Can Asia thrive, with or without China?

Recent economic data from China has been weak with retail sales, industrial production and fixed asset production all missing targets
The central bank is likely to announce stimulus measures in the second half of the year
China’s weakness does not dent the outlook for the wider Asian region

China’s reopening has not gone to plan. Businesses and consumers have emerged cautiously from the restrictions, economic revival has been slow and the country now appears to be wrestling with deflation. However, it doesn’t dent the case for broader Asian markets – and even careful exposure to China itself.

The recent data emerging from China has worried investors: retail sales, industrial production and fixed asset production have all missed targets. The country tipped into deflation in July and there are ongoing concerns over the property sector and bad debts.

The result has been real weakness in Chinese stock markets since the start of the year. Elizabeth Kwik, manager of abrdn China Investment Company Limited, says: “The macroeconomic situation is concerning investors. The market has been disappointed with the pace of recovery since the reopening. People were initially expecting a V-shaped rebound and that has not been the case.” This is also worrying for the rest of Asia. China has been an engine of growth for the wider region, with countries such as Thailand particularly exposed to China reopening.

Rebuilding confidence

However, the gloom may have been exaggerated. Even if data has come in below expectations, it is showing growth. Elizabeth says: “Although the recovery has not been as quick as hoped, it doesn’t mean there is no growth or opportunity. The recovery in services is underway and there has been a pick-up in retail sales. This should broaden out to the rest of the economy as the savings rate normalises – it is still very high. It’s a question of rebuilding consumer confidence.”

She believes that policy support will emerge to support the economy. The central bank is already starting to ease policy. It has the scope to do this because China is not struggling with the same inflationary problems that are hurting other large economies. She adds: “There is a lot of headroom for policy easing. The central bank is looking to do this more actively in second half of year. Local governments are yet to hit their loan quotas.”

Asian growth

Elsewhere, there are few signs that the region is struggling in the face of China’s weakness. Gabriel Sacks, manager of abrdn Asia Focus plc, points out that some countries may even be beneficiaries. He says: “When we talk to companies in India, they reference the “China plus one” opportunity. A lot of countries are looking to benefit from that reconfiguring of supply chains away from China. We see Vietnam and Indonesia benefiting in particular.”

He adds: “Based on recent consumer surveys, only 11% of people in the UK feel positive about the economic outlook. In India, only 2% of people of people feel pessimistic. Even in China where there’s a lot of negative noise and a tough economic backdrop, it’s about 50/50. We also see this positivity when we speak to companies. Inflation has surprised on the downside. That positions Asia better and once interest rates start to come down in the West, you’ll see that happen in Asia as well. There is a good outlook for growth even if China grows more slowly.”

Lower valuations

For investors, the negative sentiment surrounding China has pushed valuations lower. Elizabeth says: “Valuations are undemanding. Company earnings have not been downgraded as much as share prices would suggest.” abrdn Asia Focus can invest across the region, but Gabriel and the team have been adding to China more recently because of the compelling valuations on offer.

The team have also been bullish on India but caution against jumping in at this point. While India appears to be firing on all cylinders – Prime Minister Modi recently had a successful visit with President Biden, the economy is strong, the corporate sector is buoyant – valuations are too high in some cases. Gabriel adds: “It is still our largest country weighting, but we’re trying to hold back our excitement because it’s consensus. Indian small caps have more than doubled over last three years, China has gone the other way.”

Regardless of the economic situation, the region is still tapped into a range of growth opportunities. abrdn China Investment Company, for example, looks to benefit from China’s rapid adoption of technology, through areas such as cybersecurity, e-commerce and data centres, or its move to net zero through renewable energy, electric vehicle or battery storage.

For abrdn Asia Focus, Gabriel has been looking at leaders in the technology supply chain, who may be supplying behemoths such as TSMC or Samsung. Healthcare has been another important part of the portfolio, particularly in India where spending is very low, but growing fast. However, the most important theme in the portfolio is domestic consumption growth, which remains a powerful long-term trend across the region.

China’s economic weakness should not obscure the opportunities across Asia, including within China itself. At the same time, weak sentiment has left valuations appealing, meaning investors may be getting access to growth themes at a lower cost. China’s reopening may not have gone to plan, but investors shouldn’t be deterred.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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.
Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
The Company may charge expenses to capital which may erode the capital value of the investment.
The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
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.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
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 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.
The Company invests into other funds which themselves invest in assets such as bonds, company shares, cash and currencies. The objectives and risk profiles of these underlying funds may not be fully in line with those of this Company

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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