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6 July 2020updated 09 Sep 2021 2:37pm

Investing in Asia in the wake of Covid-19

The impact of Covid-19 is likely to endure, even after the lockdown measures are lifted. Pruska Iamthongthong, manager of the Asia Dragon Trust, is based in Singapore and here she discusses the post-Covid investment landscape in Asia.  - The post-Covid world is likely to look different in a number of important ways. - Digitisation, changing attitudes to China and the resilience of Asian economies are all likely to be important factors. - Focusing on quality companies is likely to be particularly important as the global economy recovers.  

By Pruksa Iamthongthong

There are still many questions about the world to emerge from the Covid-19 outbreak. Will the global economy bounce back? Will industries such as airlines and oil be temporarily wounded or permanently impaired? Much will depend on the efficacy of government support, the potential for a second wave of infections and the resilience of the corporate sector.

Nevertheless, a few changes seem inevitable. In many cases, these were changes already in the mix: the move to online, a shift in perception towards China, a rebalancing of economic power towards Asia. The Covid-19 outbreak has, in many cases, accelerated and encouraged these trends and – amid market volatility and lower pricing – we have sought to ensure that they are fully reflected in our portfolios.

The ability to distribute goods or services and manage operations online has been a key differentiator in this outbreak. Those companies that had not digitised ahead of the crisis now face a battle to stay in business. Digitisation has become a business imperative, not merely a marginal advantage. Those high quality, well-run companies that have spent years moving to the cloud or building an online presence have reaped the rewards during this difficult period. Those that haven’t face a stark ‘modernise or die’ decision ahead.

Part of the largest battle and expense for most companies with an online offering is converting consumer behaviour. Will people change the way they shop, order food, pay for goods or travel? However, that change has been forced upon people and, having experienced how easy and convenient it is, it seems unlikely that they will abandon these new habits the moment the shops reopen.

Meituan Dianping is one of the ecommerce-focused stocks we hold in the portfolio. The group’s main business is in food delivery. However, increasingly, it is using its food delivery business to build a broader platform. Users can now do more and more on the app – booking hotels, beauty treatments and ordering non-food items. Increasingly it is a lifestyle tool and we believe its platform will become very powerful. We target those companies that can lead their sectors over many years and a strong platform can be a key differentiator.

Data centres are the engine of this new wave of digital growth. We hold a number of data centre providers in the portfolio. GDS Holdings, for example, is a pan-China player. With more companies moving to cloud-based systems, storage is likely to be in significant demand.

We believe that the outbreak may also change the perception of China. While China appears to have its crisis under control, Covid-19 has quickly followed the US/China trade tensions and companies needing parts and services from China have seen considerable disruption. Companies have been forced to reexamine their supply chains. While there are still good, fast-growing companies in China, we need to be aware of these issues when investing.

With this in mind, we’ve been adding to Vietnam. Vietnam has had some Covid cases but appears to have its outbreak under control and should be a major beneficiary of supply chains moving away from China. Market liquidity is low, but here, the closed-ended fund structure is helpful and we have been able to find some interesting, high quality companies trading at attractive valuations.

There is a broader question about Asia growth. Although Asia appears to be through the worst of the crisis, with fewer deaths and a lower economic toll, it will still suffer. It is reliant on exports, for example, and will not be able to transcend global economic weakness. China may have moved to become more consumption-driven, but it is still reliant on manufacturing for a significant portion of its economic strength.

To our mind, the key difference is its balance sheet strength. Corporates and governments across Asia have less debt, having learnt lessons from the Asian crises of the 1990s. This means governments have more space to support their economies and governments. In the West, central bankers had barely recovered from the last round of quantitative easing, which doesn’t give them a lot of room to cut rates, and governments are still highly indebted, leaving them less capacity for fiscal support.

With this in mind, we believe many Asian economies and companies will emerge stronger. As one of the largest Asian investment Trusts, Asia Dragon Trust seeks to be a long-term, cornerstone investment for investing in Asia, targeting world-class quality companies that can compound their earnings and dividends over many years. We believe this focus on leading, quality companies that are transforming their sectors and setting governance standards will be even more important at a time of slowing economic growth. Asset strength, sound cash flow and low debt levels are likely to define the winning companies in tomorrow’s world.

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Pruska Iamthongthong is manager of the Asia Dragon Trust.

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