Last year saw a significant adjustment in financial markets, as inflationary pressures ushered in a new era of rising interest rates. Markets also had to contend with sliding economic growth and a squeeze on household and corporate spending. So far in 2023, the outlook still warrants caution, but there are green shoots emerging.
These green shoots are perhaps most evident in Asia. China is reopening as it moves away from its zero-Covid policy. This creates economic momentum across the region, as activity resumes.
At the same time, Asia’s post-pandemic debt hangover is not likely to be as severe, with governments remaining more circumspect about spending than their Western peers and inflationary pressures lower. This means the path to recovery appears clearer.
In return for its services, so long as the infrastructure is available for use – hence ‘availability-style’. BBGI’s co-CEOs Duncan Ball and Frank Schramm invest in government-backed availability style assets around the world, all with contractual long-term income streams with genuine links to inflation.
‘IT HAS BEEN AN EXCITING START TO THE YEAR FOR ASIA'
In Asian financial markets, valuations have been hit hard. The region saw a significant bounce in the first month of 2023 as confidence has returned.
Gabriel Sacks, manager of abrdn Asia Focus, says: “It has been an exciting start to the year for Asia. Inflation has been relatively benign, particularly in China. Increasingly, there is an expectation that there might be pent-up spending household savings have increased a lot. This is worth bearing in mind.” He admits there are still some reasons for caution.
It is still not clear how high interest rates could go and this could impact certain markets, such as India. He adds: “2023 could be a tough year for growth and earnings could also slow. But Asian companies have been more conservative and economies have generally been managed in an orthodox way. This positions Asia well and it should remain the powerhouse for global growth.”
Elsewhere, more caution is warranted. Martin Connaghan, Murray International Trust manager, says the team is still finding plenty of opportunities, particularly in sectors that have been sold off, but remains diversified and defensive: “We have holdings across Latin America, Asia and Europe. The only area we don’t hold is Japan – we have a level of frustration with Japanese companies on their conservative capital allocation. We are well-diversified across industries and sectors, holding energy, consumer staples and telcos."
We are underweight those areas that don’t offer high or consistently growing dividends, including the software space of technology and most consumer discretionary companies. “We’re still quite cautious, particularly after the recent rally.
We expect to see S&P 500 earnings at around 3% and sales growth slowing to a similar level. In general, employment has had to drop further before the cycle turns. Activity has fallen, but we need to see unemployment numbers tick up to bring prices under control.”
‘VISIBILITY OF CASH FLOW AND INFLATION PROTECTION IS IMPORTANT’
Nalaka De Silva, manager of Aberdeen Diversified Income & Growth Trust, is similarly circumspect. He says core inflation is proving persistent and ‘soft landings’ are difficult to orchestrate: “The US Federal Reserve is effectively killing the cycle and we have yet to see where rates peak through this year. The extent of the recession is also unknown.”
The trust is split into three main areas: equity, fixed income and credit, and reduced beta assets, which includes areas such as listed alternatives and infrastructure.
De Silva says exposure to private markets brings a long term perspective to the portfolio. He admits there has been some concerns that valuations of private equity holdings do not yet reflect the weaker economic environment. He believes the high yields on offer more than compensate for any potential re-set on valuations.
There are also significant discounts on many of the private equity trusts. The fund holds private equity managers rather than making individual private equity investments, which gives greater diversification.
The trust is also looking for opportunities in equities and credit markets as the economic downturn unfolds and value re-emerges. He says visibility of cash flow and inflation protection is important. As such, he has trimmed back non-investment grade bonds and unrated credit, maintaining a weighting in investment grade where there is less chance of default. The fixed income portfolio tends to be shorter-duration, with less exposure to interest rates.
De Silva believes yield is likely to be particularly important in the year ahead, as investors look for stability while capital values remain volatile and uncertain. The fund looks to have a broad mix of income sources, including listed infrastructure, real estate, private infrastructure and private credit.
This helps create a stable portfolio of income-generative assets. There are green shoots in the year ahead, but until there is greater clarity on the turning point for inflation and interest rates, some caution is warranted on financial markets.
At abrdn, the focus is on finding assets with reliable, inflation adjusted cash flows and income.
Risk factors you should consider prior to investing:
• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘subinvestment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
• The Company may invest in alternative investments (including direct lending, commercial property, renewable energy and mortgage strategies). Such investments may be relatively illiquid and it may be difficult for the Company to realise these investments over a short time period, which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of investments.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn
Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.
Find out more by visiting the Trusts’ websites or by registering for updates.
Murray International Trust PLC
abrdn Asia Focus plc
Aberdeen Diversified Income and Growth Trust plc
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