Please note that the Board of Asia Dragon Trust is conducting a strategic review, initiated on 21st May 2024. The outcome is pending.

Overall take – still a fundamentally tough environment

The prevailing mood still seems pretty subdued, with the headwinds around the property sector, weak consumer sentiment and geopolitics clearly weighing on fundamentals and unlikely to be alleviated any time soon. Policy moves may help sentiment on the margin and cheap valuations are supportive, but announcements to date have mostly been small in value and fraught with complexity in terms of execution. Fundamentally, the challenges are considerable and will not be solved easily or quickly.

Bottom-up approach is best way forward

Retaining a bottom-up approach strikes us as the best way forward for now. That said, between now and the July politburo meeting, there appear to be rising expectations around further policy announcements, which might continue to support market sentiment. So, we would need be mindful of this and manage portfolio risk accordingly.

Property sector still facing crisis of confidence

The sector is still struggling and hurting consumer sentiment. Sales volumes and pricing are weak as home buyers remain in a ‘wait and see’ mode. This is primarily an issue of confidence as households have considerable savings and there is a push for affordable housing. The silver lining is that the government finally appears to understand that adding more supply on top of the current oversupply is not a viable solution. The sector remains a big drag on the economy and local government financing vehicles (LGFVs) are a concern still, given the high leverage. The government is intervening by helping LGFVs to refinance, unveiling stimulus and a whitelist scheme, and loosening monetary policy with lower rates. The companies we spoke to do not view this as a systemic issue. Most of the remaining property developers are now state-owned, and so, the government is unlikely to let them fail.

Economic outlook – a broad spectrum of views

There was a wide range of views, often polemic, among the strategists and economists we spoke to. The most bullish view was that it is not as bad as everyone thinks. China’s economy is still growing at 5%, with exports and the manufacturing sector still going strong, while the situation is not as bad as the US sub-prime debacle or Japan’s property crisis. Others were much more circumspect. They were mostly positive on the policy direction, but they highlighted that implementation will be key and it was unlikely to be as straightforward as just the soaking up of the glut of housing inventory. They view the value of support as insufficient. The issuance of one trillion yuan in long-term bonds is not that material when cast against a GDP of 126 trillion yuan.

Geopolitics is driving change

Among the companies we met with, some are pivoting away from the US and setting up operations in places such as Mexico, while others are ramping up their European manufacturing bases to localise production and considering a potential overseas listing as a hedge against geopolitical risks.

Last word

Hang Lung Properties’ Chairman Ronnie Chan’s view in his latest Chairman’s letter sums it well: “China is in for a long winter, but will eventually get through it”. Even in a long winter, it is still possible to make money through thoughtful and careful stock selection of quality stocks trading at attractive valuations, and China is still home to many of those.

Important information

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.
• 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.
• 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.
• 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.

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.

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The Trust's Key Information Document (KID) can be found at www.asiadragontrust.co.uk/literature