of the recent volatility is that good has been thrown out with bad. The domestic growth companies that we like have become cheaper while their fundamental characteristics have remained unchanged. Companies that we have previously been unable to buy on valuation grounds can now be introduced into the portfolio.
It is not certain that the volatility will dissipate until the finer points of trade negotiations have been settled, but we have used it as an opportunity to add to those areas that we believe are exciting. This supports the trust’s vision of providing exposure to exciting but stable growth stories across Asia. The prospects for individual companies in the region are more predictable than the whims of politicians. This is where we choose to focus our attention.
By Pruksa Iamthongthong, Senior Investment Manager Aberdeen Asian Smaller Companies Investment PLC
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