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Cherry Reynard: Hello, everyone and welcome to this Investment Trust roundtable. We're going to be discussing the outlook for 2022 which will include a look at the global economy, the health of the corporate sector, inflation and valuations amongst lots of other topics.

With me today are Thomas Moore, manager of the Aberdeen Standard Equity Income Trust, Bruce Stout manager of Murray International, Adrian Lim, co-manager of Asia Dragon, and Jen Mernagh, co-manager of the Aberdeen Diversified Income and Growth Trust. Welcome, everyone.

ruce, could we start with you. I wonder if you could give your view on the state of the global economy today? Do you think that recovery is firmly established? Or could we still be derailed by the Omicron variant?

Bruce: Thanks very much Cherry. Two minutes to go around the world isn't very long, but I'll tell you the way that we're looking at it within Murray International, we kind of look at it in terms of a split between what's going on in the developed world and what's going on elsewhere.

We do know that a massive contraction in 2020 and then a massive expansion in 21. Next year, it will probably return to some sort of normality of growth. But that would probably likely be lower than we've seen in the past, purely because of the debt legacy that we've had, in order to bail out the pandemic - it's come at a big cost, and it won't be a cost that will be easy to pay back, it's going to take some time, so it will be a constraint on growth.

I think when we look at the developing world and elsewhere, the cost hasn't been so high there in terms of monetary costs, there's been a much higher human cost, obviously. And it's certainly in terms of - there's been a delay in as much as vaccination rollouts have been slower elsewhere. And therefore, we'll probably see a better recovery in Asia and emerging markets next year, and the year beyond catching up for lost time as they begin to satisfy the pent up demand that's been growing since they were in lockdown.

Cherry: Great. Thanks, Bruce. And, Tom, from a UK perspective, how healthy do you believe the corporate sector is today in terms of earnings, dividends, all that kind of stuff.

Tom: You know, we've really encouraged by what we've seen Cherry over the last 12 months or so. And the reason for that is that corporates in the UK are seeing the benefit of the unlocking of all these different restrictions globally. In the UK, we were hit hard by the pandemic. But as a result of that, we're now in a position where companies are starting to look forward. Herd immunity is increased as a combination of both vaccines and natural immunity. And so actually, the advent of all these new variants - the latest one being Omicron - actually poses less of a risk now. And so there's a palpable sense of confidence among the corporates that we speak to, even despite the headlines that you see in the media. So actually, things are looking a lot better for UK corporates. They're well run businesses typically. And obviously, we also select companies that we think are going to be able to fare well, in the next 12 months - even if there is more volatility in the news flow in terms of new variants or lockdowns, whatever might come our way. So I think we're in a good place, the companies are reinstating their dividends, nearly all of the companies in my portfolio are paying dividends again, there's only a handful, four or five companies, I think it is at the moment which aren't paying. And actually, that's a conscious decision by me as the portfolio manager to own a handful of companies with significant growth prospects, which may prioritise growth at the moment rather than paying out dividends.

So things are looking good from a dividend perspective as well. Our portfolio incomes looking up as well, so yeah, very happy with the outlook from a, from a macro perspective. It's been a big test the last 12 months, but I think we've come through and things are looking up.

Cherry: Okay, great, thanks Tom. So, Adrian, let's talk valuations in Asia and how they look relative to history. I mean, as you look across Asian markets, do you see any particular pressure points? I mean, you sort of assume it's technology, but I guess there may be other areas as well.

Adrian: The market as a whole is not particularly expensive, but there are segments like you say which are not cheap - parts of green energy, for example, and parts of certain online business models, for example, these are verticals or segments that are not particularly cheap, from a PE perspective.

They are, however, delivering decent levels of growth. So there's a decent amount of underlying growth in these segments. But we do have to be quite careful about valuations, because there are pockets of these expensive stocks or segments.

Overall, as the market as a whole, is not particularly expensive. If you strip out the distortions, during the last 18/ 24 months, where PEs were very high, because earnings were depressed. So if you go pre COVID, and look at the three years before that, PE levels were about 14 to 16x forward in the region as a whole. And now we're currently trading at about 16/17x. But there are some, there are some wins, that would give us a lift over the next 12-24 months, that should see the effective PE coming down. So, we're reasonably comfortable with what we've seen in the region. And the more important thing is to understand how earnings momentum recovery is developing over the next few quarters.

Cherry: And are you seeing that earnings recovery coming through Adrian?

Adrian: We are, we are, but it's not hitting all segments equally. So for example, the airline industry, the hotel industry, is still going through a very, very tough time. And we are looking at, you know, you need to look out maybe two, three years before you’re seeing a normalisation of earnings that will make us comfortable. But other than that, it's not just valuation, some of these companies need capital desperately. And so at this point in time, you know, are trading at understandable discounts. So they may be cheap, but they're definitely cheap for a reason. And we are not the type that would put our investors’ money at risk in that scenario.

Cherry: Great. Thank you. And Jen, turning to you, how optimistic are you feeling about the next 12 months and are you more optimistic on certain areas?

Jen: Sure – so, how optimistic. So I think we do expect global growth to slow from here, from where we have been. And although we do believe that we're past the peak of the recovery, we believe that growth remains high on a relative basis the next year, in fact, the next two years.

Just thinking about monetary policy as well. So we do expect a less accommodative stance, particularly in the US where the Federal Reserve has been key. But we believe it remains supportive, and that fiscal policy should take over in terms of market support in the long run.

And then thinking about the Trust that I help to run, whilst we do perceive kind of remaining uncertainties around how economies may evolve going forward, including the impact of Omicron, as I was saying, we feel that the company is well positioned for this uncertain environment. So because of the public and private nature of the Trust as a multi asset trust that can invest in public and private markets, it means that we can access private market investments that should deliver returns in excess of public markets. We also believe we can continue to enter to participate in the growth upside, where we think it's available in listed market equities. And also to participate in the income generation capability that we think we can continue to extract from fixed income and credit and listed alternatives as well.

Cherry: Great, okay. Thanks Jen. So, Tom, turning to you, again, the market has kind of flip flopped between value and growth for quite a long time now - it's either been all about tech or all about sort of recovery stocks. Can you see that changing in 2022? So you have a more kind of nuanced market, that that's more focused on the sort of individual outlook for specific companies?

Tom: The bond yields are really important here, Cherry. And the reason that you know that is if you take a look at the MSCI value index versus the MSCI growth index, it's a very high correlation with bond yields, and in particular real yields.

Now, though, that's inflation adjusted yields. And at the moment, what we're seeing is we're seeing higher inflationary expectations as, is evidenced by breakeven rates of inflation. If you, if you look at breakeven inflation, it's been going up all year, it's now about 2.6/2.7% in the States - US 10 year breakeven inflation.

Now, if you then look at real yields, you'll see they're still at the lows, they're still about -1%, which is historically, very rare, almost unheard of that real yields should be -1%, especially when you think that we're actually in the middle of quite a sharp economic upswing.

So the reason why real yields are still so low is that there's central bank intervention in the form of quantitative easing. Now, at some point, the central banks are going to look at inflation rates all around the world, Germany at 6%, US 6%, UK over 4%, and they're going to start to say, whatever the latest variants are, Omicron, or whatever the latest news flow is - we've got an inflation problem here.

Now, perhaps it is transitory, at least, at least partially, but you can see that the central bankers like Jay Powell, are now starting to move away from that kind of transitory language. And so this is going to be very important for this value versus growth question that you asked Cherry - what happens in 2022.

Now, if you believe that central banks are going to need to start tightening, that's going to play an important role in how different sectors will perform in 2022. And what I am doing in my portfolio is making sure I've got plenty of decent inflation hedges in my portfolio.

If you look at the cash flow that's being produced from various sectors, such as mining, oil and gas, financials, and some of the consumer discretionary stocks, these are companies producing massive cash flows like on a level that we haven't seen for years. And these companies are producing so much cash, that we have a lot of confidence that the dividends that we're paying out, is sustainable.

The dividend yield, by the way on my investment trust at the moment is just under 6%. We are confident in the sustainability of the dividends. And so because what we're seeing is companies producing cash, companies with that kind of inflation linkage, which means that I am not sweating about rising inflation. I'm actually excited about what this portfolio can do in a new macroeconomic backdrop, and central banks are going to have to fight this one out and work out how are they’re going to confront rising levels of inflation, which is causing significant stress for consumers at the low end, you know, people whose energy bills are going up, food prices are going up and wages are going up now, you know.

So, it's all in the mix Cherry, it's a great question to ask. We believe we have positioned the portfolio extremely well for the environment that we're entering now. And I do believe it's a new environment, by the way. This is a new economic backdrop that we're entering, which I believe a lot of fund managers out there are not ready for. So it's really very exciting.

Cherry: Great thanks Tom. Bruce can I put the same sort of similar question to you about the characteristics that are likely to define the winners and losers in the year ahead. You know, do you agree with Tom, is it all about sort of, you know, finding the inflation hedges or what, what other things are likely to be important?

Bruce: Yes, it's an interesting question, because, obviously, we listen to the companies very carefully as to what they're seeing on an operational basis. And the one characteristics - you could probably take the ‘s’ off it - because there's one overriding characteristic that is causing a lot of dislocation at the moment, and that is inflation.

And it's coming in two areas - inflation in pricing, and inflation in labour. Now, that has big implications for the types of business that you want to own, going forward from here, because if you own a capital intensive business, such as telephone networks or pipelines, which are real assets, then you're far less likely to be impacted by wage inflation going forward from here. If you own labour intensive businesses, particularly in the gig economy, then once wages start to rise, it's very difficult for those companies to pass on wage increases and costs going up through selling prices - purely because they're in such competitive industries. And they have benefited so much in the last couple of years when we've been at home, that we're looking going forward from here, for more and more real assets.

Now it's very interesting because we now have a situation where a lot of the disruptive forces that cause deflation, such as globalisation, and technology, and disruption, are beginning to be reversed - we see more trade barriers, we see more tariffs, we see more and more impediments to the movement of goods and services around the world, which is actually all inflationary as well, which is coming at a difficult time.

Prices can come out of material such as oil, wood, concrete, whatever, and reverse if the market deals with supply bottlenecks, but where costs become established - higher costs become established is in wages, and when the retail price index is 6%, then you will not go with your boss and try and negotiate a 1% wage increase to see yourself 5% worse off in the next coming year, so there's definitely upward pressure on wages. And that's a key component of the type of businesses that we're owning in Murray International going forward from here, looking for capital intensity, rather than the vulnerability of high labour content.

Cherry: Great, thanks, Bruce. And, Jen I wonder if we could turn to you just to look at some of the key themes running through your portfolio as we head into 2022?

Jen: Sure. So I guess it's interesting, actually, what Bruce was just saying. So if I think about the portfolio as it stands today, so we have a good degree of inflation protection at the moment, so we have a reasonably high weighting to infrastructure and real assets, both in private markets and in listed exposures. Obviously, these assets have cash flows that are often linked to inflation, they generally kind of government or quasi government backed entities. So the Trust is offering protection that way. The other holdings that we have is in floating rate credit, as well. So if we are to see hikes and interest rates to whatever degree, then we should see some protection for the portfolio there as well.

I guess, you know, thinking about the way that we construct portfolios, we do obviously think about different scenarios - we're kind of position for a baseline scenario - but we do consider others and look at the portfolio to see that we're insulated, I guess some of the things we've been considering most recently is inflation. Obviously, we’ve had a kind of long discussion about that. We're also thinking about China, and the stresses that we've been seeing in China and how China will deal with those going forward. And one of the kind of, one of the other things we're kind of looking at a bit more at the moment, but have had on the radar, really, since the pandemic I suppose struck, is vaccine escape, and thinking about kind of how the portfolio are performing in those scenarios, as well.

I suppose the other thing to note is in the Trust, we do have some specialist investment vehicles, which are typically kind of unrelated a business cycle and economic climate. So, things like healthcare, royalties, litigation, finance, and so on. So, we do feel that we've got a reasonable degree of kind of insulation against some of the economic risks that we've been discussing.

Cherry: Great. Thanks, Jen. Adrian, the same question to you - the key themes running through your portfolio as we move into next year,

Adrian: Dragon will see quite a few, will check some of these concerns that, you know, have been talked about. So inflation is definitely an issue, the recovery from COVID related stress across various degrees of lockdown across the Asia Pacific regions is an issue as well.

I suppose what I would say about the Dragon Asia exposure, as there will be three additional things.

One is that inflation so far has surprised on the downside. So central banks within the region have created a buffer of expectation that inflation should be higher even now. And so that might come, we are still watchful for that risk. But it hasn't been a very - it hasn't been strongly evidenced quite yet.

We insulate that by looking at companies, business models, the ones that can pass on some of those inflationary aspects on to their customers. And also we look at the ecosystem and try and understand the products and services, which are more demand in elastic when it comes down to inflationary pressures.

Jennifer talked about China and China itself. It's not a two minute answer, but simplistically, China's trying to balance between a potential for growth and recovery and structural growth, with making sure that society as a whole is not left out. Over the last 20-30 years, there has been this push for growth almost at any cost. And there are now checks and balances that have been instituted in quite an intense period over a relatively short period of time, to make sure that, you know, the social fabric is not unduly stressed. So that's one of the things that we are looking out for, it's an interesting opportunity. But you know, we have to be very selective.

So, stocks that have been sold off, like Tencent, we still have an active weight in because what is important is that within China, we have been increasing the concentration of exposure into stocks that we feel very comfortable with. And then we've been trimming the ideas that are a little bit less convincing. And Tencent is one of those positions that we think has the strength and resilience to weather through this, this uncertainty.

India's also another area that's interesting, because of the underlying growth potential that remains in a developing market that comes from very low base. The interesting thing about India is that, unlike China, which has invested a lot in physical infrastructure over the last few decades, the current push in the Indian growth may be coming from its late entry into the digitization of quite a few business models. So, it's an area that provides selective ideas. But valuations as we talked about earlier, arent cheap. So, it's something that we have to be very selective about. So, it's COVID, it's inflation, specifically China and India, interesting. And we need to balance that out with the uncertainty of recovery over the next five or six quarters.

Cherry: And sorry just sticking with you, Adrian, I mean, what permanent changes are you seeing as a result of the pandemic in Asia?

Adrian: I think the most obvious one has been this shift from offline to online delivery of products and services, you could argue that, you know, you saw signs of this three years, four years, even five years back, but the pandemic has really accelerated this push. And although we've been looking for signs of a reversal of some of these trends, you know, the moderation to median, or the shift to, you know, a moderation of that trend, hasn't been very strong to date. So that might come as borders open up across the region.

But we think that quite a few of these structural shifts are now semi-permanent. There are certain areas, for example, also in areas like property where retail, real estate, you know, as a case, is less appealing than it used to be, you know, pre COVID, as well. So, there are some bargains there. But we need to be very mindful about very basic things like cash flow, like strength balance sheets, and like, you know, the quality of locations of these assets before we really jump right in and embrace them. So, these are some of the key changes, some will retrace back some of these plans over the next five, six quarters. But we think that some of these structural changes are here to stay.

Cherry: Great. Thanks, Adrian. Right, just to wrap up, I was just going to go around the sort of virtual roundtable and just ask everyone, you know, to sum up in in a couple of lines, how you're kind of feeling about the year ahead - risks, opportunities, that kind of thing. Tom, I was gonna start with you on that one.

Tom: Yes. Thanks, Cherry. So, I would characterise the year ahead in the following way, I would say that the macroeconomic backdrop is changing. So, as I mentioned, we're going to have inflation for a little while. And that's going to make people reassess how they should be positioned in terms of their portfolios. And I think that everybody needs to be comfortable that they're in a good place - we certainly are. We've got an abundance of stocks in the UK market with very high free cash flow yields, which support very high dividend yields. They're seeing dividend growth as well. So, these are definitively not value traps. So, I think that those people who've been saying would be a bit worried about that yield should think again, you should be excited by yields which are elevated, you should not be frightened by them, you should be embracing those yields. And you should be saying, I will have as much of those stocks as I can in my portfolio because they are sustainable, because the earnings that support those dividends are going up as the economy picks up. And so, where we see that, particularly are resources, mining, oil, financials, consumer discretionary, there are some incredible opportunities at the moment in those areas.

And you know, what, if the market says we're not interested, other companies, other corporates will do, private equity will do. We've had four bids in the last 12 months, we've got another two in the new financial year coming through. We’ve got Playtech and Vivo Energy, both completely underappreciated stocks. That will continue, in my view, if the stock market remains as bizarre as it as it currently is.

The reason why the stock market is behaving in a strange way is that central banks have engineered quantitative easing in a way that has changed investors mindset, it's taken people away from conventional metrics such as price to earnings, price to cash flow. That's why you're reading more about price to sales. Bruce here knows perfectly well, that is not sustainable on a long-term view, we've had lots of good chats about that around the desk. So, we are positioned in a way which will ensure that we are protecting our clients capital, shareholders capital, at a time when that unravels and the macro trigger for that to unravel will be when quantitative easing turns into quantitative tightening, the discount rate starts to go up from zero to something that is higher than zero. And there will be probably, in my view, the most almighty rotation at that point, and that is when people who have stuck to the basics of finding companies with lots of cash flow, and not overpaying for that cash flow will be rewarded.

And that's why I'm confident that you can look at the dividend yield on Aberdeen Standard Equity Income Trust of around 6% and say - that's great. I will have that. I will grab it with both arms. So that's how I'm feeling about the next 12 months.

Cherry: Great, thanks. Same question to you, Bruce.

Bruce: Yeah, well, it's probably a longer horizon than 12 months actually, just looking at maybe for the next two or three years for Murray International.

I think the main areas that we are excited about, where we think the markets mispriced and where there's real upside in both earnings and dividends, is definitely Asian operational leverage to recovery that has been postponed by continuing lockdowns and things this year.

And we do like our exposures in the capital intensive industrial such as Epiroc, Atlas Copco, Hon Hai Precision in Taiwan. We do like digital networks and telecommunications. We do like pipelines that move gas, very difficult to replicate those real assets nowadays. And of course, we do like the commodities particularly special ones such as Sociedad the Chilean lithium producer or Vale in Brazil.

But we're also mindful, the areas that we don't like are consumer services and we don't like areas such as tourism or hospitality. They have very, very high labour components of their business models and if wages really do start to rise, then the margins will be squeezed there. And the same goes for high end consumer discretionary. We are slightly concerned about that.

And I guess it wouldn't be a season of goodwill without a nice fact to leave you with. And I guess the last time the retail price index and the UK was 6% was exactly 30 years ago. And the last time the retail prices in the UK were 6%, base rates were 11 and a half and today base rates are 0.1. So perhaps the biggest concern for us, is a policy mistake in the developed world, because they let the inflation threat run for too long.

Cherry: Great. Thank you, Bruce. And Jen, same question to you.

Jen: So, I guess, you know, we do have to have - because of the nature of the Trust being invested in private markets, as well as public - somewhat of a longer timeframe as well.

But in terms of the next 12 months, I guess, you're feeling relatively confident in the kind of global economic growth, we're feeling relatively confident in kind of the way that the portfolio is structured, in as much as it's as broad spread of risks. So that's the way it's designed to be, multi asset nature and to be diversified. So that we can take into account all of those scenarios that we've been discussing.

I suppose, just thinking about kind of private market investing in general, we, we see kind of quite a spread of returns around the mean in private market investing. So, we feel that we have an edge to be able to extract those returns towards the top quartile of returns. So, we feel somewhat insulated from kind of, I guess, any kind of gyrations or expected cuts going forward. And I guess that the environment that we're going to face in the next 12 months probably will be a bit more volatile than it has been, up until now, for all the reasons we've discussed.

I guess that's kind of the investor appetite for infrastructure remains key, and the Trust has quite a lot of exposure to infrastructure. So you know, the key social and economic infrastructure with long term inflation, then contracts, they will continue to provide a yield and inflation protection through the next 12 months and beyond – we’re quite confident in that.

Thinking about private equity, obviously, there's huge amounts of cash available to put to work in private markets, which I think Tom was alluding to earlier. We think that that means that the environment continues to be quite competitive in private equity, but at the same time, when we're looking for exits from our kind of more mature investments, that's quite a positive environment. Thinking about private equity, private credit as well who have investments in private credit. I guess, as government starts to taper, there will be more opportunities in private financing, which you know, where borrowers are facing a tighter lending environment. So, we have to be careful and make sure that that the investments we're making are really kind of, I guess, that we're sharpening the pencil on those to make sure that the rest we're taking the right ones.

And then just thinking about real estate again, because you know, the kind of the more kind of, I guess, idiosyncratic things that we've been talking about in terms of, kind of, I guess, the, you know, the big secular trends that have occurred and been even amplified by the pandemic continues. So, if you think about the dissipation of the office market and tailwinds for residential, we're trying to take advantage of those as well in real estate, in the real estate, part of the portfolio.

So, I think just broadly, you know, we're pretty diversified. I think that the markets probably going to be trickier to navigate going forward, more volatility, slightly less growth, but we still feel relatively constructive.

Cherry: Great, thank you, Jen. And Adrian, last word to you.

Adrian: I think the near term is interesting, the recovery is interesting. And I think we have balance in Dragon, that will take good exposure to that recovery story. But across Asia, there are a few themes that are structural that are longer dated as well, that excite us. We've seen companies now that didn't quite exist 15-20 years ago. They are they still got a long pathway to growth.

For example, in electric vehicles, we've got some chemical companies in North Asia like LG Chemical that is really important and crucial to the adoption of EV batteries and engines going forward. We've got things like SunGrow, big solar panel manufacturer in China, which is huge, which is a leading player in market share terms.

We've got companies like, we've got companies like PolicyBazaar in India that are revolutionising the way insurance is distributed in India as well. So, in addition to the nearer term recovery story, we've got some medium - long term ideas that are interesting. But, you know, it is going to be a volatile environment, the, the map is not going to be visible all the time. And that's where we need to be quite proactive about the way we shape the portfolio always, but I think Asian is in a good place, and we have position to cover that.

Cherry: Great. Okay, we'll wrap up there. Thank you to our managers for their thoughts today and if you have any further questions, please do look on the website, www.invtrusts.co.uk.

And thank you to everyone for listening.

Cherry Reynard: Hello and welcome to this Asia Outlook podcast. 2021 was a decidedly mixed year for Asian investors. It was a tough year in China as a regulatory clampdown hit its internet stocks and sentiment in general, while India went from strength to strength.

The year ahead is tough to call. China appears to be tightening policy, but the region is still buoyed by global economic recovery. Today we're talking to Pruksa Iamthongthong, co-manager of Asia Dragon, James Thom, lead manager of Aberdeen New Dawn, and Gabriel Sacks, co-manager of Aberdeen Standard Asia Focus about the year ahead - welcome, everyone. I’m wondering if we could start with the macro-economic picture. So, James, how do you view the strength of the Chinese economy today? Do you think some of the fears have been overdone perhaps?

James: Well, growth is certainly slowing, we are seeing that, both at sort of macro-economic level in China and at a sort of corporate earnings level. And, you know, there's no surprises there really. If you think about the headwinds that the economy is battling against currently, I mean, you mentioned the regulatory clamp down, there's the new common prosperity kind of policy agenda, China's still pursuing its zero COVID policy, but battling new waves of infections. And then we've had concerns around power supply and the property sector more recently, and all of that is having an impact. Is it overdone? Possibly, certainly the market has been very poorly performing this year. And our view is that if you step back and reflect on these issues, most if not all of them are actually kind of self-imposed and a function of policy at their core, whether it's restrictions around the property sector, or environmental policy impacting the power supply sector. And what that means is that the Chinese authorities have the wherewithal to relax policy, or slow down the implementation if they need to. And that aside, they still have plenty of other kind of levers, policy and macro-economic levers at their disposal to kind of buoy the economy, should things start to get really tough. So our base case is that China's going to be okay, and that there is no real systematic risk.

Cherry: Gabriel, do you see any looming political threats? I mean, Taiwan is the obvious one, but are any others?

Gabriel: Yeah so thank you for the question. I think ultimately, the rise of China as a dominant economic and military force is going to be the biggest challenge of the century, you could say, perhaps alongside something like climate change. So it's, it's quite likely we'll see political tensions and flare ups every now and then in the region. You know, not just with the US, but Japan, Australia, India, as China sort of flexes its muscles. And as James highlighted, you know, the fact that Xi is embarking on quite deep structural reforms at home, it does raise the risk of policy mistakes. So that's something we need to watch. You know, so far, China has been very good and strategic and deliberate in the way they manage these things. But it's something to watch alongside the Taiwan issue, you know, that's not something that China is going to let go. So hopefully, Xi doesn't become increasingly erratic around that issue, and some sort of status quo can remain to be the case.

But beyond China, I think most of the issues are now domestic, you know, COVID, has brought significant challenges for politicians and central bankers, in terms of managing that balance between public safety and economic growth, and inflation as well, a big issue at the moment. So these domestic challenges have been more important this year, and probably into next year as well, rather than the international issues aside from China.

Cherry: Pruksa, if we could bring you in here. To what extent do you see the fortunes of the wider Asia region as tied to those of China? Or could other major economies such as India pick up some of the slack perhaps?

Pruksa: Yeah, I would say that China is important to Asia, and I think this is given the context of how the intra Asia trade as well as trade with China has been growing over the last few years. And more specifically, if you look at the greater China trade, it accounts for around half of total Asia trade. So I don't think it's an understatement, you know, when you hear people say that when China sneezes, Asia also catches a cold. But as James highlighted just now, China is not facing a systematic risk, not from our point of view. We are probably going to see a slower level of growth, but we also believe that it will be a higher quality of growth.

Turning to the next big economy, we certainly think that India can pick up some of the slack. I mean, in itself, it is a large economy and this is certainly where the growth is as well for the region. And if you were to look at things from a stock market perspective, this year, India has certainly been picking up the slack in China. Just to give you some figures to go by, it is the best performing market year to date as of end October. And in GDP terms, India has risen about 25%, while China has fallen by 14%. So I think more than picking up the slack, actually, there's a few things going on for India. It has favourable population demographics, a young and growing educated labour force. And coming up as well we are seeing that mortgage rates in India are at close to 15 years low, while household incomes have risen on a year on year basis. So this has resulted in, you know, a record levels of housing affordability in the major cities in India. And you think about digital adoption, as well, as part of what's happening with COVID. We are seeing an acceleration of digital adoption in India, and this is expected to get close to 70% by 2025. So we are seeing lots of investment opportunities in this as well. Very, very exciting years ahead.

Cherry: James, what do you see happening across Asia more broadly? I mean, how do the ASEAN economies for example, look today.

James: So I'm quite positive on the ASEAN economies looking into 2022. I mean, they've been as a region, you know, so out of favour for so many years now, and sadly got hit, were amongst the hardest hit by the COVID pandemic, if you look to Indonesia, or the Philippines, for example. But that means that they're now amongst the best positioned for kind of a reopening play. And we've seen the sort of V shaped type recoveries elsewhere in the region in the world. And the expectation and hope is that the Southeast Asian markets will stage a similar kind of V shaped recovery as COVID restrictions ease and they get the pandemic under control. So, so I'm pretty positive from that perspective.

Having been out of favour for so long, there's also quite a bit of value, I think, in the Southeast Asian markets. So we're sort of hunting around for opportunities there. And there's some really great quality companies to and not dissimilar to India, though, perhaps not quite the same scale, rather than there are also some really interesting kind of tech and internet plays emerging within the region to.

Cherry: And Gabriel, does the virus continue to exert a significant influence? Or do you think its impact will ebb from here?

Gabriel: No, I think it certainly does still play a part in terms of the direction of the recovery. And clearly different countries have different approaches at the moment. So you know, Asia generally has been more cautious in, in opening up. So you see, you know, James referenced the zero COVID policy in China. So things are quite restrictive there in terms of mobility. And that does put some pressure on growth, particularly as the base effect for China had been higher during sort of the first wave of COVID, and then they managed that very well. You know, Singapore, has been quite tough on border restrictions and lockdowns until very recently, as well. So how long this policy is maintained for will be interesting to see and it will affect markets. I think there's also a risk of perhaps some complacency coming in as people sort of move on from the virus, people sort of don't want to get a booster shot or a second dose. And in a big market like India, that can that could potentially, you know, bring a third wave.

But generally speaking, I think we we've seen very good progress with vaccination rates in most of Asian markets. So the outlook for next year, certainly much improved. And we feel the stage is set for recovery. You know, I think I think COVID will remain the risk in terms of any sort of negative surprises. But generally speaking, we do expect as James also highlighted, a more V shaped recovery in Southeast Asia. So that's an area that we are starting to allocate more capital to, as you see a recovery there.

Cherry: Pruksa, obviously, inflation has been a big consideration for Western economies and to what extent are you seeing it have an influence across Asia.

Pruksa: Yes, it is a concern globally, but I think the picture in Asia is slightly different, but maybe we should expect that when we look at the Western economies headline inflation is expected to continue to pick up over the next few months. And I think things are getting slightly stickier than what previously, the central banks have predicted as well.

But as far as Asia is concerned, it really stands out relative to the rest of the world from an inflation perspective. And we haven't really seen a big surge in inflation in Asia as well. So as a result, from rates and monetary response perspective, is going to be quite limited, especially if you want to take a comparison with Western economies, we are not seeing the same pressure at all.

Perhaps one country that we might want to watch out for in Asia, in terms of inflationary pressure is in India. So far, it does look manageable. And the Central Bank of India has also indicated that it could actually adopt a slower pace of policy normalisation and will not be too perturbed if inflation exceeded his target range. So I think as economies start to open up for India and inflation pressure remains relatively manageable. I think rates and monetary policy should remain pretty supportive for growth into Asia next year.

Cherry: If we could turn to stock markets now. It's obviously been a tough year for Asian markets. But James has that less valuations looking more attractive would you say?

James: As a whole, yes, I think they have. So my perspective is that Asian valuations are looking pretty undemanding at this point in time, they are broadly in line with their long term average, depending on what kind of metric you look at. And to your point around Asia having sort of disappointed versus some other global markets, there is now a widening gap in terms of valuations between Asia and say, the US, for example. So Asia is now trading at approximately a 30% discount to the S&P 500. So I think valuations look quite attractive in aggregate, as always, the devils in the detail. And of course, there are pockets of, you know, markets and sectors that remain expensive and look a little bit stretched. But that's why, you know, we maintain our bottom up approach to selecting stocks

Cherry: And have Asian markets seen that same strong performance from value as other markets, or is that kind of recovery rally, still to come? Pruksa I’ll put that to you.

Pruksa: I will say it’s a combination of both, actually. So yes to both of your question. I think in terms of the value rally, we have seen some of that, and we are seeing this from a field perspective as well. So if you were to look at things from a sectorial perspective, we actually see that through this year, energy, materials, capital goods and banks, and these are typically cyclical and value sectors, they have actually delivered double digit increase in terms of stock performance, again in GDB terms, and this is a huge outperformance against the broader Asia ex Japan index, which fell 2% during the same period. And we are seeing this strength, more particularly so during the third quarter as well for banks and energy. So I think overall, it's quite clear from the sectoral perspective that there is a rebound from a value angle. And from a country perspective, it is quite interesting that, again, back to the optimism that James talked about with regard to ASEAN economies, we already start to see some of that playing out that third quarter Asian economies, sorry, ASEAN economies have actually outperformed the broader Asian market, and a special call out for Indonesia, which jumped 23% within just one quarter as well. So from a characteristic standpoint, Indonesia is smalling to the commodity cycle, and so has a large financial heavy as part of that index as well. So I think from that you do see some evidence that underpins the valuation - the value angle – within, within Asia. But then, I think it's also worth highlighting that we think that this rally has more legs to go. And this is tied pretty much to the vaccination rates improvement as it comes through - and we are going through that phase at the moment as well. And as more economies start to reopen up an economic activity resumes in Asia in a more sustainable way, we should continue to see this recovery rally playing out further on into next year.

Cherry: And Gabriel, what do you think are likely to be the strongest influences on markets in the year ahead? You know, might it be interest rates or global growth or possibly earnings for individual companies?

Gabriel: I think all those factors will be important. I’d probably bucket it into three things. The first is the pace of reopening that we see in the region, and how much recovery do we see in growth. So, you know, referencing Southeast Asia, you know, does that really materialise? How damaged are the sort of small and medium sized enterprises in in the region? And thinking, for example, in Thailand with the impact of tourism, you know, has that has that led to pretty significant structural issues? Or is it a case of, you know, once you see a reopening that comes back, so that will be important to track.

The second point is really, around liquidity in markets, we've seen a huge wave pretty unprecedented support to the economy via fiscal and monetary policy. So how quickly the Fed and other central banks start tapering and raising rates that will drive stock markets and have an impact on sentiment or what you call animal spirits. So that is a key question really for markets globally.

I'd say the third bucket is inflation. I think that's very topical at the moment. Pruksa mentioned that in Asia at the moment, it's less of an issue, because, you know, Asia is on the producer side of things. I think inflation is ticking up more aggressively in the US and in Europe. But it's something that we have to keep an eye on, you know, how long supply chain bottlenecks remain in place and the spike in energy prices that we're seeing, you know, that that is potentially a structural issue, particularly as you see capital, fleeing fossil fuels and the transition to renewable energy, you know, how we manage that transition, and the impact on inflation will be important. But maybe that's a bit more of a long term issue rather than a than a very short, short term one.

I’d just add one, in the specific case of China, I think regulation will remain pretty key. So whether we see some easing next year, you know, there is an expectation that with a slowdown that we've seen in growth and significant tightening across several sectors and regulatory crackdown, will there be a bit a bit more sort of relaxation in regulation and easing of policy and property in particular, that could move China and then it's important to bear in mind as well.

And finally, if we could zero in on the trust themselves, I wonder if I could turn to each of you individually to talk about your trust positioning today, you know, key themes, stock ideas. Pruksa, if we could start with you.

Pruksa: Yeah, so starting with Asia Dragon, we are positioned to capture long term structural growth opportunities in Asia.

So, if you were to think about the five broad themes that we see running through Asia, for the longer term, it will be aspiration - so that's more about consumption, it will be things like building Asia, digital, health, green and technology.

Today, we don't really have time to go into all but I thought, it's quite timely, to actually expand a bit more on the green side, which is more of a energy transition story.

And within that energy transition story, I'll say that there are there are three main layers to that.

The first one would be the renewables layer. And here we prefer upstream companies, companies that are making the components in solar farms, for example, and this would be components like solar modules and solar wafers. And our preference here is really because the industry, the whole industry is in a growth phase, and we want to benefit from the rapid growth of the whole industry. And the consolidated nature of the industry structure also means that companies within these areas do have good profitability. So here we have companies that do solar wafer manufacturing, companies that does, you know, inverters, energy storage systems, we even have smart grid and grid automation company, for example - so very exciting opportunities here.

Apart from the renewables layer, the second layer is the electrification layer. And this layer is really about increasing EV penetration, largely in China, but also elsewhere around the world. And the opportunity set here within north Asia, so you have Chinese companies within the battery space, as well as the Korean companies and both are globally leading in their own ways. We have the component companies as well, something like you know, a separator, which is part of a battery. And there are companies that do the onboard charging infrastructure, for example, in Taiwan.

And the last and third layer would be the energy efficiency layer. This layer may not be the most obvious to everyone, but it also represents the broadest in terms of opportunity set for us. It will actually involve companies in advanced semiconductor supply chain and that's really because more advanced semiconductors are more energy efficient. It will involve companies like you know, data centres in China, as well as machinery and automation companies. And all this together will be very well placed to help their customers to meet the increasingly tough energy efficiency targets set by the Chinese government and many governments around the world.

Cherry: And James, same question to you

Well, New Dawn shares many of the same structural growth themes that Pruksa has just talked about there, including the going green theme, but perhaps just to provide a slightly different perspective on how we're positioned. So at the moment, were underweight China, but have been selectively adding to China on weakness. In contrast we’re overweight India, and are still constructive on that market, despite the strong run this year. We're positive also on the tech hardware sector going into next year. And so maintaining a pretty large, absolute exposure to that sector. And we also like healthcare, mainly on the sort of services and equipment side, which is a sort of clear structural growth story as well. And then consistent with the comments we've already made, we've been looking for more opportunities in Southeast Asia and kind of hunting for value with a with an eye on what rates may or may not do, going into next year.

Cherry: And Gabriel, if we could turn to you about your Trust as well.

Gabriel: Yeh, I think the first thing to say is that Asia Focus has much more of a small cap slant. And, and just on, on that, relative to the performance of Asian markets this year, I think it is worth highlighting that small caps have actually done pretty well and are sort of back in vogue, with the index up 20% or so. So even though the large cap index fell 2%, small caps have been outperforming which is which is great to see from an Asia focus perspective, and over two years, you know, the differential in performance from the index is now 30%. So there is quite a differentiated exposure here in terms of the size of these companies.

In terms of the positioning, it's quite balanced portfolio in terms of country and sector. And what I'd say between sort of old economy and new economy stocks, a notable point is that we're comparatively low on China, China is a smaller part of the small cap universe anyway. So if you look at the index, it's less than 10% versus 40% or so in the large cap. So we have very little in China, we are underweight the index, we'd like to have more. But that has been beneficial this year, given the regulatory crackdown, as well.

We have a large allocation to India, Taiwan, as well, increasingly, and Southeast Asia. And then we have a reasonable position in countries like Korea and Vietnam. And by sector, as I said, it's very, it's very balanced tech is now the largest sector in the portfolio at around 20%. But tech is really now quite pervasive. So we do have tech in other sectors. The clear one I can think of is Momo, which is the largest position in the trust that around 5%, and that comes under consumer discretionary, but is an Amazon equivalent in Taiwan.

And then we have a chunk in other sectors like industrials, more consumer oriented industries and financials. We have decent allocation to healthcare and real estate as well. But where we're very light on is, is in more cyclical areas, such as materials and energy. And we also have very little I think nothing in utilities actually.

Cherry: Pruksa, so what do you see as the key characteristics for stocks in the year ahead? You know, will it be kind of pricing power, for example?

Pruksa: Yeah, I would say if there's anything that we learn from the COVID lessons and the disruptions that we are seeing this year, in the market, it will be resilience. And, and I think I'll come to this with different angles of resilience.

So look for you know, resilience of margins. And here you can talk about the company's ability to hike prices. So this links to that pricing power as cost increase comes through. And we talk about that the threat of inflation as well, so resilience of margins will be important.

The second resilience would be in terms of resilience of energy supply, and we would all recall the huge power shortage situation in China recently. And I think it's to see how the companies are reacting to that and strategically making some changes whether they should think harder about diversifying their power supply from just reliance on the grid, should they have backup power or installation of solar panels, for example, or even factor this into the longer term expansion plan as to whether, you know, how do they actually diversify their production risk, perhaps away from China into somewhere that is more stable from a power supply point of view as well. So that's something to think about.

The third area will be resilience of supply chain. And again, a big issue this year is in the semiconductor supply chain. So and that's really because it's a long and global one. So the ability to get sufficient supply, not just for yourself, but also for people on your upstream and people and your downstream will be very critical to have sufficient supply security for, for us to be able to sell that goods on as well. So resilience of supply chain is important.

And the last bit perhaps might seem longer term, but resilience to climate change, this will be important. And I think people might not realise that this is impacting our companies sooner than most of us think, because a business decision today has implications for longer term returns as well, especially if it's capital heavy. So having a good understanding of how the company is positioned for climate change in terms of the risks and opportunities, will be extremely important and will have significant impact on financial returns.

Cherry: Gabriel, I wonder if we could talk about, you know, the most interesting areas of structural growth across the region?

Gabriel: Yeah, sure, you know, this is an exciting question. And I could go on for a long time. I think one of the we've referenced quite a few of these in the conversation already. But I think one of the most obvious areas where I think Asia is very dominant, and there is structural growth is in the semiconductor supply chain, which Pruksa was talking about, just now, where you're seeing shortages. You know, this is an area where Asia has deep expertise. And you'll continue to see strong demand for complex chips as we move into an age of you know, connected devices, smart manufacturing, and just the prevalence of software applications in everything we do. So we think that that is an area that is pretty exciting. And I think in most of our portfolios, we have a decent allocation to the semiconductor supply chain.

The other one that was referenced earlier in the conversation is Internet penetration, and digitalization in India and Southeast Asia. So until recently, it was all about China and Alibaba and Tencent, but we are seeing a wave of IPOs in India. And it's not just you know, ecommerce companies, but gaming, FinTech, EdTech. So it is a really thriving area. And in the case of India, specifically, you know, you already have a pretty vibrant tech cluster, around Bangalore, where you've had these IT services companies doing outsourcing work for multinationals for a very long time, you know, two or three decades at least. So it is quite an exciting opportunity for India and again, for Southeast Asia as well, where I think Internet penetration and, and these business models are now starting to grow more than they have in in in China, or comparing to China's just a few years before.

And then, you know, I don't want to elaborate too much, I think the other one would be the emerging green energy theme, which Pruksa was highlighting, that's also going to be beneficial to some miners in Australia, you know, lithium and copper, for example. And then generally, the rising affluence and strong consumer theme is still very much alive in Asia. And we're positive on several areas there, you know, property in India, health and wellness in China and premiumization, generally.

Cherry: And finally, James, what do you see as the key risks in the in the year ahead? And how are you navigating those in your portfolio?

James: Yeah. So I mean, I think we've probably covered all the key risks already in the discussion. For me, you know, there are three main ones that really stand out, as we look into next year.

There's the, you know, the China balancing act for one of a better term. And Gabriel spoke about the potential for missteps there for on a sort of policy front. I mean, it's not our base case, we think that China will kind of navigate its way through this, but certainly, there is scope for error there. I think from a portfolio perspective, you know, ultimately, the sort of direction is to try and not go against the grain of policy, and kind of align yourself as best you can. So that's been what we've been trying to do in China.

I think the second big risk is COVID. And Gabriel's talked extensively there already. Obviously, if we see a new variant emerge, that will again act as a major setback. And so we from a portfolio perspective continued to take an approach of diversification. It's a positioning in some defensive sectors and stocks, but also positioning in the number of reopening plays that would benefit should that risk not come through.

And then the third big one is inflation and rising rates which Pruksa’s spoken to already and from a portfolio standpoint there I think, you know, Pruksa has talked about focusing on quality companies and those with pricing power, the ability to sort of pass on some of the inflationary impact, so that's key. Certain sectors and companies will actually benefit from rising rates so we've been looking at those, and meanwhile being a little bit more cautious on some of the sort of longer duration stocks where cash flows are kind of longer dated, and perhaps favouring value over those kinds of stocks.

Cherry: Great. Okay, we'll wrap up there. Thanks to Pruksa, James and Gabriel for those insights today and thank you to our listeners for tuning in. If you have any further questions, please do take a look at the abrdn Investment Trust website, which is www.invtrusts.co.uk. Many thanks.

Welcome, everyone. And thank you for tuning in. I'm Cherry Reynard, with me today is Hugh Young of the Aberdeen Standard Asia Focus Trust to give us an update on performance and the outlook for the months ahead. So welcome Hugh.

Thank you very much Cherry.

And now let's start by giving an update on the fund performance over the past six months, what's worked and what hasn't worked and what's been good and bad?

Well, broadly, it's been a good six months for the portfolio rising some 10%, also making it the best part of 20% year to date. And that's including a recent pullback in markets an understandable pullback, given the strength of markets. What's worked generally, much has worked so far. So part of it has been a rebound on expectations of stronger economic growth, as Asia emerges from COVID. Another part has been that we haven't been exposed to China, or much to China, which has been the weakest market in the region, pulling back quite substantially on a new strong regulatory stance, which has affected various businesses.

What has been the most influential factors in in Asian markets? I mean, is it still the virus an emergence with the virus kind of driving different sectors? Or is it is there more at work now?

I think it has changed. Now, I think as far as markets are concerned, the virus is largely behind us as the major driver of markets. I mean, clearly, the virus is still rife in Asia, and it is affecting various things, and certainly the speed of economies opening up in particular, but Asia generally is moving towards a post virus environment of just learning to live with a virus. It's been a bit slower than Europe on that front, but it's catching up quite rapidly, the vaccination programmes which lagged in Asia are rapidly growing. So I think we're looking beyond the virus and really what we're looking at things affecting the world as a whole. So a more dramatic effect on markets has been issues such as interest rates, and inflation, the fear that interest rates are now going up. And we've seen weakness in in bond markets, the fear that inflation is rising, and of course, we've seen energy prices rising quite a bit. So in many ways, it's back to the normal drivers of markets, that we'd experienced pre virus but still with the virus in the background, which can still has the ability to cause the odd shock here.

And next up I wondering if we could talk about what's happened on earnings for companies in the portfolio. Are you seeing good recovery? Or are there still areas where it's lagging?

Yes, for the portfolio as a whole, we're seeing earnings recover quite nicely, which is exactly what one would expect are for a really tough previous 12 months. So the prospects for the calendar year as a whole and certainly the 12 months going ahead from now are quite a strong rebound. Yes, certain areas of the portfolio that are still lagging, we have a bit of exposure to hospitality and hotels, which has recovered from the bottom but is still nowhere near back to normal. And that's relatively small positions within the portfolio, then we've got some particular stocks, say with exposure to Myanmar, for example, which is going through a difficult period at the moment. So it's not all sunshine and light. But in aggregate it is, evidence is for a strong earnings recovery. We're looking at the portfolio as a whole standing on about 14x prospective earnings, which is quite a reasonable rating in historic context and certainly still holds out quite a bit of value.

And I know in 2020 there were there were sort of more changes in the trust then might normally be expected with your sort of buy and hold approach. But have you made any notable changes to the funds positioning this year?

As far as the big picture is concerned it's remained much the same so our large holdings are what they've been for a little while possibly even larger we've seen a very strong performance from our top holdings Momo, which is the essentially the Amazon of Taiwan has performed very well in this COVID environment. And then we've seen a pickup in one of our long established holdings Pacific Basin shipping, which is a dry bulk shipper, which has seen a pickup in share price, very strong pickup in share price from the rise in economic activity. And if you look at our top 10, you see the benefits of the changes we've made over the last few years. So out of our top 10, about half of them have been introduced into the portfolio in the last two or three years. And a lot of that has driven performance, along with some of our older established holdings. As far as a portfolio is concerned this year, we've introduced some new holdings. So we've introduced a few new issues to in India, in particular, a specialty chemical company called Tavta Chintan, and a diagnostics company in southern India called Vijaya Diagnostic as IPOs. And then we've also bought another technology company in Taiwan and started a holding in the world's leading producer, it doesn't sound very exciting. But we find it rather exciting the world's leading producer of bicycle benefiting from the rise of cycling worldwide and rise of electric bicycles, which is a KMC International.

Are there any other sort of areas you're looking at, at the moment areas where there's potentially sort of IPO activity or new things coming to market?

Yes, it has been there has been quite a lot going on in the IPO market. So the markets been very active, and there are lots of new issues that we're looking at. Of course, most of them we choose not to invest. So when we select a few, three or four that we're looking at currently, now how many of those actually ended up in the portfolio, it's been quite a quite a hot market for IPOs. So there's always a degree of caution that we exercise when things have been very hot, because of course, that means people demand very high prices for IPOs. And the other issues with IPOs, often they're dressed up to sell so you only hear the good news about them rather than some of the sort of maybe more bitter reality that can come with them. So with so we're a little skeptical of IPOs and very selective, but they're giving us opportunities. And as I said, we've invested in a couple this year, we invested in two or three last year as well. So that that's really looking ahead the next year would be roughly what we'd expect, although we never quite know, of course.

And then what are the levels of gearing on the trust today? And does that suggest something about how you're feeling about the outlook, your relative levels of optimism?

The levels of gearing, touch over 10%. And really that's reflective of the optimism not so much in markets, per se, but more in the underlying holdings that we own. So are individual companies. Yes, we are optimistic about trading on some 14x earnings. That seems a very good value to us when we see earnings growth quite a few years into the future. So yes, markets will gyrate global concerns and regional concerns. But as far as the businesses in which we're investing, we have quite a high degree of confidence. And a little over 10% gearing seems about right to us.

And what do you believe will be the most important factors for markets from here? I mean, is it sort of the same as the factors that are important globally? So US interest rates and inflation and things like that? Or they're factors that are unique to Asia as well?

Yes, the big global factors that have been driving markets, short term, pretty much the traditional factors that used to drive markets have come back into play. So concern over interest rates, and that's a valid concern, given how much money has left bond markets and gone on, gone into far more aggressive assets such as equities, so any rise in interest rates might pull money out of equities. Then of course, interest rates might rise due to rising inflation, improved economic prospects, some of which is good news for equities, of course, improved economic prospects should lead to improved earnings for equities. So yes, the traditional factors driving markets broadly. And as far as Asia is concerned, there are some specific factors, probably the biggest factor, which is also a global factor, of course, now is China. And what's going on in China, there are lots of what's going on in China is, is really driving its domestic markets more than affecting international markets, certainly, as far as the reality of what's going on. So we're seeing increased regulation in China, affecting a whole variety of industries from the internet companies, through to schooling companies, property companies and the like. And there's also the issue of debt in the Chinese market, again, in the property market in particular, which we're seeing causing some ruptions. At the moment. Many of you will have heard of seen Evergrande mentioned in the news as a big defaulter in China, which highlights some of the issues that have occurred domestically within China, we don't think it will cause major ripples worldwide. We think China can handle this. But it's an example of what is going on in China and for us, of course, might give rise to opportunities. So with the weakness in the Chinese market this year, we've actually taken the opportunity to increase our exposure to China, which has been very, very small in Asia focus so far. So in a funny sense, we've taken quite a positive view of the troubles in China, positive view from the point of view of our portfolio and giving rise to opportunities.

Hugh, I wonder if you could talk a bit more about the China exposure in the trust?

Our China exposure traditionally has been quite low, sub 5%, within the portfolio for a variety of reasons. One being simply finding companies where we have confidence below the 1.5 billion US dollar level, which is our cutoff point for investment. And the other, of course, more general worries about Chinese governance and some of the things going on in China. And the encouraging thing is that, generally, we think China's getting better and better. But it's still been tough to find those quality companies that really is our hallmark, when we make investments at the level of below one and a half billion. Now the good news is that the recent pullback in Chinese markets is enabled us to add holdings, so we've added 1.5% or more of the portfolio into a new company in China called Yantai China pet foods, which is a pet food company. So we're looking for what's going on in China at the moment and the uncertainty in the broad market, which by and large affects the large, more monopolistic companies rather than the small companies. But of course, the sentiment has been pulling down the price of the smaller companies and for us, that's hopefully going to give us some more opportunities to add to China.

Okay, great. And just a final view on the kind of market outlook for the next 12 months, how to valuations look at earnings look? Where do you sit on the sort of positive negative balance?

Yes, there is always that, that balance between the two. When we look at the portfolio itself, we're very positive because we see our companies in a very strong position, they have strong balance sheets, strong, long term business outlooks, and are reasonably rated that 14x earnings. So that's very fair value as far as we find. Of course, markets are shorter term and driven by far broader themes, whether it be issues about China, geopolitics, inflation, interest rates, so we were bound to see some, some swings in markets and markets have performed strongly this year. I think it's been quite healthy, but we've seen a pullback in markets recently. So markets, it's a healthy reminder that markets go up in straight lines. But for us that gives opportunities to rejig portfolios and take advantage of any market weakness. So net, very positive on our portfolio and it’s very specific distinct portfolio of individual companies. That day to day might be driven by markets. But beyond the day to day will be driven by those companies individual outlooks and those outlooks are very, very healthy.

Great. Okay, thank you, Hugh, for those insights today. And you can find out more about the trust at www.asia-focus.co.uk. And thank you to everyone for tuning in.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen. The companies discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. 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 returns, return projections or estimates and provide no guarantee of future results.

Welcome, everyone. And thank you for tuning in. I'm Cherry Reynard, with me today our Bruce Stout and Martin Connaghan of the Murray International Trust to give an update on performance and the outlook for the months ahead. Welcome both of you. Bruce, can we start with you and just give an overview of the trust performance over the past six months.

Over the last six months, when we actually look at the net asset value of the trust, it's been relatively stable is pretty much unchanged. That's despite the fact that the markets been up and down risk aversion has been on and off all the time. And but we have been relatively stable. What has been noticeable is that the Trust has gone from 5% Premium around about April, March to a 5% discount today. So that's affected the share price, although, as I said, the net asset value has been relatively stable.

And is there a highlight in terms of areas that have performed well, or areas that have performed badly?

Yeah, I mean, it's been, it's been quite an up and down period, we had a lot of strength in sort of miners and cyclical businesses, as people became more hopeful that the pandemic was easing. And then there's been quite a lot sell off in those areas when the Delta variant came along in the so July, August, September period. So sentiment really moving around all over the place. But as I see on a on a point to point basis, the net asset value has been relatively stable. Okay, thanks, Bruce.

Looking under the skin a bit, Martin, if we could so what's been the picture on kind of earnings and dividends for the companies in the portfolio? And also how does that compare to the wider market?

With regards to the dividends, first of all, in the trust and in the market, the story is one of recovery, and improvement, dividends have been coming back most strongly where there was most disruption last year, and that was in the UK and Europe. Dividends in the second quarter went up over 60% in both the UK and Europe year upon year and the second quarter and that really just been driven a huge amount of that growth being driven by the reinstatement of cancelled and delayed dividends from the prior year. In addition to some quite large special dividends coming from the miners, and other parts of the globe, you know, dividends have been solid, but we were left with less growth just as a result of there being less disruption now, the prior year so dividends went up 5% in the second quarter in North America and we're basically flat in Japan again just struggling by the resilience there from the prior year. So that's fed through into the trust and I guess in earnings that too has seen a recovery story I guess the main question mark that we see at the moment is where we really go from here I'm on the earnings front because you know, the market has been about more volatile and a bit weaker more recently. And the market quite rightly has some concerns around you know, where revenue growth and earnings go towards the end of the year into next year as these you know, supply chain constraints etc. seem to be you know, weighing on market sentiment for perhaps longer than was initially anticipated. So earnings and dividends improving in a certain way, perhaps a question mark over earnings from here.

Okay, great. And sticking with you, Martin, if we could have you made any notable changes to the funds positioning over the past six months?

Past six months, we have made some changes to the positioning but not as many as the prior year. We sold out of Auckland Airport in the early part of the year it had rebounded quite nicely but it also faces uncertainty with regards to travel, and its a business where today the dividend hasn't come back. So we did sell out of that stock. We also sold out of Japan tobacco earlier in the year, continuing the theme of reducing that tobacco exposure and trust. And we sold out of buyer there the German pharmaceutical and specialty chemical company. I just started concerns that roundup and the litigation surrounding the weed killer roundup was going to continue to weight on the stock and distract management. On the other side of those we initiated position and the Canadian midstream company Enbridge transports you Huge amounts of natural gas all over the continent of North America a fairly solid business model, very solid revenues and very attractive levels of dividend and attractive levels of growth and that dividend so Enbridge was one of the new businesses that we put in. And then just before the end of the year, we put in two new pharmaceutical holdings. We put in Bristol Myers in the United States, and Sanofi in France, just really attracted by the valuation of both companies. But again, both of them having an attractive level of yield and solid growth and dividend. So that would be a summary of the activity during the first six months for the trust.

Okay, thank you, Bruce, if we could turn back to you. Where do you see as the most kind of exciting areas of growth in the global economy today, you know, whether that's sectors or regions, how are you seeing it?

I think the so called developed world has already enjoyed quite a bit of a bounce in anticipation of this pandemic is, our pandemic problems are easing, certainly seen that in Europe, North America, and to some extent in the UK. But I guess we're more focused on Asia for next year, I think he just been delayed slightly because of the Delta wave. And because of a resurgence of cases, which of course, further isolation and lock downs. But that really just postponed it to next year. And we think next year, should be good for earnings and dividends in Asia and emerging markets next year, and the year beyond in terms of sectors, we're going to come on to the issue of inflation, I think shortly, but we have been really focusing more on real assets. Because we do believe that there are some developments on the inflation front, which may not be pleasant for some of the sectors in the areas that have done well over the last 10 years. So real assets for us are things like pipelines, property, industrials, and even into the minerals such as iron ore, lithium, oil and gas, and we'd also, you know, telecom networks in there as well, because a lot of investment has gone in those businesses over the last few years. And they're really beginning to benefit or will benefit from an uptick in demand, especially for data. So real assets have become increasingly a focus of the portfolio.

And you mentioned inflation there. I mean, is that likely to be kind of the key determinant of the direction of markets in the year ahead, or do you think, interest rates, the dollar, the virus, all these other things may come to the fore?

Yeah, I mean, all these things that you mentioned, are very important in terms of the direction of financial markets, but the thing that is quite interesting at the moment, is that a lot of policymakers and politicians are maintaining the view that the inflationary pressures that we're seeing at the moment are transitory, although there's no actual evidence for that. It's probably more wishful thinking. But we do have in reality, there's a significant increase in things like energy prices of oil and gas. And that's before the world has actually emerged from a pandemic, because there's still lots of areas that are struggling. So the reasons for those things are under investment over the last few years as supply disruptions, as Martin's already mentioned. But we also have a changing geopolitical climate where less globalisation more tariffs and more rigidity in the flow of goods and services, and these are all actually inflationary. The question is, if the retail price index stays above 4% or 5%, in the UK, for the next six months or so what starts getting factored in to wage negotiations? And I think that may be one of the biggest challenges for markets or certain sectors of the market anyway over the next year, or year and a half. And that is how it digests some rather unpleasant inflation numbers.

And how are you handling that in the portfolio? Is that a question of looking for companies that have pricing power, for example?

Well, again, companies that have pricing power is always advantages. And companies will tell you companies have got pricing power, but you're never really sure if they do or not until the event. But it goes back to the issue of real assets that we talked about earlier. Because companies that have real assets, tend to be in a relatively strong position in an inflationary environment. The other issue about inflation is what happens to very expensive growth stocks that have valuations or current valuations that are kind of based on the perpetuity of low interest rates and low inflation that we've seen for the last decade and should that change then, perhaps, we have to be very careful about some sectors of the market that look overpriced. So yeah, I mean we we look through businesses on an individual basis. But you know, when you get a general rise in inflation, it's difficult to avoid input costs or labour costs, if you can pass them through great, but you know, it will be a much, much tougher business environment probably in the next year or two years then than we've had in the previous five.

Okay, thanks. Uh, one final question for you, Bruce, which is about the gearing on the trust. So what level is that at today? And what does that say about your sort of relative optimism or pessimism?

I'm not really sure that is a barometer of optimism or pessimism in terms of the gearing and we use bonds to de-gear, the trust when equities are expensive, and when bonds are expensive relative to equities, we go back the other way. So it's more a function of what is the most attractive asset. And last year, I think, as you know, Martin and myself and Sam divested quite a lot of bonds during the difficult period, because we could get yield and dividend growth, uplift from reinvesting back into equities. So the trust went from 94% yield at the beginning of last year, and there's now 101% into equities who were more geared into equities, there's probably more a function of bonds looking less attractive than equities, rather than seeing equities are really attractive. But we're always looking for opportunities and some of the bonds that we owned had got very expensive, then that's why we divested them.

Okay, thank you. And then just finally over to Martin to talk a bit about the outlook for the next 12 months, you know, any key themes you see in markets and sort of running through the portfolio?

I guess given all the risks that we've already, you know, highlighted, I think the outlook is the is the trickiest part as always is I don't think anybody would really be overly comfortable giving a detailed outline with any degree of certainty. I mean, we are, we are comfortable that we and are hopeful that we can continue to, you know, to repair on the income side as it relates to the trust and that ultimately, the best way for us to, you know, try and negotiate the uncertainty as we go forward. As via the diversification in the trust. So, you know, there's been new companies that have came in this year, there was a lot of new companies out there last year and as we as we move forward, we will always continue to look for those opportunities, regardless of where the companies are listed. Because at the moment, you know, they're in the best place to be is very, very difficult to soar and our means diversification is the best way to manage that for shareholders.

Great. Okay, thank you both so much for those thoughts today. As always, there's more information about trust at www.murray-intl.co.uk. And thank you so much for tuning in.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen. The companies discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. 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 returns, return projections or estimates and provide no guarantee of future results.

Cherry Reynard: Hello and welcome to the latest abrdn Investment Trust podcast. I'm Cherry Reynard. Today I'm talking to Ben Ritchie and Georgina Cooper, managers on the Dunedin Income Growth Trust. We'll be discussing UK markets in the post restart environment, and how they're positioned in the Trust today. Welcome, Ben, welcome, Georgina.

Ben, I wonder if we can start with an update on the Trust over the last six months.

Ben Ritchie: Thanks, Cherry. It's been a pretty eventful six months, I think overall for the Trust, both in terms of how markets have developed, how the Trust has developed. And I think importantly, how the Trust has evolved its strategy through this period as well. And it might be worth starting with, with the last point first, which is that I think the most important thing really for the longer-term positioning of the Trust is that we achieved approval to adopt sustainable and responsible investment principles as part of our investment objective from shareholders during the first part of the year. And I think that's an important action in terms of positioning the Trust for the longer term, it certainly puts us, we believe in a better position to deliver risk adjusted returns over the longer term. And we think it does differentiate the Trust in what is a competitive field as well. So, we think those things are quite important.

In terms of the portfolio itself, we think we've done an okay job during the first part of this year. And I think you always need to see these things in context. So, we have lagged the wider market a little bit. But I think you need to look back and see that, you know, we managed to prove to be very resilient during 2020. And that built on a good year, in 2019. And a number of years, we've delivered it consistently solid investment performance. And I think having been very resilient during what were some pretty choppy and volatile times, I think keeping up more or less with what have been strong markets during the first part of this year, is a, is a reasonable outcome, although we are always striving to do better than that.

And in terms of the portfolio underlying, it's really been a focus on continuing to execute our strategy, which is to focus the portfolio down, concentrate our capital into our best ideas, and look to maintain that balance of income today, and growth of both income and capital over the medium to longer term. It's a fine balance, it's a difficult, I think, thing to be able to get that mix, right. But we've continued to focus on delivering that during the first part of this year. And I think overall, the portfolio today is in pretty good shape, a resilient portfolio capable of managing through some tricky times if they happen to come through, and also of participating, if we are going to see more buoyant markets ahead. And I think that's really, I think the important thing to take away from here going forward is very much an ambition of trying to position ourselves to be quite well balanced. We don't want to be overly positioned for any one outcome, partly because we believe that the range of outcomes that sits in front of us is fairly, is fairly finely balanced at this point.

Cherry: Okay, thanks, Ben. Georgina, I wonder if we could turn to you to talk a little bit about what's been happening with dividends over the past six months?

Georgina Copper: Yeah, sure. Well, I mean, I think it's fair to say that the pitch has been much, much healthier than what we saw last year. And, you know, by and large, we've definitely seen a good recovery in dividends, both, as we've seen sort of businesses learn to deal a little bit better with the disruptions from COVID. But also, just generally the visibility that that companies have on the on their outlook, it has certainly improved.

And, you know, I'd say now, I think all companies within our portfolio have restored a dividend of some sort. And actually, quite a few have probably distributed additional capital as they sort of recovered from income that they held back last year. And yeah, actually, I think if we look at our sort of forecast into next year, I think it's about 80% of our portfolio that we now think will increase their dividend to pre pandemic levels. So yeah, the picture is certainly looking a lot rosier than it did last year. And I think it probably is worth noting, though, that you'll probably recall that our income performance last year was pretty robust, much more resilient than what we saw from both the market and a lot of our peers. So, whilst we're sort of confident that the income generation that will have this year will be strong, it probably will lag the market a little bit, but continue to be very supportive of our of our dividend policy.

Cherry: Okay, thanks, Georgina. And, Ben, where are you finding long term dividend growth potential. I know that's a, that's a real priority for the trust.

Ben: I think the opportunities for us are as broad as they have been, for a very long time, and I think one of the great strengths of abrdn's equity capability is its fundamental research and the breadth of that. And we're able to generate ideas from across the market cap spectrum in the UK, and also to source ideas from our European team as well. And that gives us a really broad range of options to look at. So, I think if anything, the competition for capital in the portfolio is as high as it has been, I think at any time in the last four or five years, which I think overall is good news.

And in terms of sort of specific areas, I think it's a combination of I would say, recovery, and then also continuity. So, there are some companies in the continuity camp that have continued to deliver very solid consistent results throughout this time period. So, think about a business like Croda, that makes a speciality additives for a wide range of industries, it's a high margin, relatively high growth business, Croda has, has sort of sailed through the volatility of the last couple of years, and continues to do very well and is moving its dividends ahead at a nice rate in line with its earnings.

On the other hand, we've got companies which have cut dividends, or didn't pay dividends in 2020, and who've come back to the dividend paying list, and in some cases, come back with a vengeance. So, you know, we've seen companies like close brothers, who reported results this morning, very strong results this morning, again, opting not to pay a dividend during the first part of 2020, but actually, now again, really looking to move dividends ahead at a nice pace.

And we could say something similar around someone like Marshall's the building materials company, again, you know, a business which opted not to pay a dividend during part of 2020, but where business is actually performing extremely strongly into 2021. And we're seeing a very, you know, good catch up in terms of their, in terms of their distribution. So, from the Trust perspective, you know, having sort of, I think, navigated the challenges of, of 2020 pretty well, we're benefiting both from some rebound in companies that sort of paid a bit less last year, and also, from solid continuity of delivery from our from our core holdings. And I think on Georgina’s point, we're not going to see the kind of dividend growth in 2021 that some of our peer trust will do. But equally, we only saw around a 10% hit to income last year, and across the board, you know, there were some very significant hits. So, we see it more as in just continuing to deliver what we've been doing over recent years. And as I say, I think there's a good range of opportunities, both for income and capital across the board at the moment, which is, which is interesting.

Cherry: Great, and Georgina, Ben mentioned, the incorporation of ESG metrics, earlier. I wonder if you can talk about the extent to which that's changed the portfolio, whether it's, you know, seen you exit certain positions or, or move into new ones.

Georgina: So, I mean, there were certainly a handful of names that we mentioned, when we were pitching the idea of this new screen that would no longer meet some of our negative criteria.

So, some of the criteria included, no longer investing in tobacco, no longer investing in companies that had exposure to thermal coal, and a lot of our screens around those that have high carbon intensity. So, there was a handful of names within our portfolio that no longer fit that criteria, including, say British American Tobacco being an obvious one and BHP Billington and National Grid for the carbon intensity of their generation assets in the US. But it was a fairly small number of names that we had to actually exit from that those criteria. They were however, quite high yielding names. So, we were conscious of trying to replace that yield. And we did that partially through adding some of our existing high conviction names that did have a decent yield including, Scottish and Southern energy, Diageo.

But as Ben mentioned, you know, we have that option to invest overseas. So, we utilised some of our exposure there to invest in some new interesting names, for example, finished bank Nordea and commercial vehicle manufacturer Volvo.

And then aside from that, you know, we had a conscious mind of keeping balance within the portfolio, but there were a few sort of obvious changes that we felt would work so we exited something like Countryside which has had good relative performance but still isn't paying a dividend and chose to replace that with Persimmon, which still gives us that nice exposure to the housing market but Persimmon does have a much more attractive dividend policy, which is well underpinned by its strong cash generation and robust balance sheets, so gave us that ability to keep that income piece strong without really disrupting the overall composition of the portfolio.

So overall, when I sort of think about what does the portfolio look like, now, with these changes, I think there has been a slight increase in financials, which has offset the sort of obvious reduction we've seen in some of the more commodity driven stocks. And we have, as I said, also taken advantage of that ability to invest overseas. And so that's probably come up slightly in terms of the percentage that we have in our European holdings. But overall, I do think, you know, we've kept a really good balance within the portfolio. And actually, if anything, I'd say the outlook on dividend security is now probably stronger with these new holdings than those that we've exited.

Cherry: Okay, thanks. And Ben, I wonder if you could talk a bit more about those overseas holdings. So, to what extent are you using that ability to invest outside the UK at the moment? And, and are there any - apart but apart from the ones Georgina just mentioned - are there any notable holdings amongst those overseas positions?

11:20

Yeah, so we sort of really kind of find sort of three angles to our overseas exposure. So I think the first one is, you know, able to diversify high yielding sectors, or give us access to high yielding companies which can allow us to broaden out our income generation so that's, that's an important area and Georgina has touched on a couple of companies, Nordea and Volvo, where, you know, those have been quite deliberate investments to seek out good quality, higher yielding opportunities in the European context.

Then we're also really looking to see can we find exposure to sectors or segments which we can't find in the UK and I think certainly, some of our more growth orientated investments overseas, you know, generally focusing a little bit more on the on the technology side, which is where perhaps, you know, it's a bit more challenging to find interesting ideas within the UK market.

And then the other angle is thinking around companies that are just frankly, you know, fantastic businesses which we want to own and this gives us the opportunity to be able to do that. So perhaps something like Novo Nordisk the Danish insulin, diabetes, pharmaceutical focus company, it's a world class business, fantastic long term opportunities, it's a great company to have in the portfolio. And perhaps in terms of some of the sort of technology type things we need. We've got companies like Edenred, which is a French payments company, companies like Ubisoft, which is a computer games, manufacturer, those sorts of things as well.

So, I think it allows us to round out the portfolio and help to give us a better balance. And I think that's, that's quite important, really, because, you know, we're targeting to have a high active share near the active share portfolios over 80% today, which is a pretty good level for any UK fund, particularly income one, it also allows us to be able to expand our positioning in the sort of mid cap, mid side part of the market, which again, where we see, you know, opportunities as well. And again, I think it's important for us to keep that balance of, of exposures and not be too weighted to the outcome of any one sort of particular scenario as well, particularly at this point. So that I think is quite helpful in terms of what we get from our from our overseas holdings

Cherry: Thanks. And Georgina, is, is the concentration of UK dividends still a problem? I mean, presumably the offshore holdings help with that a little bit. But are there other things you're doing in the portfolio to stop that being an issue?

Georgina: Yeah, I mean, I definitely think you have seen a bit of concentration in dividends, certainly this year, as Ben mentioned, you've seen a lot of names sort of catch up on the dividend payments and, and that's probably seen concentration in some names that, in particular, have given those large specials. So Rio Tinto, for example, this year was, I think, a large contributor to income for a lot of funds within the income space.

But I think going forward that should start to normalise. And actually, if I look at sort of our top 10 holdings, and the income that they generate for the portfolio, its probably not actually that dissimilar to what we've seen in previous years. I think that might be a digit specific thing in the sense that, as you probably recall, over the last five years, we've been moving away from our reliance on those high yielders with low-income growth. So, we have that balanced sort of focus on generating both income and income growth for the future as well as capital growth.

So, I think the fact that we aren't reliant on those high yielders probably serves us well, in a market where you are seeing some concentration that amongst those high yielders. You know, I think the fact that we have that full waterfront coverage of the FTSE 350 really does help, because it gives us the ability to really search out those best ideas in the market that can get that balance. And I think it also, you know, it gives us good exposure to some of those mid cap names, which over the longer term, I think will be key to maintaining that diversification of dividends, because they may today not be the high yielders that we see within the market, but I think they're the ones that have the real potential to grow the dividend over time and to be sort of the real high yield as of the of the future.

Cherry: Ben, is there any sense that UK dividends have kind of built back better, so you know, improve dividend cover improve their payout ratios?

15:55

Ben: I think a number of companies have taken the opportunity during the last 18 months to sort of reassess their dividend payment capacity and what it means for their business. And I think it had been, I think, a problem for the market. But in the past, I think investors have become quite dependent on the dividends from a number of large UK corporates and insisted on those dividends being delivered, I think, to the detriment of the businesses on an underlying basis - not allowing them to fully invest perhaps in the capital opportunities or the M&A opportunities that might have been available to them and I think that's a slightly problematic situation

This may well perhaps give the opportunity for that to change somewhat, and companies might be able to better balance their investment opportunities going forward. And I think having a broader range of companies to be able to choose from, I think will give you know investors about the freedom to allow businesses to recalibrate their dividend policies.

But if you think about some of the larger companies during this period, you know, the big oil companies have all cut their dividends. You know, the mining companies have adopted variable payout ratios, Glaxo will be reducing its dividend this year, the banks were held back from paying dividends last year. So, amongst those bigger paying companies there've been, there've been some quite big reductions. And hopefully that gives those businesses a bit more opportunity to be more flexible and considered in terms of that distribution strategies going forward and better balance, Capex, internal investment, M&A, and shareholder returns.

Cherry: Okay, thanks. Now, if we could just sort of round off with a look at kind of risks and opportunities over the next kind of six months or so, Georgina, I'll give you the risk portion. So what are your greatest concerns over the next few months?

17:52

I mean, I definitely think it's sort of it's that piece around earnings outlook, you've already seen sort of a shift in the market caution around how sustainable the strong earnings recovery saw from the beginning of the year is into the second half of the year. And I think with that there's there is probably more pressure on earnings, as we've seen this significant rise in supply chain disruption and sentiment around inflation, in particular, sort of how long that piece lasts and the implications that it has on businesses and how long it affects that that earnings potential. You know, I don't think our companies are immune to that, they are certainly exposed to some of the logistic issues that we’ve seen - the labour shortages, some of the raw material cost inflation. But I mean, I think the fact that we do focus on those longer term quality names that generally have strong pricing power and flexibility within their business models, does help them mitigate those issues - so while not immune, I do think that it's perhaps less a risk than some other parts of the market where we, where we don't invest.

And so yeah, I think it's mainly just sort of, sort of how sustainable that that growth really is. But generally, I think that's sort of quite a short term outlook. And, and as you know, we are very sort of long term in our thinking. And I think we do remain confident that the holdings that we have, have strong structural growth drivers that over that, that medium term, should be able to continue to underpin our, underpin our strategy and you know, deliver that income and capital growth that we, that we expect to sort of keep in line with the strategy of this Trust.

Cherry: Great. Thanks. And Ben, just to you for some sort of concluding remarks on how you're seeing markets today and the outlook over the next six months or so.

Ben: Yeh, I think to echo Georgina's comments earlier, it's an interesting period, the headwinds are building up to some degree and I think, when we look at the portfolio, and we look at the companies in it, and I've used this word a lot, but I think it's important, we do think about this balance of the portfolio resilience, but also, participation on the upside. When we look at the company level, I think we're pretty happy, generally speaking, businesses are performing very well and we've just produced our sort of outlook for next year and broadly speaking, you know, as Georgina said earlier, our view of income security for 2021/22 looks as good as it ever has done.

But there are headwinds building, you know, we can think – as Georgina has talked about - inflationary cost pressures coming through, that's certainly an element, we're seeing a slowdown in China, and that will have ripple effects through the rest of the global economy. We're also getting to the point where government support is starting to be withdrawn. And in the UK, we'll see an end to furlough, but also potentially we've got tax increases coming in 2022. And at the same time, we're also annualising very strong growth numbers. So, the sort of functional numbers are starting to come into play. And at the same time, you've got policymakers thinking about how are they going to withdraw some of the extraordinary stimulus that's been provided during the crisis period, potentially talking about raising interest rates. And I think that was sort of captured a bit with Andrew Bailey talking the other evening, which is that raising interest rates won't increase the supply of semiconductor chips, I think they're aware that some of these supply challenges aren't necessarily going to be fixed by raising interest rates. And so it's an interesting balance, because we are at a point where perhaps, momentum is starting to slow, at the same time as policymakers are thinking about withdrawing stimulus - at a time when there are also a number of other challenges around supply chains, logistics, costs, and so forth that are out there. So, it's an interesting period. But I think to bring all that back, you know, while there may be some volatility around that, we still think that our portfolio is pretty well positioned, you know, kind of regardless of what happens, there are some scenarios where things were better for us, somewhere, it would be worse. But we think overall, we are setting ourselves up to deliver relatively resilient income growth over the medium to long term. And we feel pretty good about how we're positioned for that, although I think if we were thinking around the headwinds that our companies and the markets might face, there were a few more of them around today than they were six months ago.

Cherry: Great. Okay, thank you, Ben, thank you, Georgina, for your time today and those insights. You can find out more about the Trust at www.dunedinincomegrowth.co.uk and thank you all for tuning in.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. 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 returns, return projections or estimates and provide no guarantee of future results.

Cherry Reynard: Hello and welcome to this abrdn Investment Trusts podcast, I'm Cherry Reynard. With me today is Alan Gould, manager on the Standard Life Private Equity Trust. We'll be discussing the latest interim results and recent activity on the Trust. Hi Alan.

Alan Gould: Hi Cherry.

Cherry: Can we start with an overview of the Trust for those who might not be familiar with it, what's the investment approach and what differentiates it from its peers?

Alan: Sure, so Standard Life Private Equity Trust or ‘SLPET’ as we refer to it is an Investment Trust that focuses on making investments into private equity, both via private equity funds and direct co-investments into private companies.

SLPET was launched in May 2001, so it celebrated its 20th birthday this year and there are three things regarding its approach that I would draw attention to and have been consistent over those 20 years. So firstly conviction, it is a conviction play on private equity - it isn't, it isn't a private equity index as such, it's backing a relatively narrow set of private equity managers. We have 17 core managers in total that equate to almost three-quarters of NAV, the top 10 fund investments equate to around 50% of the portfolio, so yeah, conviction is the first thing I would draw out.

Secondly, specialism. Over those 20 years I refer to, SLPET has been focused primarily on the European mid-market. The mid-market we think offers great opportunity - it has for many, many years - to really add value to businesses, before selling to a large trade buyer or to the large and mega private equity players in the market, which is where most of the capital and private equity is accumulating. But in addition, Europe, you know, the European market brings structural barriers to entry, you know different cultures, different languages, different regulation, different laws - so it's not homogeneous like other markets can be and so that yeah, really does make it harder to crack and more important that you're able to access the best managers.

And then the last point I would highlight is diversification, so whilst SLPET is specialist and conviction based, you get the ‘sleep at night’ comfort of a portfolio of over 450 underlying companies, well balanced by sector geography and maturity.

For example, our largest single company exposure is less than four percent, just less than four percent of NAV, and really there's an increasing focus on the more resilient long-term growth sectors. You know for example technology, health care and consumer staples, in SLPET equate to around 50% of the portfolio. But in addition, you also have numerous recurring, revenue-based business to business services companies on top, within our industrial exposure, so it's a very resilient portfolio. Only two companies in the top 100 we believe have been materially disrupted by Covid, another good example there, and that's less than a percent of NAV- so yes those would be the three consistent areas. That said, on top, I would probably draw out two other key points. Firstly ESG, in the last five or six years, our focus here is massively increased. Now SLPET will only partner with private equity firms that have best-in-class ESG capability or a cultural commitment to improve their ESG. All our investment papers and due diligence focus on ESG, it’s one of our, one of the core pillars of our work and analysis when assessing new investments. All our managers undertake an annual survey which allows us to rank them and engage where any are falling behind, but thankfully in the latest survey almost two-thirds of the, of the managers scored green which we see as positive.

And then the other point I would draw, is the increase in direct investment. I mentioned this at the outset, that SLPET also makes investments into private equity co-investments and direct investments into companies. This was introduced to the investment objective in 2019 and there's lots of advantages to that: lower costs, more control over cash deployment, more control over your sector and geographic exposure. We have a team that's been doing this for two decades, so it's a very logical change, and that this we believe will benefit returns moving forward.

And then the last thing I guess I would draw it is, is the performance. Over the 20-year period, our annualized NAV total return is 10.8%, that's through the global financial crisis through the global pandemic more recently, and in the last five years around 16% annualized. So strong performance is 11% uninterrupted years of year-on-year NAV growth and outperformance to the FTSE All Share across three, five and ten years.

Cherry: Great okay thanks Alan. I wonder if we could look at the interim results in a bit more detail now. Can you talk through performance over the six-month period?

Alan: Yeah, happy to. Well I would start by just summarizing that the portfolio continues to perform exceptionally well follow on the emergence of the global pandemic - better than we really could have wished for when we were sitting there in sort of March, April time last year.

So, in the first six months of the financial year - which is from the start of October through to the end of March - the portfolio grew 22.9% in constant currency. When you roll in the sort of FX headwind from the appreciation of Sterling against the Euro, the performance is 16.9% - so really strong performance for a six-month period. And that equates to a NAV total return over the six months of 14.9%.

If you roll in this performance over the last 12 months - so you know basically since the emergence of Covid - the portfolio has grown 48.1% in constant currency, and we regard this as is very strong performance in the context, you know, often enforce lockdowns across many economies. So, the size of the Trust now is £873.9 million Sterling of net assets and so it's very sizable. And the share price over the last six months has reacted as well so it's increased 38.8% over that period, so overall we're very pleased.

Cherry: And with that, where there any areas of particular strength?

Alan: Yeah I would say so, I mean obviously - and we'll come on to the sort of the makeup of the portfolio - but our portfolio was a lot more oriented to technology and healthcare than it was in the past, you know, it's around or just shy of 40% of our portfolio is in those two sectors and those sectors have done very well. But yeah, more generally, I’d say that a lot of the performance has been driven by exits in our portfolio or IPOs.

You know over the last six months the average uplift upon exits or IPO has been 63.1% in our, in our books in terms of the valuation uplift, so it's been a terrific market for exiting businesses. So, in terms of our full exits in the portfolio, it’s been companies such as Calypso which is a provider of capital market software solutions to the financial sector, its main sponsor being Bridgepoint, a manager that we've backed for a long time. The Signature Foods, which is a leader in chilled convenience food, you know, it's private equity sponsor being IK, again long-term relationship of ours and Fare Group which specializes in circular food packaging, another strong exit via its sponsor Advent International.

But in terms of IPOs, I mean we've seen some really good examples that hopefully will be familiar to a number of the listeners. So Moonpig - the UK based online gifting business which was around a percent and a half of our of our portfolio listed in London, Dr Marten's likewise in London, the leading consumer footwear brand, you know that was close, that was 1.3% of our portfolio and a really strong return for Permira who we backed and Allegro in Poland, it's sort of the leading online marketplace in that region and another strong uplift for Cinven and Premira there and for our portfolios. So, you know, typically these listings have been a material valuation uplifts and also have provided an element of you know returning cash at listing.

Cherry: And any sort of major changes to the portfolio over the six months - sort of new investments and that sort of thing?

Alan: Yeah we've been active on the new investment side. So in the first six months we've committed to three new funds. So we've got, Triton Smaller Mid Cap II, IK Small Cap III and PAI Mid-Market Fund I. And all of these managers we've known for almost two decades, we regard them as blue chip and they're all strategies focused on the lower mid-market and that's where you expect us to continue to play - you know, backing strategies that are focused in on slightly smaller companies in the middle market, but where there's a real opportunity to add value - whether that's organically or through MA and grow these businesses into being market leaders that will attract the larger PE houses that have, you know all this capital available, or trade buyers that can pay high prices that are based on the synergies that they'll be able to create with their existing businesses. So, we're very excited about those three funds.

But on the co-investment side as well, we've been active and the pipeline there is looking as strong as it ever has. And so far in the financial year we've backed three new co-investments. So the first one there is a business called NAMSA, which is a sort of - they call it a CRO, a sort of contract research organization - that works in the medical device space, but really helps with the testing of medical devices and all the services attached to that, and that's alongside its sponsor ArchiMed, who's a healthcare specialist and uh obviously knows the space very well indeed.

We also backed a business called FUNECAP, which is a French headquartered funeral services and crematorium business. That one there we just regard the management team as is very strong the sponsors involved there - Latour and Charter House - I think you know, again high quality institutions. And there is a real opportunity to grow that business via M&A and obviously the service it provides is, you know, very resilient and predictable in terms of revenues. And then the last business we have, we have a sort of confidentiality around it at the moment but is an exciting high growth business in the technology space focused in on sort of conversational AI and hopefully in the coming months we'll be able to formally tell everyone what the business is and give a bit more detail but we're excited about that one as well.

Cherry: Okay great and have those changes made any sort of notable differences to the sector or geographic balance of the, of the portfolio?

Alan: I mean there's some changes around the edges, but I wouldn't say there's been any notable shift in the last six months or so.

So, if you look at our geographic balance, I mean it's been well balanced for a while. So UK and the Nordics are the highest single sort of regional exposure that we have, so around 19% of NAV for both of those regions. And then you have North America at 15% and then France and Germany at 14% and 12% respectively - so pretty well balanced, you know, really focused in on northwest Europe and the more stable economies there.

I think looking more kind of, you know, over the longer term, sector has been an area that we've seen a lot of change. So I referred to it a bit earlier on, the main change being the increased exposure to tech and health Care - 10 years ago for example it was around 14% of SLEPT’s portfolio, now it's 38%, and I think there when you combine it with other stable sectors as I mentioned earlier - consumer staples - you combine those three in your half of the book, and there's a number of resilient businesses across the other sectors as well that we're excited about. But yeah, nothing really major over the last six months, but that's more of kind of a longer trend.

Cherry: So how would you describe the sort of overall shape of the portfolio today, I mean how much in kind of healthcare and technology and how much in sort of, the larger end and the smaller end of private equity?

Alan: Yeah well, I'd say the book is very focused in on its core mid-market segment. That said we will continue to back mid-market managers that you know sort of graduate into the larger end of the market, and we have done that with Advent International for example. It's just that, that end of the market we would probably have less conviction because of the sheer amount of capital flooding in there and how institutional the businesses already are when they arrive in that segment. We just have less conviction in terms of the opportunity to create value, so yeah, we will continue to kind of follow managers into that segment but probably more selectively.

I’d say where we are seeing a bit more of a change is we are doing more in the lower mid-market – I refer to the three funds that we committed to in the first six months of the year, being all kind of more in that lower mid-market segment. But we're also doing more in growth as well, so, you know, we're pursuing a lot more in that space just to try and get a bit more access to the businesses of the future really and the disruptors in various sectors.

So, the shape of the portfolio is still kind of very oriented to mid-market, still very oriented to Europe. It's around sort of 80% plus of managers being European, of underlying companies being headquartered in Europe, so that's still the case. We've got over 480 companies now, but the highest exposure being a business called Action, which is a sort of physical discount retailer in continental Europe - but it's a phenomenal business. It just has this incredible following and has managed to grow through the pandemic - which is incredible for a physical retailer - and kind of shows it's more kind of consumer staple characteristics. People will know that because the lead sponsor there is 3i and so it's a well-publicized sort of business.

But yeah, I just again call out, sort of in terms of the shape of the portfolio mostly is through funds but co-investment continues to grow. So it's now up to 7% of NAV, we had no exposure to it in 2019 for SLPET, it wasn't part of the strategy, so we'll continue to see that grow I suspect or certainly we expect anyway, and you know to closer to that sort of 20% of NAV over the medium term.

Cherry: Okay and looking at the accounts, you have around £62.5 million in cash plus an undrawn credit facility. Do you have any plans for that cash?

Alan: Yeah absolutely. I mean for a bit of context I think we should note that the level of distributions that we've received, that the company's received, over the last sort of six to nine months has really surprised us - and not just us - but you know most people in the market I would say. We paused investment activity at the outset of the global pandemic, really to understand what shape this was going to take and we really didn't expect there to be much activity in private equity - but there has been. People have been able to get on and really continue selling businesses and buying businesses, despite the restrictions and activities really, has really surprised us and hence distributions have come in way above our forecasts.

So we have a very good cash position right now. Our intention though is to, we want to increase co-investments. Co-investments need funding up front by and large, whereas funds are typically drawn over a three-to-five-year period. As we do more in co-investment, that will eat into the cash. We intend - or we certainly try to be - cash neutral throughout the cycle, so that's how people should think about us. It's just simply the sheer sort of weight of distributions and cash coming back to the company has been surprising.

Cherry: Okay, and also outstanding commitments are below the longer-term range. Can you just explain what they are and why they're a bit below normal?

Alan: Yeah, I mean outstanding commitments, it's just the way that SLPET is run and has been for 20 years. We make fund commitments and so when you make a commitment the funds are drawn over those sorts of typically, that sort of three-to-five-year period as I mentioned earlier. And so you have an element of your commitment to that fund outstanding at any time, so it's amounts that you're legally bound into supplying the manager with, and the fund with, so we'll always have an element of SLPET having commitments outstanding that it needs to fund.

But yeah, I mean we typically look to have an over commitment ratio of you know in that 30 to 75% range, it is below that at the moment, it's sort of in the 20% at the moment, so it's below our range which means that really that the commitments as a percentage of NAV are pretty low.

I would say the cash position is contributing to that. This does mean that the whole portfolio is certainly sort of, I would say, less risky shall we say at this point in time. It's just a consequence of the fact that our cash position is so strong and we have a 200 million undrawn facility and the fact that we paused commitments at the onset of the global pandemic. So, we expect this to reverse over time as we make more new investments both in terms of funds - but particularly in co-investment - the cash figure will come down and the over commitment ratio will go up and into levels that we think is probably slightly more efficient over the longer term.

Cherry: Now sort of zooming out into the into the wider private equity market, I mean what are your current views - are you still seeing plenty of opportunity there? How do valuations look?

Alan: Yeah, it's certainly seeing lots of opportunity, it's about being disciplined. As I say, the activity levels in the industry have surprised – have surprised me certainly - and surprised a lot of people. There's a lot of capital going into private equity, you know people are on the hunt for yield, for returns and private equity has been a strong performer over the long term. But I would say a lot of that money is going into the sort of large and mega end you know, there's a lot of large investors coming in and the only way that they can get access is to these very large funds that they can accommodate large tickets.

Actually the mid-market we feel, it's not really grown that much, in terms of the capital available in that space, which we think's really interesting and a really fantastic opportunity. Because the mid-market is the place where you can still add a lot of value to businesses and really increase their profitability, increase their top line growth, increase their attractiveness to trade buyers and larger private equity and to the public markets frankly - we've seen a lot of that more recently as we discussed earlier on - so a lot of opportunity. I would continue to stress that you know private equity is a great place even now to put money to work. Companies are staying private for longer and public markets are shrinking in terms of number of companies, so to get access to some of these businesses you know, you know faster growing the disruptive businesses, you know they're mostly privately held. So whether that's a sort of, some sort of digital strategy technology whether it's healthcare and or things that are more sustainability focused, you know the private market is the place to find that and get access to that.

Cherry: And just finally I mean what, role do you see private equity playing in a sort of broader equity and bond portfolio?

Alan: Yeah I mean, I view it primarily as a diversifier at a time when traditional markets are becoming more correlated. I think private equity can add something a bit different into the portfolio and give you a good diversification.

As I mentioned earlier, I think it's really important that people note that companies are staying private for longer compared to what they did in the past. You know, Amazon sort of listed - I can't remember exactly but sort of $500 million - Amazon today, if it was coming through would be listing at several billion - a much later stage, when a lot of the value has been taken. So, I would continue to stress that and as I mentioned before, continue to stress that sort of innovation you know the world is changing and very quickly - particularly in the back of the global pandemic, and a lot of these disruptive businesses are privately held. So, if you want access to that private equity and private markets is you know, needs to be a part of your portfolio.

Cherry: Great okay thank you so much Alan for those insights. You can find out more about the Trust at www.SLPET.co.uk - that's S.L.P.E.T.

Cherry Reynard: Hello and welcome to this abrdn Investment Trust podcast. I'm Cherry Reynard. With me today is Hisashi Arakawa, our manager on the Aberdeen Japan Investment Trust. We'll be discussing the latest results for the trust and recent activity and the outlook for the Japanese market - hi Hisashi. Can we start with an overview of the Trust, you know, its aims its investment approach, and also a little bit on what differentiates it from its peer group.

Hisashi Arakawa: Hi Cherry, good morning. Yes, Aberdeen Japan Investment Trust, invests in quality businesses, businesses, that strong moat competitive advantage, and those direct run by management teams with a proven track record. And we read that this makes a difference over time, because these quality businesses are resilient, they are consistently generating superior returns. And we saw this very clearly last year during the pandemic, these quality businesses were able to cut costs in difficult times quickly, or capture new opportunities arising from the pandemic.

Another aspect of our investment approach is that ESG is well integrated into the process because we needed environmental, social and governance factors, financial material, and they impact corporate performance over the long term.

But not all companies are perfect. And we believe that it's important to engage with these companies, if there is room to improve. And we are quite active on this front, because we are long term investors, and we can establish this relationship with management teams to have a constructive discussion.

The other aspect of our team is that, in addition to locally based team on ground, we can visit management teams or look at products that are being offered, or what's happening around Japan, on the ground. But also, we have 140 investment managers around the world, and we access these global, which means is that we have a good feel for what's happening in the supply chains globally. Because many Japanese companies, especially the quality companies, are global. And we need to understand in a timely manner, what's going on around the world. And this helps us make better investment decisions.

I'd also mention that, because it's an all-cap mandate, we can invest in a wide range of companies from large to small and really look for the best opportunities within the Japanese market.

And finally, we have an enhanced dividend policy in place. For the financial year ended March 2021, the total dividend was 15p, which is equivalent to just over 2% dividend yield. We believe that we offer a good balance of capital gains, as well as income gains for investors.

Cherry: You've just released the latest set of results. I wonder if you could talk a bit about the highlights from that, you know the performance dividends any ESG highlights?

Hisashi: Sure, the Japan Investment Trust has consistently outperformed the index topics since the mandate was changed to Japan early in 2013. Before the financial year ended March 2021, the Trust share price rose 35% in Sterling against index that was 25%. And if you look at that one year, the performance is really driven by these high-quality businesses such as Shin-Etsu Chemical, they are the number one maker of semiconductor wafers, as well as PVC materials used in buildings Daikin Industries, which is the number one aircon maker in the world, and also now Tesco, they global leader in components using robotics. So, these quality businesses continue to provide and contribute to our performance for the Trust. In terms of dividend for the financial year ended, the total dividend was 15p so that equates to just over 2% yield and this is in line with enhanced dividend policy that was introduced earlier. We also have share buyback programme in place. We believe that the Trust offers good combination of capital gains as well as income gains.

Cherry: Okay, great. Could you talk about any recent changes to the, to the portfolio, you know, any major adjustments you've made over the past year or so?

Hisashi: Yes, because as it is an all-cap mandate, we're able to invest in some of the global heavyweights such as Toyota Motor, but also some of the younger companies - fast growing companies in small cap space - including IPOs. So we subscribed to IPO of WealthNavi, that was the end of last year. And they are the first and largest logo advisor in Japan. And they contributed to performance this year, and they continue to grow the client base. As you can imagine, in the low interest rate environment, especially in Japan, retail investors are looking for opportunities, looking to make their money work, and WealthNavi has been able to capture that demand. Another example is Tokyo electron that we initiated earlier this year. They are one of the leading semiconductor manufacturing equipment makers in the world. And because of their technological edge, they are able to capture the rising demand for semiconductors for valuation applications from 5G to data centres. And the stock continues to do well after initiation. We've initiated these holdings by taking profits from some of the stocks that did well last year, and we've been recycling capital in doing so.

Cherry: Okay, and it's been a slightly tougher time for performance recently. I want to - can you explain why that happened?

Hisashi: Yes. Last year, we had strong performance - out performance - of the Trust. And coming to this year, we saw the market look at reopening economies around the world, including Japan, and taking profits from stocks that did well last year. So, some of these resilient businesses that did well last year, they were subject to profit taking this year. And instead, some of the beneficiaries of reopening, such as banks, trading companies, still, they have been doing well this year.

But we believe that some of these businesses face structural challenges over long term, and some of the rotation is done in our view. And as a result, the market has been stabilising after the sharp rotation earlier this year. So, we believe that this is actually an opportunity. If you look at the single stock or stock specific basis, there are some opportunities arising as a result of this rotation that we've seen.

Cherry: Now, I wonder if we can turn to engagement, you mentioned that that's an important part of your process a little earlier on. I wonder if you could show how that works in practice, you know, give an example where engagement has been successful.

Hisashi: Yes, as mentioned earlier, we are very much active in engagement, because not all companies are perfect. And in fact, there's still room to improve for many Japanese corporates - whether on the E,S or G front - particularly on the G front. And we believe that that way, we can unlock value hidden in some of these holdings. And to give an example, SANKEN ELECTRIC is long-term holding first, it's a semiconductor company. And they had this subsidiary based in US that was highly valued, but the market was just not evaluating or rewarding a company for it.

What we saw last year was that the company based in US – the subsidy based in US - was listed, and this helped them unlock value. And as a result, the stock is more than doubled within a short period of time. They’re also restructuring their businesses to focus on areas of growth. And this follows many years of engagement from us with the company, discussions the company, to unlock value and improve corporate value. So, this has been a positive contributor to our performance.

Cherry: Okay, great, thank you. And what about markets more generally? I mean, what are you seeing on the ground in Japan today? How Is recovery progressing sort of post pandemic?

Hisashi: Yes. What we saw earlier this year was recovery of exports to markets around the world. Japan's exports continued to be at the historical high levels. But at home in Japan, the economic outlook continued to be uncertain. And this is on the back of continued cases of COVID 19 infections and also slow progress of vaccines, which led to concerns over consumption and domestic economy.

But what we see right now is the government has been active in accelerating vaccination. And towards the end of last month, more than 10% of population had already received two doses of vaccines. So, we believe that this is actually an opportunity because we see gradual improvement in the outlook for the domestic economy as well. Once the vaccination exceeds a certain rate, then some of the consumption or some of the sectors that have been hit by the current pandemic could begin to see recovery. So, we are cautiously optimistic on that front.

Cherry: Okay, and what about corporate earnings? Have you seen an improvement there, or is that sort of waiting for economic recovery?

Hisashi: Yes, for companies that are more exposed to global markets, we have seen a sharp recovering in earnings. And while for those that have high exposure in Japan, management teams remained cautious. But we see or we feel from speaking to these companies, the outlook is improving slowly but surely. And this actually gives a positive outlook for corporate earnings as well.

Cherry: Can you discuss any sort of major themes running through the portfolio today?

Hisashi: We identified certain underlying trends, these multiyear trends through our bottom-up stock picking. These include trends such as: increasing use of robotics on the back of labour-saving needs; going green, everything from EVs to energy efficient components; digital economy - Japan is still lagging in certain areas in terms of use of IT; technology in healthcare and rise of Asia's middle class.

But I’d just like to mention going green because this is increasingly important trend that we see. Governments around the world are taking measures to address growing environmental challenges, and Japan actually has a lot of companies that are able to provide energy efficient energy saving solutions. And in the Trust, we hold the SANKEN ELECTRIC - that I mentioned earlier - they make energy saving chips for white goods, Murata that makes key components for electric vehicles, and also KOITO, they make energy saving headlamps. So, Japanese companies are actually well positioned - not just in terms of being energy efficient themselves - but actually using their products and services to help save energy, so we believe that there is actually an opportunity for many of the companies held in the Trust.

Cherry: Thank you, I was just going to finish off by asking - why now might be an interesting time to think about investing in in Japan. And perhaps this just in particular?

Hisashi: What we saw earlier this year was export read recovery. But now we are seeing signs of domestic led recovery as well. So, we have, we have - once these recoveries begin to be seen more clearly, then the market could appreciate the improving outlook for these corporates. Japanese stocks have been somewhat weak in more recent times due to concerns of slow progress and vaccination, but we see on the ground that vaccination is making good progress and could be that this is actually an attractive time to invest in Japanese equities for that reason.

As for the Trust, we hold a number of companies that can benefit from reopening economies. Just to give you some examples, companies such as Keyence that are beneficiary of improving sentiment for capital expenditures, that had been weak for a while; Recruit that will benefit from rising job ads and pickup in promotional material related to travel and activities and also a company such as Asahi group, beverage company, that is expected to recover from lifting of restrictions for daily activities. So, we believe that the Trust is well positioned for recovery ahead, both globally and in Japan.

In addition, the Trust trades at a discount against NAV, it trades at a wider discount to its peers. And we read that this could provide an attractive entry point for investors, given the improving outlook. Thank you.

Cherry: Great, okay, thank you, Hisashi for your time and those insights today. Listeners can find out more about the trust at www.Aberdeenjapan.co.uk or by contacting one of the sales team. And thank you so much for tuning in.

Podcasts from abrdn Investment Trusts, invest in good company.

Cherry Reynard: Welcome to the latest in the abrdn Investment Trust podcast series, I'm Cherry Reynard.

Today I'm talking to James Thom, portfolio manager of the Aberdeen New Dawn Trust, about the state of play for Asian economies and markets. Welcome, James.

James Thom: Thanks, Cherry, great to be with you.

Cherry: As we've seen in the press, some parts of Asia are battling a new wave of COVID-19. To what extent is that hurting the economic recovery in the region?

James: Well, I think, yes, unfortunately, Asia is battling a number of new waves. And it's across the region, really, everywhere from Singapore, where I'm based, India, of course, which has had the worst of the waves, but also Taiwan, and some of the other Southeast Asian countries, Australia, even another small outbreak in China. So that's the bad news. The good news, I think, is that this time, the impact of that is, is much less severe than the initial waves we saw last year. And by that, I mean, there's been no sort of wholesale nationwide lockdown in response to these waves. And instead, we've had a much more targeted and less restrictive kind of intervention by governments. And that's meant that the impact economic activity has been far less dramatic - even in India, where, as I say, the pandemic really got to very scary levels, in terms of case numbers.

Even there, whilst we have seen some downgrades to GDP growth forecasts, they're not terribly dramatic. So, I think the overall economic recovery remains broadly on track, and that's been reflected, really in the way in which Asian equity markets have performed as well – so we haven't seen those dramatic falls that we saw last year amid the initial wave, and in fact, the markets been pretty resilient.

Cherry: And how have governments and central banks responded to this sort of new wave? Have they put in place further stimulus measures, or have they just kind of left things as they are?

James: Yes, there's been further support, and I think one of the big positives if you like, for Asian economies is that there is still a lot of firepower, in terms of policy support available. So, most countries here have followed, you know, fairly orthodox monetary policies – so, they can if they want to though we haven't seen it, yet - they could cut rates. Obviously, there's some inflationary pressure that we're seeing at the moment, so that I think they're a bit hesitant to cut rates, but they could if they wanted to.

Instead, we've seen central banks kind of pursue more kind of, different kind of relief measures of the type that we saw last year as well, so kind of loan moratoriums and things like that. So, there has been help on hand to help economies through this period.

Cherry: And you mentioned inflationary pressures there and obviously, that's, that's been a big issue in in Western markets. Have you taken any action in the portfolio to mitigate those pressures?

James: Yes, on the margin, I have to say at this point, I'm not unduly concerned by the inflationary pressures. We are seeing a bit of kind of cost push inflation out here with rising commodity prices in particular, so that's sort of eating into margins in some cases, but it's not a serious issue at this point, and may very well proved to be temporary.

So having said that, I think we are all conscious and aware that at some point rates will have to rise again, and there'll be a normalisation of monetary policy globally, so we are thinking about how that might impact Asia. So we have been just, as I say, on the margin, moving a little bit more into some of the sectors or segments of the market that might actually sort of be, I guess, either more insulated from that, or even beneficiaries of that.

So, banks, for example, for the most part in Asia will be beneficiaries of higher rates, so we have just been adding a little bit to our bank holdings with that in mind.

Cherry: Okay, and have there been any other notable changes to the Trust over the past six months?

James: I think the key change has really been in the domestic China A-share market where previously we got the exposure to that market through holding the Aberdeen China A-share fund. And we did that as a way of diversifying the risk across multiple holdings.

We have since transitioned out of those fund holdings. So indirect exposure to the A-share market, now into direct A-share stocks instead. And that reflects really just a growing level of comfort and conviction in the direct holdings. So New Dawn now holds eight or so direct Chinese stocks that span a range of sectors, but they're all, you know, high quality and many of them high growth companies. So that's been, I think, the key change. And then we have added a little bit more to some of our electric vehicle theme, not directly, so we're not buying the electric vehicle makers - but we are buying some of the suppliers and component manufacturers into that growth area, in both Korea and China. And we've added a little bit in the healthcare sector as well.

Cherry: Okay, so could you give us sort of a big picture view of the of the Trust as it stands today, you know, the type of themes that are running through it?

James: Yes, so there are several really, I think, I mean I mentioned the electric vehicle component makers there. And that's part of a broader kind of green economy theme, if you like, that encompasses not just electric vehicles, but kind of renewable energy. And that's becoming a more important theme within the portfolio, we've got some exposure to the China solar energy sector as well in there. And we're seeing more and more ideas within the sort of green economy theme - so that's one.

And that I think, just reflects the increasing emphasis that we're placing on ESG in the portfolio as well - it's always been a core part of our stock selection process. But it's becoming ever more important, I think, and so that cuts right across the portfolio today.

Aside from that, I think technology's an important theme still within the portfolio, that's both on the hardware side. So, we have large holdings in some of the semiconductor and memory stocks, and we're still very constructive on the outlook for that sector.

And then also into the area of digitalization, so the internet names and some other service providers into that.

I've mentioned adding to health care and that remains an important theme too, spanning everything from kind of services within the healthcare space - particularly around the sort of high growth biologics segment - but also medical devices.

And then finally, I would just say the portfolio continues to be a play on kind of rising wealth levels and aspirational consumption, right across the region.

Cherry: And what about the health of the corporate sector, generally? I mean, what are you seeing in terms of corporate earnings at the moment?

James: Earnings are rebounding nicely, right across the region. So, not withstanding the fresh waves of COVID that we talked about just a minute ago, and some of the impact that that's having on economic activity in the short term, we are seeing, nonetheless, a continued rebound in earnings. Consensus estimates are for growth of, you know, 30% or more in earnings this year for Asian corporates, with very strong growth in the tech sector. But also, as you would expect, a rebound in the cyclical sectors, financials and some of the reopening stocks or plays that had been most impacted by the by the pandemic.

So overall, still a very healthy outlook. I think I've mentioned the inflationary risk already in some of the cost pressures, but I think, you know, that might take the edge off it a bit, but I think we'll still see a very healthy year this year in terms of earnings.

Cherry: And do you have a sense of which changes that have been seen during the pandemic will have longevity? I mean, things like cloud computing, or ecommerce or that sort of thing?

James: Well, I think there are a host of changes that are here to stay. You mentioned cloud computing, I mean, I think that's absolutely one that's seen an acceleration as a result of the pandemic and isn't going to reverse. You know, we've seen companies push faster and faster on their digitalization strategies and shift to the Cloud, so that's, that's key. Working from home, I think we'll, you know, my personal view is that that will moderate a bit and we'll see a kind of shift to hybrid, working with a split between home and office. But obviously that has implications for the real estate sector, ecommerce and again on the sort of digitalization theme, that has seen a big acceleration as in Asia as it has elsewhere. And I don't see that reversing. So that shift from offline to online, I think is structural and will continue to accelerate.

So, you know, I think within all of this, there remains opportunity. And it's certainly something that we're alive to and focused on trying to identify really high-quality companies, that might be a play on some of those structural shifts.

Cherry: Okay, and there have been some concerns about the shifting regulatory environment in China and in the internet sector, specifically. How are you viewing that? I mean, has it shaped your view of any particular stocks as a result?

James: Yes, it has - I think, in the near term, we remain fairly cautious on the China internet sector because of this regulatory uncertainty, and it's been ongoing for some time now. So some of the sort of uncertainty is clearing and we've seen some companies kind of maybe not quite emerge from it, but certainly a further along the journey than others. And it's getting a little bit clearer to decipher what the future is going to look like. Whereas other companies, it's still quite uncertain. So overall, I think, cautious at this point.

But looking longer term, I think we're still positive on the sector as a whole, I still see very strong growth opportunities longer term. And we don't think that the regulators are trying to sort of take down the internet sector I think they're trying really just to sort of catch up with the huge amount of innovation that's been going on in the sector in recent years, and bring it within the sort of regulated realm, and ensure fair play is at work.

So that'll take a little bit of time, it will mean a bit of change to some of the business practices and so on. But overall, I think it will find a new equilibrium, and the as I say, the long-term prospects are still very attractive.

Cherry: And are there any other kind of major risks that you've identified today?

James: So, I think COVID remains front and centre of the risk register. Fortunately, many of the countries are now emerging from those new waves. So India has, we've seen such a clear reduction in case numbers from the peak back in May, of that second wave, and elsewhere as well, numbers are coming under control again. But where vaccination rates remain low - and India would be an example of that - clearly, there's still a risk of further waves. So I think that's, that's probably the key risk. We've talked about inflation already and my views on that, but obviously, that's a risk factor too. And you only have to rewind back a few years to the so-called ‘taper tantrum’ when quantitative easing policy in the US started to be unwound and the impact that that had on emerging and Asian markets. So, we have to be a little bit cautious there.

And then I think just geopolitics will remain the big sort of macro question, with no obvious thawing of tensions between the US and China in particular - and I don't, I don't envisage based on what we've seen so far under the Biden administration, that we will see a reversal of tensions there, so that will remain a tricky dynamic to navigate.

Cherry: Okay, thanks, James. And then I guess, just finally, can you give your thoughts on that on the on the remainder of the year? Are you feeling sort of optimistic? Do you do you have any sort of key predictions?

James: Cautiously optimistic, I think is probably the right phrase. And I say that because, you know, in part, if I look at the fundamentals in Asia, as I said, we're still seeing a robust rebound in earnings growth this year. So that's, that's encouraging. And, you know, notwithstanding some of those risk factors, I think, will, will continue.

I think, also, you know, there is that scope for further stimulus and, and support from Asian governments so that will provide a bit of a cushion too. And then when I look at it relative to other markets, Asia remains, under owned within global portfolios, it has lagged global markets, year to date, so I think there's scope for a bit of a catch up there given still resilient fundamentals. And looking longer term, you know, all of those longer term structural attractions that we've talked about in terms of themes, those are still very much intact and, and continue to be as attractive as ever. So, I think that provides quite a sort of supportive backdrop for the remainder of this year.

Cherry: Thank you so much, James for those insights today. For any more information on the Trust, please check the website at www.newdawn-trust.co.uk. And thank you all so much for tuning in.

This podcast is provided for general information only, and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of abrdn Investments. 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 returns, return projections or estimates and provides no guarantee of future results.

Cherry Reynard: Hello and welcome to the latest in our abrdn Investment trust podcast series, I’m Cherry Reynard.

Today we're looking at Latin America and how it's emerging from the Covid crisis. With me today are Viktor Szabo and Brunella Isper, managers on the Aberdeen Latin American Income Trust. Viktor is responsible for the fixed income side while Brunella is responsible for the equity side, welcome both.

Viktor it seems fair to say that Brazil has had a tough crisis, could you just walk us through the situation today as you see it.

Viktor Szabo: Well I fully agree with you Brazil had a difficult crisis but it's not out of the woods yet I mean, if you look at the pandemic Brazil is in its third wave, infection rates are high, new cases are higher than ever before but on the positive sides I can say that Brazil has already administered 27 million vaccine doses - quite a nice achievement. Over five and a half million people have already received both doses, so they are fully vaccinated, that's slightly less than three percent of the population. Brazil initially had some supply issues with vaccines, but they are getting over it, now they're vaccinating around 1 million people a day which I think is a decent pace. We do anticipate some slowdown in the coming days but looking at the projected supply, probably by the end of the month the pace will gather again and then they will be able to vaccinate - well at least the most vulnerable people - by the end of July.

In terms of the data, we have seen some softening recently in the PMIs - so the high frequency indicators - but probably it has at least as much to do with mobility restrictions as with the slowdown in the automobile sector which is related to the semiconductor shortage which is a global phenomenon. Otherwise social mobility hasn't fallen as much as during the first two waves of the pandemic, clearly fewer people are staying home, especially people are conscious about getting to work and young people are really happy to move I think. That is quite important for the economy, so I think the impact of the this third wave is not going to be as great as the previous ones.

Cherry: And what about the other major countries in Latin America and in which you invest so, Chile, Mexico and so on?

Viktor: Well, the Covid cases are also on the rise in those countries, and we are seeing different progress in terms of vaccinations. Chile is clearly the leader not just in the region but also globally it has quite a strong position. They have already fully vaccinated 22% of the population and further 15% have already received their first dose, so they are quite advanced. That said, they still decided to reapply some mobility restrictions as the cases are rising. Uruguay is also doing quite well, they have fully vaccinated almost five percent of the population, however in terms of the other countries if you think about Mexico, Colombia or Peru, they are not doing great in those countries - just slightly over one percent of the population is fully vaccinated, which clearly indicates that they are in early stages of the program. Although it has been mostly supply issues but in some countries it is also the lack of political will to move ahead and I’m thinking particularly about Mexico.

If you look at the mobility data there are quite interesting divergence there, so for example Mexico's mobility seemed to increase and it is also reflected in the high frequency indicators both the manufacturing and the services PMI have been rising in Mexico. On the other hand, if you look at Chile or Peru we have new mobility restriction measures, the economy is much less open than in the case of Mexico, but here again even with those mobility restrictions I do expect smaller impacts on the economies as they learn to adapt to the new reality, to this new pandemic world.

Cherry:Okay and what does that look like in practice in terms of what are your assumptions about economic recovery across the region?

Viktor: Yeah, if you look across the region, growth expectations are not upbeat to say the least. The recovery this year will be clearly smaller than the recession we have seen last year so if you think about the longer term the GDP is not going to return to pre-Covid levels this year, probably we have to wait till well into next year to see the full recovery from the pandemic.

That said the forecasts are based on a strong Covid wave and slow vaccinations here and I think we have some reasons to be optimistic that vaccination will speed up. I think supplies will increase and not just come from the original planned imports but also I think by the second half of the year many developed countries will be in advanced stages where they actually will be able to export some of the excess supplies which they have purchased. As we know many countries have over procured just to be on the safe side and that I think will help the region. Does it mean we will see high growth figures this year? Highly unlikely but probably it will be better than what the market consensus is now.

Cherry: Brunella, I wonder if we could bring you in here just from the equities side of the portfolio - how has the Trust performed during the period and have you shifted it at all to accommodate the expectation of recovery?

Brunella Isper: yeah, thanks for the question Cherry. So, I guess speaking for the Trust, in our consolidated basis, if we look at performance for one year and in February 2021, we've had perhaps a story of two halves.

So, the first half of the year we saw that significant decline in asset prices across the board - both equities and debt - specifically in March right last year, when we had the pandemic hit across the board in markets. And then we've seen recovery in the second half, so if you look at performance, where the six month period will be very different from the one year figure. So one year, the fund, if you look at share price performance, was down about 6% and that's in sterling terms - against the benchmark which declined 11%, but then if you look at the six-month period it increased 14% and the benchmark increased just under 6%. So we have been seeing a good recovery since the break of the pandemic, however the fund remains on the negative side in terms of absolute performance and I would say its important to highlight that a large part of the absolute negative performance comes from currencies such as currencies in the Latin region, have declined broadly across the board against the Sterling in the period, I think all currencies declined - with the exception in terms of the major currencies of the fund - with the exception of the Chilean Peso, which strengthened in the period helped by the commodity prices boom etc. But Brazilian currency for example which is the fund's largest exposure was down 26%, so that more than explains the decline in the overall fund NAV.

So the performance has been difficult, we are seeing recovery and if we talk about the equity performance in specifics, the fund in the same period - the equity sleeve - saw a decline of just under 14% so more exacerbated than that portfolio. And we have been doing some shifts in the portfolio across this period, so we've taken advantage of the strong market volatility as I said, we've been seeing - I mean these two halves that I explained - so we've tried and take advantage of market volatility to add and back our holdings where we have higher convictions, so things like the Mexican lender Banorte or the Chilean lender Banco Santander Chile, are places where we allocated a bit more cash over the past year.

Some stocks in Brazil like the railway operator UMO as well as the Brazilian miner Vale and the pharmacy chain operator Raia Drogasil are also places where we took opportunity of volatility to increase exposure at more reasonable valuations and really express that conviction. And then against that we've reduced a bit of our consumer names exposure and places where we had lower conviction, slow businesses, where we saw a big hit in terms of the pandemic and where we had concerns over really the performance and against valuation. So for example we've exited the Brazilian brewer Ambev also a poultry producer and we've also exited Embotelladora Andina the Coke bottler based in Chile.

And we also introduced some new names to the portfolios, there was quite a bit of activity over the past year more recently the names that we introduced were an IPO which we joined, so quite an early stage opportunity to take advantage of the growing penetration of this specific category in the online space for retailing in Brazil. We also introduced the renewables company Omega Geracao which has exposure to mostly wind farms projects, so taking advantage of that I would say increased focus towards green energy and renewables not only in Brazil and Latin but across the globe.

And another name and an example of a new stock that we introduce is Groupo Mexico which is the holding company for the copper producer Southern Copper, so it's a way to get exposure to that asset at a discount and there we see a strong story around electrification trends and increasing infrastructure spending which has really been a tailwind for copper prices where the supply demand imbalance really justifies, and we see a positive outlook there.

So just a few examples of things that we have been doing, so we've been busy over the past year trying to really position the portfolio well to take advantage of the recovery always as we come out of this crisis.

Cherry: Viktor, perhaps you could give the fixed income perspective?

Viktor: Yes Brunella has already described the market movement, so I’ll probably just add that on the fixed income side we are now facing a reflationary environment - this is where inflation picks up as the economies recover and the central banks react to that with great hikes. This is typically not a great environment for owning duration so that's why we have rotated out of some of the long duration position particularly in Brazil.

Cherry: Brunella, you mentioned a couple of IPO positions that you'd taken there. I wonder if you could talk about the IPO market in a bit more detail, it seems that there are lots of new exciting companies coming to the market and that’s sort of diversifying Latin American markets and bringing new opportunities.

Brunella: Yes so we have been seeing as Viktor said in terms of the interest rate environmental though we're now seeing kind of a reversal and an outlook of rates rising we're still at record low levels in Brazil in particular of interest rates and also across the region which really I would say stimulates companies to come to the market. Also considering the level of valuations and the amount of value that they can raise in the capital markets which have been seeing a deepening in the region over the past year, so we've been seeing more activity in terms of IPOs. More recently perhaps important to say that this activity has been mostly limited to Brazil really, as we've not seen that many new offers coming to the market in all the markets, we've seen a few in Mexico, in Peru for example but it's only a handful and quite small offers. But in Brazil, there is definitely a lot of activity taking place in 2020 as in the total year we saw 28 IPOs in Brazil raising more than 110 billion reais for these companies - the largest of them was a health care company called Rede D’Or, they operate hospitals, and they were they raised more than 10 billion reais to fund their expansion plans. And for this year we have been seeing the market continuing to - we've seen continued momentum for equity offerings and equity raising in Brazil again so there is a pipeline of 42 equity issuances registered at the local regulator - most of them are focused on the healthcare space, information technology and staples which account for about half of those and to date we've already seen 22 equity offerings taking place so a lot of activities definitely that amounted about 34 billion reais - includes follow-ons but 16 IPOs which is a lot.

So I mean for us it’s great that still the market depth in Brazil and in Latin region as a whole can be improved to give us more opportunities to invest in quite interesting industries and where we see a lot of opportunities in terms of the sectors, I mentioned in healthcare space information technology, among others - there's a lot of activity also in the real estate space. So I think that that is very good for the development of the local economies and in particular the capital markets and to give investors more opportunities in terms of the companies that are available in the stock markets.

Cherry: Okay great thank you. I wonder if we can look forward a little bit now Brunella, could you talk a bit about the mood amongst Latin American companies today - are they generally optimistic, are they confident on earnings or are you still seeing the pandemic sort of weighing on sentiment?

Brunella: So the mood, I would say that is quite mixed really according to the sector and the specific company that you're talking to, so how the sort of sector and industry has been really impacted by the pandemic and if they are or not beneficiaries of the more positive global backdrop that we're seeing or exposed to for example the U.S economic recovery and rising commodity prices as well - so it really depends.

I would say that we have been seeing some companies really take advantage of the increased penetration or the acceleration of the penetration of digital and e-commerce to really tap on that, to grow their businesses, invest more and really take advantage of how this mobility restriction has shifted consumption to online. So not only the more obvious names such as e-commerce groups like Melee that we have in the portfolio for example, but less obvious things even like Raia Drogasil, the pharmacy chain I mentioned, they had been making already quite a lot of investments in terms of their omni-channel delivery and even on their healthcare platform, so we've seen that being speeded up throughout the pandemic and them really outperforming peers and taking advantage of that. All the things like even the banks which have their online capabilities being able to reduce the amount of branches and offer more services online and make the businesses leaner, so I mean real opportunities to make businesses more efficient and come out stronger from this pandemic even the sectors which have been more hit in terms of consumption, things like the shoemaker Arreso, similarly to the pharmacy chain I mentioned, they had been investing in omnichannel and we're able to capitalize on that to continue selling through different channels and mostly online.

So I think there are pockets of growth in terms of countries, obviously Mexico and those companies more exposed to the U.S manufacturing sector and exports. There we really see a lot of optimism and likewise commodity groups or energy groups benefiting from the rising in the underlying commodity prices, so we've seen quite a significant improvement in outlook for earnings for these particular sectors. So yeah the mood is mixed but on the margin I would say there's quite a bit of optimism from companies on the ground and on what they can deliver now and even more, once recovery comes through to really take advantage of that operating leverage when we see upline recovery specifically for businesses which have seen quite a halt in activities during the pandemic.

Cherry: And do you find being based in Sao Paulo gives you sort of additional insight in into that sort of mood and what's happening?

Brunella: Yeah it definitely does even though we are all mostly based out of our homes and working from home for more than a year now, so not really being able to meet companies face to face, I guess having the ability to use digital platforms and all that technology to communication among our teams and then also with companies, has really allowed us to keep very close contact with all our holdings, with also potential new opportunities to invest, I think there has been an increased access to shareholders and potential investors in the market enabled by technology and I guess that really allows us to be very up to date with what's happening with companies, what's happening on the ground and also to do our engagement works on the side of corporate governance continuing to vote also enabled by all the technology that offers the sort of proxy votes, so I think things have continued to work quite well throughout the pandemic in terms of our contact and our ability to do our investments in-house research.

Cherry: Viktor, political risk always kind of looms a little in Latin America, I mean do you see any political risks emerging and if so where are the pressure points.

Viktor: Well Cherry, politics is never boring in Latin America as you might well know it. Even before the pandemic I mean we have seen the election of anti-establishment populist presidents, we have seen civil unrest, you know in Colombia, in Chile, we have seen a big corruption case spreading into the whole region impacting governments and then we had this pandemic which brought the deepest recession in decades, health care crisis in a few countries, a big spike in unemployment. Yet surprisingly this has not led to political instability, even in countries where populist leaders have clearly mismanaged the whole pandemic - the public dissatisfaction hasn't boiled over which is surprising a bit, but maybe also tells you something about the political maturity of the region.

So we have a few elections coming up which might help to kind of judge the public sentiment, one of them is in Chile which was postponed a bit that's the vote on the new constitutional assembly - quite interesting because the country is now redesigning its social contracts, we'll have a new constitution, so it will be quite interesting to see how the whole thing will play out. Before, towards the very end of the year, we will also have presidential and parliamentary elections. This weekend we have elections in Peru, a country which is now on its fifth president in so many years, they also had big corruption issues and the populist congress and just as few weeks ago it looked like we will end up with a left-wing candidate Yohny Lescano running against the far-left candidate Veronika Mendoza, which was clearly quite a dangerous mix for the markets. Now we see actually an economist Hernando de Soto also getting into the race with good momentum and this race is as open as it can be. We have five candidates with decent chances of making into the second round, there is a high proportion of undecided voters, so it will be really interesting to see what will happen in the next few days.

And then later on in the second round we'll also have midterm elections in Mexico in June, we'll see the indication of how well the anti-establishment president Lopez Obrador is doing. He is also one of the deniers of the severity of the pandemic and also one of the rare leaders who decided not to pull out the fiscal bazooka and actually was quite restrained while all other countries in the region have provided huge support both in terms of fiscal and monetary policy to the country. So we'll see what the voters will have to say about that.

And maybe one last thing which we can see across the countries. Clearly the countries have spent a lot last year to offset the impact of the pandemic - someone will have to pay the bill. Debate is ongoing how the fiscals can be put back in order, one common theme we see across the region is the willingness to tax the rich, which is not necessarily a problem for a region which is famous for its high income inequality, but we have seen that Chile and Mexico they already propose to introduce taxes based on individuals net worth but only to really high net worth individuals. Colombia is preparing a fiscal package which will also include taxes on the rich, in Uruguay the opposition has proposed such a measure and Argentina and Bolivia, and the region have already approved those. So it will be interesting to see how that plays out and what additional measures will the governments find to please the population.

Cherry: I wonder if we could bring all that together now and just talk a little bit about how optimistic you feel about, you know, the next 12 months in Latin America - Brunella, can I put that to you first?

Brunella: Sure I can give some brief comments with the angle of the equity side. So I think one important aspect to consider when we talk about outlook for the next 12 months is really how well the rollout of vaccination is conducted in the region and how the economies can really see it through this pandemic, so that's quite crucial really for businesses to return to their activities day to day. But I would say that besides that, what we have seen on the ground and talking to companies is, many businesses actually have over delivered in terms of managing their balance sheets, showing up liquidity and being quite quick to react to make the businesses leaner and more efficient to be able to operate under significant stress and more difficult environment. So I would say that if we do see an outlook for economic recovery really kicking in, there is quite good reasons to believe that earnings growth potential are very powerful and aside from that what we see in the region as well is that valuations are quite cheap when compared to their historical levels but also comparing to emerging markets and global equities as a whole, so there is I would say quite good opportunities there if this earning story really kicks in and also in terms of out performance or really just returning to the levels of valuations that we've seen in the past, there is quite good reasons to be optimistic for the next 12 months in the Latin Region.

Cherry: Great and Viktor same question to you if I may

Viktor: Yeah, I'll touch upon valuations first because we have seen a significant rise in yields across the entire region - which is probably correct in a sense that it reflects the end of the rate cutting cycles we have seen and also the start of the monetary posing tightening in some countries, but also probably the weaker fiscal position of the countries also contributed to that increase in the yields, because that obviously means increased government bond supply on the primary markets. So long yields are now looking quite attractive, but we might need to wait for inflation price to peak in the region before seeing a better performance from the bond markets.

And more on the macro side, I mean the region has once again proven its resilience in the face of a quite huge external shock. I mean the region has been through a few of these shocks over the past two, three decades and has always been able to stand up and continue to develop. I think it will be the same this time around as well furthermore we have seen quite a decent improvement in external balances across the board. If you look at the current commodity environment, it is quite favourable, so we have to see how will the region cope with the need to improve fiscal balances and restore growth. I’m hopeful that, by the back end of this year most of the pandemic will be behind us. As Brunella mentioned, the rollout of the vaccinations will be quite important in assessing how fast can this recovery happen and once it's done, probably we can focus back again to the structural reforms and the region will have a chance to reach its potential.

Cherry: Great thank you Victor and Brunella for those insights today. You can find out more about the trust at www.latamincome.co.uk, and please do look out for future episodes and once again, thank you so much to everyone for joining us.

Cherry Reynard: Hello and welcome to this abrdn Investment Trusts podcast, I'm Cherry Reynard.

With me today is Thomas Moore, manager of the Aberdeen Standard Equity Income Trust. We'll be discussing how UK Equity Income is bouncing back after a period of weakness and Tom's strategy for the recovery, welcome Tom.

Now the Trust has had a strong run over the past six months, can we start by talking a bit about what's driven that strength?

Thomas Moore: Hi Cherry, yeah thank you very much. Yes, it has been a strong recovery, we are seeing a lot of strength driven by I would say four aspects – if I call them all ‘The Four E's’.

So, we start with Events - events have been positive for our positioning. The Biden election which has led to some hope of reflation, you can see the multi-trillion infrastructure bill going through and potentially a green deal as well, we’re seeing that feed through to the economy boosted of course by the vaccines - so Events.

Economics, that's feeding through to Earnings - the third ‘E’, we're seeing some very strong development in our company's earnings and that's of course feeding through to dividends as well which is great.

And I would characterize the fourth one as Extreme Market positioning in terms of sector and stock positioning that was extreme going into the Autumn. Even when the rally in stock markets had begun back in March after the Covid 19 initial outbreak, you saw that it was actually quality stocks dropping the rally in the first few months and we found that period to be quite frustrating because we saw lots of value in our portfolio, but it wasn't coming through. We needed those events, we needed the economy to turn, we need the earnings to turn - that's now all happening and we're seeing very strong performance in our NAV coming through which is very exciting

Cherry: Great, I mean, are there any areas you'd highlight in particular? Specific sectors that have done well or that kind of thing?

Tom: We're pretty excited about some specific areas Cherry, so if we think quickly about what those are.

Well actually the first area I would say is that the UK domestics and the financials that we've held for some time now, seeing tremendous value in those. Those were held down by the lack of economic growth that we saw really since the Brexit referendum, so it's been a long period of those stocks being cast aside by the market. They were always good companies, they were always good strong high ROE businesses that had the potential to deliver, and we just needed a catalyst for them, and that catalyst has now arrived, so I'd say that those domestics and financials are now getting to work which is very exciting. I think, I think it's still early days - but they are they are certainly starting to work which is great.

I would also say that Emerging Markets and mining in particular is performing very strongly. You know what, Emerging Markets Cherry, is what's interesting about it is that they are not reliant on all these government handouts that we're seeing in the UK and the US and other western economies, so what we're seeing with the emerging markets is that these are countries that are standing on their own two feet and I think that's going to allow them to come out of this Covid situation very strongly.

They don't rely upon, you know zero cost bonds, really, they haven't got access to zero cost bonds. And I think also what we're seeing is a sort of super cycle developing, potentially in areas like mining, because of course you know actually, if you're printing lots of money in the west, that money's got to go somewhere and we're seeing that money going into scarce assets - whether it's property or whether it's housing or whether it's copper for example. You know, actually the things that are scarce in the world, you're seeing good asset inflation in those things and so we're positioning this portfolio to benefit from, you know, both the domestic reflation that we're seeing here in the UK with our domestic positions and our financials positions, but also this Emerging Market resurgence that we're going to see.

Cherry: Great, now, many people will be taking an interest in the Trust for its yield. I wonder if you can talk a bit about what's happened with dividends in the Trust over the past 12 months?

Tom: Yeah so 5.8 dividend yield as I sit here today - I'm looking at my Bloomberg screen that's the historic dividend yield. So, if you look at the four quarterly dividends that were paid through 2020, the last one was I think declared on the 20th of February, we went Ex on the 12th of March. If you add those last four dividends up you get 20.6p, so that's a historic number that's what we've paid in the last four quarters. Now if you divide that by today's share price, you get to 5.8% - that's dividend yield.

Now some people will look at that dividend yield and they'll say – ‘that seems a bit high’. Now I think we need to put this in some context because it's rather interesting to me.

We spent much of the last 10 years - so I took this portfolio over in 2011 - rebuilding reserves. It was a period of very - you know if you think about it as the sort of fixing the roof - well we fixed the roof when the sun was shining. We built up really good reserves so at the end of our financial year 2019 - September 2019 - we had 13.7 months of reserves and that fell to 10.5 months of reserves in the year to September 2020.

So actually, we went into this with decent reserves, we were, we were making sure that we were paying out what we had, what we built up. The fact is that we did deplete reserves, so that number was a downward trend - 13.7 down to 10.5 - of course, you know having fixed the roof when the sun was shining, we then had the capacity to pay out. You know, you can call it a rainy day, but it felt more like a hurricane last year than a rainy day and I hope we don't get Covid 19 repeating every year, I certainly don't think we will, and I think you can see that the number of cases falling in countries that have vaccinated their population, is I think rather exciting.

So, 10.5, now we then adjust that for the final dividend, the months of reserves falls to 7.5. So yes, factually, historically, yes we've now, you know that 7.5 - it's still a lot of reserves and what we're now seeing if we look forward is, we're seeing companies coming out with extremely encouraging statements they are reinstating their dividends if they’ve stopped paying - and about 30% roughly of our portfolio at the moment have interrupted their dividends about 60 to 70% percent of the current portfolio has been paying continuously.

So, if you think about that as actually, you know, those stocks that have interrupted their dividend payments are starting to pay again, that's encouraging. The companies that have been paying continuously in many cases are still growing their dividends, these aren't down and out stocks, these are often companies that are - well most of them are finding life is getting better.

So actually, so that that's all very encouraging. So if you then, you know think about well in the context of some decent reserves and actually at the margin things feel like they're getting better for the economy, if you look at the nominal GDP growth forecast for the UK we're talking about 7% this year and many people are expecting - some people are higher some people are lower - but that sort of ballpark seven percent nominal GDP growth - the outlook for dividends for the market seems okay, and that sets us up I think for the board to make a decision and so I'll leave it for our listeners to decide what they think.

Cherry: But you're reasonably confident companies will come through with their dividends for the year ahead and this can you know support payouts going forward?

Tom: Certainly at the company level Cherry, absolutely yeah. And so what I've been doing over the last 12 months is sifting through the UK stock market and listening to the analysts of our 15 strong team here at abrdn and making sure that I'm positioning the portfolio in a way, which allows the portfolio to generate some decent dividend growth and I think that, that's been my focus and so that's what I can do.

And I think the external tailwinds that we're now seeing as the economy continues to recover very strongly - you know that kind of nominal GDP growth that's consensus - it's you know that's, not been seen for well, throughout our lifetimes actually - that's a, that's the kind of nominal GDP growth rate that is a significant tailwind. I think it's worth thinking actually about what that means in terms of sector rotation because we've positioned this portfolio to make sure we will benefit from any sector rotation that happens.

Cherry: Actually, that was going to be my next question so, you know the changes you've made to the portfolio over the last six months, I mean, are there are there any highlights in particular?

Tom: Yeah well, it's really just being quite clinical and laser focused on the sectors and the stocks that are going to be beneficiaries of this new environment. So, really you know, actually every day coming in making sure that I'm absolutely 100% focused on which stocks are going to benefit from this new environment. So really you know actually this is the time to go through the portfolio and make sure that we are exposed to companies with the best earnings upgrades potential on attractive valuations, and so you know I look at the portfolio holistically, I think about it in terms of sectors and themes, I think about it in terms of risk factors like the bond yield move has been helpful in the last six months, I'm aware of that. I'm also aware of course of the pound recovering, it's currently 139 as I sit here today - that's a big move. I think you and I have talked about Brexit in the last few months, it doesn't get mentioned anymore you know. It's bad news if you're a shellfish exporter but actually if you're the CEO of a company in the UK it's unlikely Brexit is at the top of your mind - the pound is therefore rallying, we're positively exposed to that.

So, I've thought about this portfolio very hard, you know, made sure that we've got plenty of exposure to financials because I think those are going to be key beneficiaries. Made sure I've got plenty of exposure to sectors like house builders and the things that go into houses like sofas, so DFS, market leader approaching a 40% market share, you know there's some decent pricing power there coming from that. Some of their peers have gone by the wayside in the last year so yeah, their time I believe is coming and I think we've done a lot of work on those so yeah that's all quite encouraging. And then and as I said, you know making sure we've got plenty of exposure to emerging markets, you know I've built a position in the last three months in a company called Vivo energy. They distribute fuel in Africa mainly under the Shell brand and you know it's been a really tough Covid for many countries around the world including in in parts of Africa.

You know people haven't been driving as much as they were, that stock fell quite sharply. We think it's trading on a really attractive free cash flow yield and dividend yield, you know and you can see that the dividend in consensus forecasts puts quite an attractive valuation and that's said to be covered by free cash, so a company like Vivo Energy, we can hold in the portfolio and benefit from you know the unwinding of these lockdown measures.

Cherry: Great and are you optimistic that the recent rotation in markets can continue or is it actually quite dependent on vaccines or can the recovery continue independent of those considerations?

Tom: That's a really good question. So I think some people – I see people dismissing this rally as a dash for trash and I see it as you know like, people wanting to sort of believe that this is a sort of one-off thing, that's just gonna, we're just gonna go back to the way things were with all the quality growth stocks out performing and all the sort of tech stocks out performing, the consumer staples stocks out performing.

Afraid that's wishful thinking, you know what we're seeing here could well turn out to be a sustained rotation you know, and I do think that the market's going to take time to adjust to these new realities, you know that there is significant output gap in the global economy.

That means that policy makers are really sensitive about raising interest rates, that means we've got monetary policy on our side, we've got fiscal policy on our side because austerity is not something policy makers want to keep pushing. They've learned their mistakes from you know George Osborne and his counterparts around the world - even Germany has stopped talking about austerity you know, that was the country that couldn't hear of any inflation. So, it's clear to me - and you know I'm sure many listeners have looked at economic history and have looked at you know the trade-off between economic growth and inflation - and they'll know that at different points in the past, policymakers have emphasized inflation or economic growth. It's very clear to me that they're emphasizing economic growth right now, they're going to let things run hot for a bit.

You know, I've been talking quite extensively with my Fixed Income colleagues in the last couple of weeks - they're very much aligned on this. It's very clear to them that inflation is going to be allowed to run hot, that we will get some prints in the next few months which are from inflation, which are going to be a bit shocking to people because economies around the world are reflating. You know, it doesn't mean that there's going to be a sustained period of high inflation but there will be there will be times in the next few months when people do question, you know, how they're positioned, when they see that and they see bond yields responding and when they see the GDP growth prints coming through.

So, this isn't a one-year thing - you know, let's think about it. So even if it is one year or two years, you've got to think about how stocks are valued anyway. So it's not like you know, you could say that quality growth stocks are desperately cheap right now anyway - they're not - they've had years of outperforming, they're pricing in sustained high returns.

So, hold on a minute, so let's look at it the other way - let's look at value stocks. Some of these cheap cheaply valued stocks are on dividend yields that imply that those dividends are unsustainable, but earnings are going up. So what happens when people find out they are sustainable? The thing that could move is the share price there, because that's what adjusts and I don't think we're fully through that adjustment process yet Cherry.

Cherry: What about ESG in all this? I mean ESG is often seen as slightly incompatible with with a value approach but is that is that really the case?

Tom: Yeah, it's something we talk about a lot. So, I think there's a, there's a maturity going on with ESG. I think at first clients might have been wowed by people saying that they observe the MSCI tear sheets and ‘MSCI says a stock is this or MSCI says a stock is that’. And we certainly, when we speak to company management teams there is some frustration actually building here that what a central bureau says the ESG score is on a company can be quite different from the reality. So that's why it's important to delve deeper and ask questions and have your own ESG analysis, which is what we do on the desk - we also have a centralized ESG facility. So really, those asking the questions beyond what's on these fact sheets, you know, and actually saying a company, if a company - the way I think about it is this Cherry. If a company is listed, what can we do to help improve outcomes, is there things that we can do to make sure that that company does the best it can do in terms of E and S and G - all three - and actually you know, we can be good stewards. If a company delists, I think you're reading about this at the moment aren't you, reading about companies like Anglos they're divesting their coal stake - well their coal business. Now what good is that going to do the world - so that coal business will still exist. So I think there's a sort of growing up phase here with the ESG which is many of these companies are still going to exist whether they're listed or whether unlisted we need to play a role in make sure those companies behave.

Cherry: Great okay and then just finally, if we could chat about, a bit about the risks that you're looking out for in the next 12 months. I mean if you've mentioned inflation there but you know possibly higher interest rates - what kind of keeps you awake at night?

Tom: Part of it Cherry is what kind of inflation it is? So, it's actually like a different language this bond markets, I'm sure that many of our listeners will relate to that. So, you know actually what kind of inflation we have, you know, and what the bond yield curve does.

So actually, let's think about this. So, you know, let's say talk about for EM for example - Emerging Markets. So Emerging Markets can perform when bond yields are rising historically that's shown to be true. If that is driven by nominal GDP growth and accompanying that normal GDP growth you get some inflation and you get bond yields rising but actually all those things together can be a perfectly acceptable environment for Emerging Markets. What the stock market doesn't want to see is some kind of inflation surge which isn't accompanied by growth because that's all together a different kind of inflation. So, I think yeah, what kind of increase in bond yields, what's driving the increase in bond yields will be important for sector rotation, but I do think you know actually, let's go back to basics here.

Long dated assets don't like higher discount rates or higher bond yields okay, so that's where, that's where I think all of our listeners need to be thinking - how is your portfolio in terms of that big picture question? If you have lots of tech - how is that going to perform, having performed so well when discount rates are falling. Are we anchoring off a different set of circumstances that’s happened for a long period of time - particularly intense by the way since about, 2017/2018. So, you know let's be careful that we don't anchor off circumstances that may well have changed. So I think that's the key question that I think I would encourage our listeners to ask. And then how is your portfolio diversified, you know is your portfolio having performed very well in certain stocks and funds and sectors, is it ready for this this change that that may well be coming or may be happening now frankly.

Cherry: Great okay, we'll leave everyone with that question. Thank you so much for your time and insights today Tom. Listeners can find out more about the trust at www.aberdeenstandardequityincometrust.com and thank you so much for tuning in.

Cherry Reynard: Hello, and welcome to this abrdn Investment Trust podcast, I'm Cherry Renard.

Today I'm talking to Andrew Lister, manager of the Aberdeen Emerging Markets Investment company. We'll be discussing the opportunities in emerging markets today and how they're being reflected in the portfolio. Welcome, Andrew.

Andrew Lister: Thank you very much.

Cherry: Now, today, it seems that emerging markets are, on the one hand, they're benefiting from global economic recovery. But they're also contending with some wealth like crises on the other. I was wondering if you could give us a big picture view on the state of emerging market economies today?

Andrew: Yeah, I think you're generally right with the question, they are definitely benefiting from the economic recovery and post COVID the world is a high growth place and that has to be positive for emerging markets. So yes, definitely participating in the economic recovery and that's been reflected in performance since the lows of March last year.

In terms of the crises, I mean, I'd say they're probably not really crises, but they're certainly plenty of headlines around as there always is in emerging markets and the kind of topic that investors are concerned about today. The big one is obviously, you know, something of a clampdown going on by regulators in China with regard to technology companies, which has had a big impact on their performance so far this year, and then also flashpoints of either politics or COVID related news in markets and economies like India, Brazil, or Turkey. So yes, the usual balance of risks and opportunities. But we think definitely more opportunities than risks at present

Cherry: And which countries are likely to be the strongest beneficiaries of the recovery. I mean, you’d assume it would be the commodity producers - but is it more nuanced than that?

Andrew: I think it's a bit more nuanced than that. I mean, certainly that's been a trend that has been playing out in the last kind of six months or so which is near to the end of April, I'm talking about what has been a very interesting period, because you have seen a very sharp reversal of fortunes between the markets that performed very strongly initially in COVID, because they had dealt with the pandemic well, and quickly got back on track for growth very rapidly, and the performance of those that suffered, perhaps a more drawn out pandemic, that are still suffering from rising or substantial number of cases.

And almost coincidentally, those two things do map on to commodity and energy countries. So the strong response from China, Taiwan, Korea, which also happened to have those technology names that I've already referred to, versus the likes of Russia, the Middle East, Latin America, Africa, which tend to be more commodity driven, as you say, and also have generally had a more difficult pandemic. So ,the last six months, you've seen a very sharp rotation actually in performance between the commodity producers and exporters and the likes of China and China being the standout market, which really hasn't gone anywhere for the last six months, which is a little surprising. So yes, we are seeing at the moment, that higher energy prices, high commodity prices are benefiting some of those more cyclical markets, which also happened to be value markets, more value markets, so it's really been a perfect storm for some of those economies in that you've had value outperforming growth, you've had commodities and cyclicals outperforming non cyclicals and that has really favoured markets like, for example, Mexico, Brazil, South Africa, Russia and parts of the Middle East, which performed extremely strongly of late.

Whether that continues or not is anyone's guess. But certainly, if commodities continue to trend higher, based on the rapid recovery that's being priced in post COVID - we're obviously not there yet but it's certainly been priced in by markets - then you'd expect to see those more cyclical commodity related economies continuing to perform well. Not least because they finally have some contribution coming through from their currencies, so, it's not just the commodity companies that are benefiting, it's the currencies that are in those countries that have been strengthening and adding to your returns in the recent past.

Cherry: And against that backdrop, how have you adjusted the portfolio? I mean, are you trying to keep a balance between the two sides or are you, have you been positioning for recovery?

Andrew: We haven't adjusted an awful lot. I mean, we were positioned for the performance of the last six months, prior to the last six months. So we had, you know, we took some pain and then the last six months have actually been very good for us.

So, we are overweight - Europe, the Middle East and Africa. So markets like those I've just mentioned Russia, Sub Saharan Africa, the Middle East, and we have been underweight China. So, we haven't had to reposition, we're pretty happy with the way things have been playing out recently. And we haven't, you know, all we've really done is taken some profit, actually.

So, the emerging markets were incredibly strong at the very start of this year. And they peaked kind of towards the end of February. So, we were fortunate to take some profits around that time to pay down gearing. So actually, that's really the only change we've made to the portfolio is to take a little bit of risk off towards the end of February, beginning of March. Now, obviously, markets have softened a bit. And, and we're looking at, you know, how we might put some of that liquidity back to work.

Cherry: And looking a bit longer term, in the past few years, it's been very, very much China and these big tech names that have led emerging markets higher, that's kind of changed more recently. But on the other hand, you feel that, in the longer term, some of these big tech names may be kind of beneficiaries of the different landscape that emerges post COVID. So where are you on those kind of ‘big China, tech names’ - you said you were underweight China overall there, but what's your longer term view?

Andrew: So, the way we invest our fund, we tend to be underweight with the largest stocks in the index, almost as a structural result of how we invest. Allocating to active stock pickers in emerging markets, you know gets us a significant overweight to small and mid-caps, and that's been a pretty consistent position for us over the very long term.

So, we're underweight some of those technology names more by virtue of the way our underlying managers invest, rather than because we have a negative view on them. I think what's happened is, is a little bit of a reality check, you know, these companies are not going to be permitted by the Chinese authorities to branch out into every aspect of your man on the streets life. It's one thing to sell products to them, they get delivered to their doorstep, or to be the means by which they communicate with their friends. But I think the clamp down you're seeing now is really saying that doesn't permit you to start other lines of business - financial in particular, for example, personal loans has been a real area where the government is trying to clamp down.

So, we think it's just a bit of a reality check. We just certainly don't think these companies have gone ex-growth, you know, they're huge, well run companies. But certainly, valuations had run up to a meaningful extent, helped by the fact that in China, you know, you had this country that had dealt incredibly well with the pandemic, which attracted a lot of capital. And so you're really just having, you know, a pullback. It's a meaningful one, it's about 30%, from recent peaks for many of these companies. But we certainly don't think it's the fact that these companies have gone to ex-growth.

So, we maintain a balance. We prefer - all else being equal - to buy companies that have attractive growth at attractive valuations as well. So, I do think the emerging market universe is broad enough, is deep enough that you know, you will always be able to find opportunities where you can have both - where you can have your cake and eat it of buying companies that grow very nicely over the long run, possibly the dividends, and that also trade at undemanding valuations which have scope to expand in the future.

And I think that the rotation you've seen is partly reflective of that, that just some of the areas we've already talked about cyclicals, financials, mining energy, you know, they've been pretty unloved places for a considerable period of time in emerging markets, so it's good to see them having a burst of life, but again, doesn't mean that's going to continue indefinitely. I think what's healthy, though, is that you know, the returns are broadening out from just that very small cohort of tech names in Asia. And reminding investors really that there are other things to buy in emerging markets. And you should probably have some exposure to a lot of what's out there rather than just focusing on a very narrow opportunity set in a single market.

Cherry: Okay, and on that. I mean, are there any other themes that you'd highlight in the trust today?

Andrew: Well, I think as I said, we're, we're happy with the way we're positioned. I think we're particularly happy with the exposure we have to small caps of the moment because we think that is a very rich seam of investment opportunity for active managers. And you know, with that backdrop that we've already discussed, you know, we do think it's a very good environment for active managers, stock pickers, in this asset class at the moment to be to be poring over the things that are less well researched, less well covered by analysts and, you know, digging out laggards or simply mispriced opportunities where, you know, perhaps companies have had a much better experience in the last year than the market is giving them credit for. So, a bit of volatility helps in that regard, because your active managers can benefit from that volatility, we've certainly had no shortage for that in the last year, so we think small caps are a very interesting area of the market. They, like everything else ex- tech, have been underperforming and have really gone sideways for a number of years. So in a world where equities at large look expensive across many of the developed markets, you know, we think that's somewhere that people can kind of really look forward to generating some good returns almost irrespective of what happens in the rest of the world.

Cherry: And emerging market dividends were reasonably resilience last year, I think, certainly compared to UK dividends. What's the outlook there? Do you see a reasonably healthy year ahead?

Andrew: Yes, I think so. I mean, all the evidence to date is that they're bouncing back very quickly. As you mentioned, yes, the UK, the average UK investor can certainly benefit from some diversification into emerging markets if they're looking for income. And so, we're seeing very much that it's still going to be an asset class that you can invest in for yield, you know, 3 to 4% is quite achievable in emerging markets, that should be a 3 to 4% that grows over the long term, which is what you want as a dividend investor, and you should be able to catch some capital gains as well. So we still think the income argument for emerging markets is a very strong one. And what's interesting at the moment is that actually, as bond yields come down around the world, for local investors in emerging markets, equities are looking attractive as well. So, you know that the fact that locals will likely be buying more equities going forward is also, you know, another underpinning for the, for your capital value in emerging markets.

Cherry: And the volatility inherent in emerging markets can be something of a deterrent for investors, how can investors go about managing that, that volatility? Is it, you know, incorporating fixed income or, you know, putting regular savings in the market? Or what would you suggest?

Andrew: Yeah, you’ve beaten me to it. So those two things would be number one and number two. Certainly, it's, it's an asset class that lends itself to that kind of drip of a regular savings approach. So, I have the same into this fund, it goes in monthly, and it builds over time, and certainly helps to dampen the volatility. If whilst you're doing that, you're also reinvesting the dividends, then obviously, you're buying irrespective of whether the headlines are positive or negative. And I think that's a very handy kind of arm's length approach to have where you, you take out some of the emotion of it, and money goes in, even if you look at last year, you would have been buying the asset class right at the March lows, because you've got that in place. And then also Fixed Income, you know, fixed incomes had quite a difficult time in the last six months in emerging markets. And you're now looking at yields of 4 to 5%, quite achievable. And very deep markets, actually, for sovereign bonds and corporate bonds in emerging markets now. So, combining an element of that, as well will certainly dampen your volatility, and same applies - no reason you can't buy that, you know, on a monthly basis or with reinvesting your income.

Cherry: Right, okay and then, just finally, I wonder if you can talk a bit about how you're feeling about the year ahead. Whether you're optimistic, the kind of risks you're monitoring?

Andrew: Yeah, sure. So, if you'd asked me eight weeks ago, I think it would have been quite a different answer. You know, at that time, emerging markets were outperforming developed markets very significantly year to date. And there was a huge amount of optimism and capital actually flowing into the asset class. That's really cooled down in the last couple of months, not least, because of what's going on in China, but also resurgence of COVID in some of the markets like India and Brazil.

And so at the moment, you know, we see the asset class looking a little bit unloved again, and we think that's always a good time to be putting more money to work. It's certainly reflected in the discount that the trust is trading on at the moment, which at about 14% to NAV, I think is extremely good value, as I said that dividend income is not going away anytime soon, so the Trust yields 3%. And we think the valuations are more attractive, as I said, particularly if you're willing to do the hard work of finding those more unloved regions of the world where valuations you know, range from attractive to frankly compelling. So we think there's plenty to be positive about. We don't see any reason why if the global economic recovery continues as being priced in by markets, that emerging markets participate very fully in that growth and that recovery, so I would say optimistic for the rest of the year.

Cherry: Okay, great. All right, thank you, Andrew, for your time today and for those insights. Thanks to our listeners for tuning in. You can find out more about the Trust at www.aberdeenemergingmarkets.co.uk and please do look out for future podcasts.

 

Macro Matters: emerging markets and the covid crisis

Stephanie

Hi, and welcome to Macro Matters. My name is Stephanie Kelly, and together with my co-host, Paul Diggle we'll be guiding you through the complex world of politics, economics and markets. We spend quite a lot of time on the podcast recently talking about what COVID means for major markets in the developed world. We talk a lot about the US, we talk a lot about Europe and the UK. But what about emerging markets? How have they fared through this crisis? And what will the short and long term impact be on things like economic growth and on political risk? To help me answer those questions today, I'm delighted to be joined by Bob Gilhooly, our senior EM Economist at abrdn, and Ed Glossop has just joined us as our EM, economist. Thanks both for coming on the show.

Bob

Thanks. Great to be here.

Ed

Yeah, likewise.

Stephanie

So let's kick off just by talking about the EM experience of the COVID crisis overall. So how have the challenges of emerging markets differed from developed markets on those kind of key COVID issues, we talk about vaccines and health systems and economic damage? Maybe, Bob, I'll go to you first.

Bob

I mean, I guess kind of fundamentally, many of the challenges are kind of the same between EM and DM, but I think we'd see that the tools that they have to face these challenges are often quite a bit weaker. And you know, the trade offs themselves can be a bit kind of Starker and harder to manage. So I guess kind of right, rightly or wrongly, many emerging markets, like developed markets have been kind of trying to balance the strain on health care, versus the economic damage, that imposing restrictions to control the virus causes. And the ability to emerging markets to provide economic support is typically much more constrained, though, making it much harder to kind of lock locked down forcibly. We turn to health care, the health care strain is, you know, it's clearly a function of, of both the quality of health service, which can vary massively across the EM landscape and case loads. And, you know, we've done a bit of analysis looking into this, in Latin America and Eastern Europe tend to actually kind of outspend and outrank emerging Asia, for example, in you know, kind of measures to Universal health care provision, kind of numbers of medical staff kind of skill to to population, but the strain overall in Asia has has clearly been, you know, much lower overall, reflecting the ability of the authorities within Asia to manage the virus much more effectively. So emerging Asia generally actually outperformed and even outperformed the US and Europe. Because of this, in the short run, economic damage reflects, you know, the severity of restrictions and structure of the economy, it can be quite hard to judge how tightly restrictions are an emerging market, in practice, it can be a bit of a gap between the kind of rules and the actual enforcement. And this might be a bit wider in emerging markets than developed markets. And emerging markets tend to have a higher share of informal workers, and also higher shares and manufacturing and agriculture to develop markets, which changes I guess, the nature of the shock, you know, when you're adding up the kind of various sectoral impacts across the board. Really, only time is going to tell how bad the long run damages. But given more limited access to vaccines, EMs on the whole are facing a longer duration shock, and one where it's more difficult to kind of provide the fiscal or monetary support that goes along with it. So really kind of raising the risk of think of greater damage. I mean, it does, of course, vary hugely across EM. Some high income, emerging markets, specifically Israel, also Chile, are actually doing pretty well, in vaccine procurement. You know, Russia and China also stand out a lot benefiting from the role of vaccines and manufacturing capacity, but many emerging markets where they are still to secure enough vaccines to even kind of try to cover their whole population.

Stephanie

So there's quite a lot of stuff in there that I'm actually keen to do just a little bit of follow up, and then I'm really keen Ed to bring you in as well. One is, I guess, you mentioned EM Asia coping particularly well, and is there any kind of evidence that they've benefited from having been through previous pandemics or like I'm thinking of SARS? I mean, was that an important marker? And I guess the other question, which is quite a popular headline is that there's a kind of a demographic dividend for emerging markets with younger population has that is that borne out in the in the evidence?

Bob

I think i'd probably put more weight on the first question. So I think emerging markets in Asia, you know, they had learned quite a lot from the experience of SARS, the kind of steps that might be necessary to kind of control it, and act quickly. So, you know, they kind of had a playbook for what to do in this scenario. Whereas I think it probably be fair to say that most European countries or the US didn't really have a ready-to-go action plan. I think the demographics one, you know, maybe the jury's still out a little bit on this. I think if we went back a year or you know, a bit more than a year ago, one of the big discussion points was, okay, well, will this virus really even have a big effect in emerging markets? Some countries, particularly India, have got very young populations? Will they even bother kind of locking down? to begin with? So I think maybe it's given them a little, a little bit of extra protection? But I think, if you take it up, take a bit of a step back and think about Okay, well, you know, many emerging markets are not that dissimilar, or some emerging markets are not similar to kind of developed markets and they both had fairly terbulant times. So I think demographics are has got a bit weaker, through the course of COVID.

Stephanie

Sure, sure. No, I think that makes a lot of sense. I mean, you talked a little bit, Bob, about those countries that have outperformed during this crisis and what's driven that? And when you look at the kind of, you know, the lower rankings, which countries have really struggled during this crisis? And what were the kind of factors you think made them so exposed to this particular kind of pandemic?

Ed

Yeah, that's a good question. I think the region that's probably struggled most although you wouldn't see it in the COVID cases data, is probably the very low income ends, like those in Sub Saharan Africa, where, you know, we have very low levels of testing, test and trace, but but there are suggestions that access data, you know, very high. And, you know, lock downs in these in low income EMs are much less feasible with no with larger households makes it harder to isolate. And, as Bob alluded to earlier, you know, lockdown is can be much harder to enforce with large shared informal workers. And also, these are the OEMs, with very, very severe fiscal constraints sometimes do sovereign debt problems, etc. And, of course, these low income EMs are late to the vaccine rally as well, because of slow delivery through the covax system and low levels of procurement. Among the kind of more middle income EMs, in that there has been a lack of fiscal support in places like Mexico and Colombia, where fiscal positions are generally quite robust, at least compared to some EMs governments are very concerned about their credit rating. So that's constraining them in that respect, and of course, in a lot of these countries, positive test rates and excess deaths, these kind of alternative measures of how the vaccine the virus is spreading, given the lack of testing are very, very ugly, some of these data releases. So economically that is weighing on GDP and the economic recoveries.

Stephanie

So that's really interesting what you just said there about country ratings, because I just had never thought about that that would be going into the decision making that happens around COVID. Again, this is my very strong develop market bias kicking in here that, you know, countries were willing to just just spend their way out of the crisis in, you know, European countries in the United States. How big of a constraint is that? Then in emerging markets? I know you've mentioned a few Is that something you see quite widely or is it that specific to places like Mexico?

Ed

I think you do. I think there was a certain degree of EM's showing some maturity during the crisis at the height of the pandemic last year. We did see some quite large fiscal stimulus packages in the end in some EMs compared to the past standards compared to the global financial crisis, for example. But I think this year, certainly that there are signs that, you know, the sort of old constraints, if you like, are starting to bite in the end, you've seen a rise in US Treasury yields. And that is that's causing some EM central banks to start tightening monetary policy or think about tightening monetary policy. And of course, that's also pushing up government borrowing costs in the end as well. So I think Colombia and Mexico are quite unusual, I would say in that they are very concerned about their credit rating and what downgrades might do to the borrowing costs. But think in general, you know, EM dollar bond yields have risen so far this year, and that that will be another constraining factor for EMs and we're likely to see fiscal policy be less supportive this year than last year.

Stephanie

Well, that's actually almost partly answered the next question I was gonna ask you, which is around how the interaction is between developed markets and emerging markets. And in particular, I mean, what are the key things that you're looking for in develop market policy that will matter for emerging market outcomes? You mentioned a couple of them there. Are they the kind of key factors that you're looking for? Are there other elements that you're you're kind of keeping a close eye on?

Ed

Yeah, so that's one factor that we have. This this rise in US yields and, and that's causing financial conditions in some emerging markets to tighten, causing some central banks to raise interest rates, and, you know, impacting fiscal plans, in terms of policymakers starting to unwind some of the fiscal loosening. You have to trade that off against the fact that, you know, ordinarily, we would say that stronger US growth, further fiscal stimulus would be positive, would create positive spillovers for some EMs, particularly places like Mexico, where exports to the US about 25% of its GDP, which is very large places like Costa Rica too, very huge figures here and in terms of their reliance on the US. But I think it's worth bearing in mind, though, that it's actually quite nuanced, because we've done some work in the Research Institute in ASIRI to suggest that US goods consumption is actually, may have peaked. And so even with this fiscal package coming through much of that extra spending may well take place in services rather than consumer goods imports. So that is a reason to essentially expect the spillovers from stronger growth in the US to be perhaps more modest than in the past.

Stephanie

It's interesting, you mentioned the kind of services goods trade off, because, Bob, I know in your initial kind of discussion of the ways in which EMs were affected by COVID, the kind of lower reliance on services as kind of a source of economic activity in emerging markets compared quite sharply to DMs, where we know services, and the fact that restaurants have to close and all that kind of stuff has really been a constraint on growth. This almost sounds a little bit like some of the factors that have constrained growth in developed markets as COVID kind of result or you know, as COVID cases fall vaccinations rise, and you get reopenings, that the bounce back in services won't necessarily then have a positive spillover to EMs, as a result of the fact that they're not really tied in. There's no tie in necessarily with those services firms in the way that there are in goods manufacturing supply chains.

Bob

Yeah, I think Steph has pretty much nailed it. I mean, as well, if you can think about the path of the of the crisis, we will actually pleasantly surprised following emerging markets, the global trade, okay, yes, there was kind of shutdowns, which led some very, very sharp contractions, in some countries abilities to export. But actually, once they got kind of past that initial stage, having, you know, a relatively large share of your economy being manufacturing or exporting, when you've got this big rotation of consumption, within developed markets, away from services and towards goods as well, no stuck at home, we need more IT equipment, but to get our kids more iPads and laptops to work to do home schooling, and just entertain ourselves, I guess more generally, as well. You know, I think that kind of has propped up emerging markets, you know, definitely through kind of the course of 2020. But, you know, as Ed was saying, there's a flip side to that. Is normalization in developed markets, that kind of that kind of unusual dynamic that we've seen over the course of COVID is going to unwind in one way, one way or another.

Stephanie

Yeah, absolutely. Gosh, it's, it's really quite striking. I guess the relationship that there is between emerging markets and developed but also the extent to which emerging markets are somewhat on their, outwith supply chains, you know, their experience of COVID was separate. And that's where I kind of want to draw on as well, the political element. Again, we talk a lot about politics on this podcast, particularly, I often have guests on to talk about US politics, European politics, UK politics, but I'm really keen to understand actually in emerging market space, populism has been this challenge for investors in developed markets in recent years and kind of ever-present question of is populism in developed markets, but actually, it seems like emerging markets face significant issues with authoritarianism and populism too. How different is I guess the experience of populism in emerging markets? Maybe, Ed, I don't know if you want to take a first go at that?

Ed

I think I think there are some similarities in terms of the drivers of populism with DMs not least, kind of weak economies. But I think I think with with EMs there are very specific issues. And one of them is just simply the income convergence with the developed world, if for many countries hasn't happened over the past 10 years, we had a period of convergence in the 2000s. But that, particularly within the commodity producers, because of the commodities boom, and that really proved to be a one off. So living standards in a lot of emerging markets have actually fallen relative to the US over the past 10 years. And, you know, against that backdrop, we also have like a general disenchanted with political classes, inequality has risen as measured by the Gini coefficients. And I guess all this reflects the idea of, as I say, the 2000 rupee, or one off period where there was exceptional growth, partly because of the commodities boom, but partly because the EM's really picked, picked some low hanging fruit in terms of performed in the 1990s and the 2000s. Inflation fell sharply, policymakers cleaned the balance sheets and banking sectors. And now we EMS really, you could argue we're facing a period of you structurally weaker growth and need some more structural reforms are fair to, you know, stand a chance of converting with US living standards. Of course the EM world has two of the most controversial populists in Bolsonaro in Brazil and Lopez Obrador AMLO in Mexico. And, you know, peculiarly, if Bolsonaro is obviously a right wing populist, AMLO left wing, while they're on different sides of the political spectrum, it's interesting that both have tended to play down the COVID crisis, and the efficacy of masks and lock downs, etc. And I think it's hard to argue that against the fact preventing these two countries from getting control on the virus, and I probably seems to be playing down the various males were playing a role in disappointing vaccine rollout, because policy makers haven't placed a lot of emphasis on vaccine delivery.

Stephanie

That's super interesting. And I like that you pointed out this thing, which is that people always assume particularly when I'm covering in developed markets is up populism is this like, catch all phrase for kind of, I think what people really associate in developed markets with like authoritarianism. It's like, there are left wing populists and right wing populists, and the policies look quite different. I'm really keen to have a bit more of a chat about Brazil actually. Particularly, I guess this question of whether Bolsonaro being reelected will be good or bad. But maybe before we get into that, how have the political systems in emerging markets affected COVID outcomes? I'm so you've you've kind of touched on, particularly the impact it's had on kind of vaccines? Maybe Bob, you know, particularly in China, how do you how do you see, I guess, the role of the political system, which is so different in China, having affected its path when it came to COVID?

Bob

Yeah. Next step, you know, I think it's definitely the case that the different political systems have affected the COVID outcomes and economic outcomes. I think looking at it, China's public state apparatus and state capacity, do look like they've paid off. What looked like quite a draconian response initially, and has been followed on, you know, still with with a kind of zero tolerance regime, since then, has has kept Covid cases at fairly negligible levels. And as a result the Chinese Communist Party has been very much pushing the message at home and abroad, this is a benefit of the Chinese governance model. They, of course, wouldn't use the term authoritarian as probably a debate for another time. I think, whether this tells you much about the merits of authoritarianism. Let's take a couple of counter examples. Australia, New Zealand had fairly negligible case numbers since October too. The Philippines, which has kind of shown some signs of becoming increasingly authoritarian, is that one of the weakest economic recoveries today out of all kind of major emerging markets. So you know, maybe it tells us a bit more about kind of either societal preferences, kind of reflecting the individual versus the collectiveness collective and also kind of relatedly I guess, the willingness to use kind of technology for monitoring and controlling COVID itself you know, clearly I think authoritarian states do have somewhat of a penchant for using technology for monitoring.

Stephanie

That's such an interesting point because I think that that exactly as you said, it's not just as simple as, you know, labeling a society authoritarian or not. But it is there is an interesting question which is, Are there certain kinds of political systems that are more willing or able to impose quite stringent lockdowns? Because that seems to be stringent lockdowns, very effective track and trace, when you named the countries, even New Zealand and Australia, you look at those countries, what you see is countries that have been really effective in terms of actually having very aggressive lockdown, very aggressive travel conditions and very kind of active policymaking, right, which is what you can get just more easily in an authoritarian state, if the authoritarian state chooses to go that way. And maybe this comes to Ed, to your point about Bolsonaro, who, you know, in kind of Political Science terms, he fulfills some of the criteria you might see in particularly right wing populism. But you can imagine already that his approach has been actually not particularly stringent when it came to kind of cracking down on COVID, mask wearing etc. So it's kind of the power you wield is only as important as the choices you make. So when you think about the upcoming Brazillian election, you mentioned already the role of Bolsonaro, and I think there's a generally somewhat pessimistic view of Bolsonaro from the COVID perspective. But when you look at it from a growth perspective, what is a "good growth outcome"? Good economic outcome from these these upcoming elections? Is it Bolsonaro getting reelected?

Ed

I think you're right, that Bolsonaro is a double-edged sword in many ways. He, I think he has really botched the response to COVID as as, as you rightly suggested, but he's popular with investors. He's popular with investors, because of two reasons. He is appointed as a fiscally responsible finance minister. So he's stedied the fiscal ship to some degree, for at least that that's that's his rhetoric, so that there has been various reforms on the fiscal front. And secondly, there have also been kind of micro structural reforms going on in the background, which should boost potential growth and reduce what was often called the Brazil cost, which is essentially just the the very, very large cost of doing business in Brazil, lots of red tape, etc. And it takes a long time to start business and, and all these sort of macroeconomic constraints. So he started to lift that as well as decent privatization. So he is popular with investors. I think, as we approach the election, there is a risk that Bolsonaro starts, the reform agenda starts to fade. And also that he turns to fiscal loosening to shore up his support base. You know, the cash handouts last year as part of the fiscal stimulus were very popular, and boosted his support. So I think there is a very real risk that he starts to become more fiscally irresponsible as the election approaches. It's also worth bearing in mind that fiscal policy always loosens ahead of general elections in Brazil and Latin America more generally. So it wouldn't be a surprise, if that was to happen. And that would not go down particularly well with financial markets. I think with the Brazilian election, there is a risk, you know, that it becomes very polarized with ex President Lula who is a populist on the left hand side of the political spectrum, where to win in the election. I think that outcome would probably spook investors. You know, as I say, it's too early to say whether he will run or whether he will run against Bolsonaro.

Stephanie

Great. No, I think that that was super, super useful. And I think I mean, we can talk about political risk and emerging markets in a moment without talking about Turkey. I think, in particular, this week, has underscored some of the concerns that investors have. I'm interested just to get your take on, you know, the Turkish kind of policy environment at the moment and what your view is on what's going on and what the implications are.

Bob

Yeah, maybe. I'll jump in briefly, Steph. And then Ed can chip in on this one, too. I think, Turkey is a really good example there. It doesn't necessarily take voters going to the polls, to get emerging market political, political shocks. And here we've got a definite, you know, a large swing away from what had been deemed a kind of move towards more policy, orthodoxy more market-friendly measures. I'm not sure if it's a record or not, I was trying to research this earlier. This is of course president Erdoğan's fourth Central Bank governor. Within two years, I could only find one which is Liberia, which had three central bank governors period of kind of two years before so you know, just really highlighting there in a slightly more serious note, kind of how much churn there has been within that key policy institution within Turkey. Turkey's been on our kind of highest risk rating for quite some time now anyway. Ed and I have been furiously writing about Turkey this week, to the extent that, you know, this shift back to unorthodox policies is you know, in many ways really complicating this policy balancing act. We've got a desire for lower interest rates and a signal by central bank Governor. But we've got high, very high inflation, looking at core inflation month on month frequency, has actually averaged about 25% annualized, over the last three months. With a very low FX reserves current account deficit. You know, put all that together. And you're really in a very unenviable position. The use of banking system assets, does give the authorities some room to maybe prop up the exchange rate, you could get more room for kind of muddling through, if you will. But I guess the kind of, you know, the very long run questions are with the authorities really at the tolerance for kind of potential slowdown that might truly kind of unwind balances, and put turkey in a more sustainable footing going forward?

Stephanie

That's really interesting. In particular, because it kind of touches on this point we've talked about a lot when we talk about political risk and markets, a kind of globally, which is the difference between sort of cyclical political risks and institutional political risks. And I think it sounds like Turkey is a good example of when your institutions are built in such a way that they can be easily interfered with politically, it can, you know, alongside a sort of political norms that are developed, I think it can lead to these quite dramatic outcomes. And in some ways, that's been the differentiator between developed and emerging market populism in recent years is, to an extent populist impulses in developed markets have been constrained by the institutions that are kind of long term developed in this developed markets in a way that it sounds like an emerging markets, you just don't have that same safety valve, I guess.

Bob

Yeah. And I think you see that in probably other countries, aside from Turkey. Last few years in Turkey, we've seen a centralization of power around the present Erdoğan, and you know, that again, gives him more scope. So kind of bend, the institutions to his will. And that, you know, as you say, that creates institutional risk. There's, other major EMs, like Hungry, can be another example of one where the kind of the political leaders are kind of damaging the institutions that could maybe be acting as a bit of a kind of a buffer in normal times.

Stephanie

Yeah, absolutely. So maybe that's, let's jump into the next section, which was we were hoping to talk about vaccine diplomacy. This is something Bob that you've been on to talk with us before about maybe a month or two ago, but I just wanted to speak quickly on the kind of latest because China and Russia seem to be at the center of a number of vaccine diplomacy disputes at the moment. So I thought we could start with China, which is, you know, as we've talked about before, China has this kind of long term strategy and vaccine diplomacy seems to be a part of it. How successful has the kind of Chinese vaccine diplomacy effort been thus far? It's very early, I realized, you know, if you were to say, when you look across the approach they're taking and the outcomes they're getting, what's your take on it?

Bob

Yeah. I mean, as you said, we were discussing this a bit recently, in the previous podcast. I think it has been reasonably successful overall. We know with developed markets really focusing on their Home Nations, China has been filling the gap, if you will, to expand its soft power, and its reach within different countries. It's, you know, it's a little bit opaque. It looks like Chinese vaccine donations are to around 50 countries worldwide. And they've got commercial agreements with what looks like around about about 30, or maybe a bit under 30 countries. And indeed, you know, that's quite a in many ways, quite generous scheme could potentially equate to almost a quarter with their national production. So you know, in that sense, vaccine diplomacy is very much in full swing in China.

Stephanie

Absolutely. And then Ed, I might bring you in on Russia. So, there's been a lot of talk on this podcast about the EU's vaccine rollout issues. How does Russia fit into this debate? And where is Sputnik being used, Sputnik 5, I think is the name of the Russian vaccine?

Ed

You're right there are no shortage of takers really in any EMS in terms of the Russian vaccine much like the China vaccines. Of course, much of the former Soviet bloc have procured the Russian vaccine. Also, interestingly, much of Latin Africa, the Middle East, in a place like India, Brazil, Argentina, Mexico, Egypt have all procured the Sputnik five vaccine. And as you mentioned in Europe, so Hungary and Slovakia have gone outside of the centralized EU procurement and secured Sputnik five doses. And you know, interesting, they're now more advanced in their rollout relative to the rest of Europe. So certainly the Sputnik five is gaining momentum, and there's no shortage of takers. I mean, there is a lack of transparency on the efficacy data. But I think it's worth noting that Russia has kind of a rich, rich history of virology and vaccine development is actually quite impressive, you know, in the 1950s, Russia and the broader Soviet Union actually played a major role in producing and testing the polio vaccine, for example. So, I mean, clearly, there is a lot of uncertainty about the efficacy. And I think it's worth flagging that there is a general risk that use of what might prove to be ineffective vaccines backfires, and kind of feeds into Stokes, anti vaxxer sentiment, I suppose that that will be a secular risk.

Stephanie

I think that's interesting that you raised the question of whether it's effective or not, because I think there is debate, at least in terms of the market environment, and I think the broader kind of societal environment, which is whether Western produced vaccines are necessarily more effective, or safer than the Chinese vaccines or the Russian vaccines, for example. I'm interested from both of you to understand, is there data to suggest that Western vaccines are more effective? Or is it more maybe reflective of what you've just said there at around? I guess, belief in the institutional transparency of these big countries affects people's willingness to believe in the US or our, you know, not just people's I mean, you know, I guess, medical doctors and the scientific community might have a little bit more skepticism because of that transparency, because I guess my understanding was that Sputnik five, results were released to the Lancet. Right, which is a very well respected scientific journal?

Ed

Yeah, I'll go first. And then Bob, maybe you can chip in? Yeah, that's a good point to test. The fact that the efficacy numbers that are on sputnik five that at face value are very good. I think that as you say, the bigger issue is the transparency of the whole process. And I think that is that is the main risk for people that could stoke the anti vaxxer sentiment, not necessarily the reduced efficacy.

Bob

And I think that's it, it's the kind of the lack of transparency makes it so difficult to judge. So, you know, I really struggle to judge what I think the efficacy of the Chinese vaccines is. And, you mentioned that the Lancet report said 90%, efficacy for Sputnik. I mean, that's great. If you take that at face value, this is flagging the danger of the lack of transparency. I was just reading a report by the levada Center, which just conducted a poll within Russia. And that reported that only 30% of Russians were actually willing to take the Sputnik vaccine. So you know, you know, there is a cost, I think, to not being transparent, and kind of building confidence in your vaccines by really being open, letting people show you how effective it can be.

Stephanie

Yeah, absolutely. And I think it's also, I mean, it's worth noting that, you know, the point that Ed made earlier about the relative success that Sputnik is having in some Eastern European countries, I think even I've seen headlines suggesting that Germany might be considering or might have provisionally agreed to look at using the Sputnik vaccine as well. I think there's a foreign policy element to all of this, which is, again, we've talked about for a vaccine diplomacy is real, and actually the whole reason for European procurement. One of the rationales underlying it was to ensure that all European member states were receiving a Western vaccine, ie not reliant on a Russian vaccine, and that's a very foreign policy incentive that's has very little to do necessarily with COVID. But obviously, it does play into these issues around transparency, and relative kind of power that you wield. If you are a major vaccine producer. That might link us finally to this the last question, I'm going to ask you for maybe one sentence, which is around the impact of the new US administration. So the Biden administration obviously has lots of implications. We talk a lot about us China relations on this podcast and in our writings. But I'm interested to know what the kind of economic and foreign policy impact of the new US administration is likely to be for big powers like China, Russia, for last time, you know, particularly but also them for smaller Ems that might get caught in the US-China crosshairs. So maybe Bob I might go to you first in terms of the China effect and that smaller EM effect.

Bob

It's a difficult one to solve in one sentence. I think the economic tools are, tariffs, and so on, are kind of the kind of little entry here to stay effectively. But I think what we kind of are seeing maybe is a bit more of a ramping up of like, known tariff actions, you know, more recently, we've kind of seen both US, but also EU sanctions against China. So I think there's some really difficult choices there. What the US's ultimate aims are, is it really willing to trade off economic access, versus human rights? or indeed, no, is the environment some sort of bridge to smooth over relationships? Maybe I shall just pass over to Ed for the kind of last one because I think that's kind of quite illustrative of kind of some of the smaller EMs in a way and kind of how, how the US administration's kind of change a policy particularly the transition, I think, from Trump to Biden is probably probably a good talking point.

Ed

Yeah, absolutely. I mean, and LatAm, as well as most, most other countries in the world should benefit from reduced political uncertainty from the White House, particularly with diplomacy and trade policy not being conducted by by tweets. Now that I think more generally are unlocked, that there are probably two key areas to watch for that where Biden might have an impact. The first is migration from from Central America. We see this link to the vaccine diplomacy points that we spoke about earlier. But you know, the US has agreed to send surplus AstraZeneca vaccines to Mexico, as well as Canada, and Mexico, it appears in returners has tightened border restrictions with Guatemala and Belize, for example. The second topic to mention is obviously Biden's climate change agenda, which could put pressure on some LatAm countries and some countries elsewhere in the world. Obviously, US Brazil relations, could stop sour over the deforestation of the Amazon clearly wasn't an issue for Trump who stopped quite a close bond with President Bolsonaro. And yet, I mean, Biden's focus on clean energy could put downward pressure on real oil prices over the medium term and potentially hasten peak oil, which would weaken long term prospects for oil producers in LatAm. So for example, Colombia, Ecuador, Mexico, Venezuela, which, which could lose market share to the lower cost producers in the Middle East.

Stephanie

That's quite a substantial set of changes that LatAm faces in particular, but maybe beyond in terms of the change to the Biden administration, we'll have to have you both on again, to have a longer conversation about that, because it feels like such a huge topic that we could spend an entire episode on. But I'm sure that my producers will start to give me the signal now that we need to wrap up for today. Thank you so so much, Bob, and Ed, for your insights and candor. I think we've been able to cover a huge amount of ground and we'll have to absolutely get you back on in the near future to dig into these issues in a little bit more. Huge thanks to our audience who keep providing so much support and interest in this podcast. If you have any comments on the discussion today, questions or ideas for future episodes, you can email us at macromatters@Aberdeenstandard.com in particular at the moment we are asking for young economists who might be studying at university to get in touch with any topics that they're really interested in, maybe what they're looking at to do their thesis on and if they'd like to hear us dig into those issues a little bit more, so please do get in touch. Otherwise, please join us again next week.

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Podcasts fromabrdn Investment Trusts - invest in good company

Cherry Reynard: Hello and welcome to the latest in the abrdn Investment Trust podcast series, I'm Cherry Reynard. With me today are Iain Pyle, manager of the Shires Income Investment Trust. We'll be looking at the UK dividend landscape and becks for the year ahead, welcome Iain.

Now by any measure 2020 was a tough year for income investment in the UK, can you talk about what's happened to UK dividends since the start of this year?

Iain: Yeah, hi there Cherry. So, you're right, 2020 was certainly a tough year, and fortunately 2021 so far is a little bit better. So, what we're seeing is kind of a steady improvement in dividend expectations for the UK market. If you looked at the FTSE 100, then expectations for 2021 are up about 15% since we started the year, which doesn't sound a lot but they're up 80% since the low point back in March last year and things looked pretty bleak.

There's still a way to go to get back to pre-pandemic levels so we're still about 30% below the high-water line for dividend expectations but what we're seeing and what we're hearing from companies is certainly a bit more confidence in the outlook and that's starting to come through into expectations for cash flow and a bit of confidence that we see dividends reinstated and start to grow again this year. It's not by any means across the market, there's plenty of companies there who have still got some uncertainties in the outlook and plenty of companies have taken on quite a lot of debts over the last year, so they need to fix the balance sheets before dividends come back - but generally we're seeing a nice steady upgrade to dividend expectations at the start of the year.

Cherry: Okay and what's that meant for share prices for income stocks?

Iain: Yes, it's definitely helpful and clearly rising dividends have helped. I think market leadership so far this year has been mainly with those stocks that were most beaten-up last year, so it's been the recovery plays that have had the most to gain as we've seen the vaccine roll out the expectations and see some, you know, level of confidence that the sectors like travel and leisure and banking will recover through this year.

Where you've got that intersection of dividend-paying stocks and a bit of a recovery play, things like banks and the miners, they've performed pretty well so far this year and that's something we would hope to continue going forwards. I think to get a real boost in the dividend paying stocks outperforming, we need to see that dividend growth coming back in which hopefully we'll see through the rest of the year.

Cherry: And can you just give me a flavour of how the Trust has performed in this environment?

Iain: Yeah, so Trust performances has held up pretty well. Over the first three months of the year the net asset value has risen by 3% which does mean it's lagged our Footsie All Share benchmark by about 2% but that shouldn't be a surprise. The portfolio is very much set up to be defensive to deliver resilient income, and in an environment like we've seen in the first quarter where it's the more value recovery stocks that have led the recovery, they’re the stocks that aren't really paying dividends yet, so we'd expect the trust to lag that a little bit. If we look back over the past year, the 12-month period is probably a better way to look at things, then performance of an asset value is 7% ahead of benchmark, so actually it's performed very well and it's been very resilient through that pandemic driven cycle we've seen over the last year.

Cherry: And obviously markets now appear to be anticipating a better economic climate ahead, I guess there are two questions from that - one is whether you agree with that and also how you're reflecting that sort of change in mood in the Trust, whether you've made any changes there.

Iain: Yeah, so first part of the question I think I broadly do agree with that, you know we're seeing generally a degree of optimism in the economy we're seeing all the indicators for consumer confidence and PMIs pointing in the right direction and company management teams we meet are definitely more optimistic about the future so I think the recovery will continue and I feel, I feel pretty confident about it. We're seeing all the evidence that the vaccine programs are working and that's allowing lifting of restrictions in the UK and the US and to some extent Europe although that’s a bit behind. There's still some uncertainty out there of course, when you look at places like India where Covid remains a real risk and I think it would be you know foolish to say we're completely past the worst and the recovery is going to be even and continuous from here, but I think direction of travel will be that things get better, point forwards.

In terms of how we position the Trust and what changes we've made; we did a lot of the kind of heavy lifting in summer last year were following the dividend cuts we needed to take action to make sure we could still deliver the income to investors and make sure we can maintain the dividends and that's when we bought some more defensive stocks things that would hold the dividend through the cycle. Now as we come into this year particularly the last six months since the vaccine trial results were released you've seen market direction change quite a lot so value is outperformed more cyclical stocks have outperformed and we've reflected that by shifting the portfolio slightly just to add the margins a bit more value and a bit more cyclicality into the, into the positions we hold - you know we tend to have quite a long term view and we tend to have a quality bias in the companies we hold, so we're not necessarily chasing the real value players in this market but we're trying to find things like Schroders for example which benefits from increasing asset values, Morgan Sindall and Marshalls which are, you know, UK industrials which have a degree of cyclicality but still meet that quality threshold we're looking for, and add those into the portfolio just to make sure we keep up with this value really.

On the reverse of that, as we've seen bond yields rise, we've seen the kind of defensive growth stocks that you call bond proxies underperforming to some extent and there's some names in the portfolio things like Assura for example which provides property to health services in the UK and has benefited a lot from lowering bond yields, as bond yields rise again we don't see so much upside, so we're selling those kind of names to fund that cyclicality.

Cherry: Okay thanks and you mentioned a couple, a couple of names there and themes, but I wonder are there any other sort of major themes running through the portfolio that you'd highlight?

Iain: I wouldn't, you know, I wouldn't try and draw out any themes particularly. We always try and focus on the fundamentals and bottom-up stop-by-stock analysis when we, when we're thinking about the stocks we want to hold. And actually, I think the nice thing about the market at the moment is really that there isn't a particularly dominant theme, we've come through this pretty extended period where growth has outperformed value where bond yields have continually declined and that's created, you know a very split divergent market for some period of time. What we've seen at the moment is actually you know, bond yields are rising, inflation expectations have gone up and there's been a bit of a resurgence in value - but it feels a lot more balanced. That kind of push and pull in the market is a lot more even and that's a pretty good environment for actually doing stock specific work and meeting companies and owning good companies with you know, high quality attributes that will outperform

Cherry: Cool, I mean could you give a couple of examples of those?

Iain: Things I think are interesting at the moment, I mean Morgan Sindall was one I mentioned earlier that we started a position in near the start of this year, and it's UK industrial, it has two main businesses - one is construction, and one is basically refitting with offices. And it has some of the quality attributes we look for despite being cyclical, so it has a very good balance sheet, it has a strong management team, and it has the ability to grow margins over time.

But what made it interesting for the start of this year was actually that you should see that cyclical uptick as companies go back into offices - we don't know what the future of working in offices is going to look like - but we do think lots of companies will try and reshape their office space and make it more fit for purpose going forwards and Morgan Sindall’s a direct beneficiary of that, they should see strong trading this year and that will drive cash flows and dividends, so it's one that's interesting for us trying to find that thing that is quality but still add some cyclicality.

Another stock that’s interesting for this year I think is Energy In which is a gas producer which has some huge gas reserves in the eastern Mediterranean and it's interesting because I think you know the energy space has come under a bit of pressure recently and it's not often deemed to be that high quality but it's a company that will start producing gas next year, selling that gas into the Israel domestic market on long-term fixed price contracts and that means it doesn't have that cyclicality that a lot of other oil and gas companies are exposed to. It has a nice ESG benefit because it allows Israel to switch from coal-fired power into gas fired power which is better for carbon emissions

Cherry: The preference shares have historically contributed about one-third of the income for the portfolio. How have they performed this year?

Iain: So, year to date they've been up marginally, they've obviously lagged behind the Equity market which is exactly what we'd expect in this environment and indeed if you've got rising yields then you'd expect to see preference shares which are slightly more of a fixed income investment under before, so they have done that. What they have delivered is still stable income all the way through the pandemic, which is extremely useful from our point of view and performance over the period has actually been really good. If you look back over 12 months the preference share portfolio is up about 30%, so they've certainly done their job. Do I expect them to keep pace with the rising market this year? No probably not, but they're there to give us that really stable source of income and provide a more defensive element into the portfolio, so I think they're certainly doing the job they're there for.

Cherry: Great and then just finally, it's obviously been a tough time for income and a tough time for the UK. How are you feeling about the remainder of the year, do you feel like those tough times are kind of behind you now and the UK market has a bit of self-sustaining momentum to it?

Iain: I do yes, I think I mean there's some pockets of the market where I think evaluations look a bit more stretched but generally, I think we're going into a period where we're going to see earnings upgrades. I think the economy particularly on a domestic basis will be really strong this year, as we get that recovery, players activity levels pick up and that's going to drive earnings upgrades for stocks and improvement in dividends over time. And it's I think a good environment for income investing in the UK and for the UK specifically that really rapid successful rollout of the vaccine program means it has a distinct advantage over other economies this year.

Cherry: Great okay thank you so much Iain for your time and those insights today. You can find out more about the trust at www.shiresincome.couk and thank you to our listeners for tuning in.

Cherry: Hello and welcome to this abrdn Investment Trust podcast, I'm Cherry Reynard.

With me today is Nalaka De Silva manager on the Aberdeen Diversified Income and Growth Investment Trust also joining us today is Jennifer Mernagh who takes over from Tony Foster who's recently retired from the Trust. We're going to be talking about the strategy and current positioning, welcome both of you.

Nalaka, I wonder if you could talk about the Trust's evolution over the past six months, what was the background to the changes.

Nalaka: Hi Cherry, hi everyone. So yes, the Trust has gone through this period of evolution as part of a strategic review that was conducted last year and really that was done to do a number of things.

One is to adapt to the global marketplace, which is changing and the overall evolution of the, I guess the changes in market dynamics whether it be macro policy, global trade capital markets you know have been accelerated through Covid. And really what the board were looking for was to find the portfolio mix that was that was fit for purpose for the future and that was to really evolve the portfolio to give investors the broadest range of investment opportunity, providing that stable income and growth. And we've done that through a combination of asset allocation shifts as well as looking at an increased exposure to private markets and given the importance of income giving the Trust the best ability to generate a stable dividend yield over the future.

A big part of the asset allocation work was really around the new target and the performance target and as part of the discontinuation of Libor and the review of the performance target, a more simplified approach to return measurement was chosen, so a six percent return over a rolling five-year period and the majority of that target return to be generated by income - so around 60% of that to be generated by income.

And as I mentioned before, there was a shift to private markets and part of I guess my role in our team's ability to generate opportunities for the fund was to really look at investing in this big marketplace and we'll talk about that in some detail but really to look at high growth areas of the market through venture capital and private equity along with stable income generating areas such as infrastructure and private debt coupled with you know real estate and natural resources which will, you know, bring income and inflation characteristics.

And the last part of it was part of the de-leveraging strategy by the board which was established through the purchase of 73% of the bonds that were outstanding at that point in time, which were expensive at 6.25 percent, you know quite expensive in terms of cash flow and a decision by the board to buy those back.

And that allowed us to do a couple of things - one is to steady up the dividend stream so there's more cash flow being able to be distributed and it would de-lever the portfolio from a risk standpoint. So really about, you know, the foundations for generating income and growth along with that foundation for capital growth over the long-term generating the income through reliable sources, focusing on that performance target over the long term, increasing that private market exposure to give us a broad diversified portfolio across public and private and then ultimately reducing risk by deleveraging - so that was the task and what we've looked to achieve over the last six months.

Cherry: Looking at that private markets exposure in a bit more detail, can you talk about which areas you've chosen to increase and what you think that's going to bring to the portfolio?

Nalaka: Private markets is a big place and so really, we break them up into I guess two main category types. So real assets being sort of infrastructure, real estate and natural resources - essentially land based opportunities and then private capital being private equity and private credit or private debt. And these are essentially the financing of private companies both on the debt and the equity side at different stages of their evolution, so the areas that we've chosen to increase are really to continue working on the infrastructure program so investing in essential assets that support domestic and regional growth such as schools, roads, hospitals, transportation assets. We're looking at renewable energy, energy generation supply, along with communication assets and these should provide fairly stable non-cyclical attractive yields that are linked to inflation which is really important at the moment. So, we're focusing on that and then at the same time you know looking at diversifies across real estate and natural resources as well.

The private capital portfolio, we're really focusing on private credit so that's increasing the dividend yield potential of the portfolio by generating higher spreads for operating in, I guess, the private markets. And that's across a range of opportunities, whether it be senior loans, subordinated debt or specialty finance to companies or projects, and then we'll supplement through the growth side through private equity as well, so really if we look at the areas that we're focusing on the private side it's really about the strong income streams along with the long-term growth potential of private equity type assets

Cherry: Jennifer, can I bring you in here. Fixed Income has been a very tough area to invest in 2020, looking ahead to the rest of 2021 and beyond - do you think Fixed Income and credit can still provide an income?

Jennifer: Yes I do, listed Fixed Income and credit investments can provide a return because we're assuming some credit risks from different types of borrowers. Specifically, within this portfolio it's possible to access investments that are structured in such a way as to make the default lower than it would have ordinarily been while still gathering a good level of income. The company can invest in asset-backed securities and these offer a high yield with a lower expected default in comparison to similar rated corporate credit. So, these ABs as they're termed, issue a series of bonds with different credit ratings which are backed by pools of assets such as corporate loans, mortgages, credit card debt and the owners of the highest rated bonds are less likely to experience defaults but they receive slightly lower returns, whereas the owners of the lower rated bonds can benefit from higher potential returns - but are also first to experience losses when defaults occur.

But the complexity of these structures can also lead to mispricing and that's what we feel the company can take advantage of and has been able to generate a good income from these assets over time and intend to be able to do that in the future as well. Sticking with the area of credit the other place which we derive good yield from is emerging market sovereign debt, so this can be issued in both local currency and it can also be US denominated - so issued in US dollars - and in the Trust we look to dampen the volatility of returns in the local currency credit that we own, by hedging out some of the risk. When lending to emerging market countries, you are provided often with a high yield as these countries typically have higher levels of interest rates, given the higher risks than developed market countries. And whilst in the past it might have been fair to say that default risks were materially higher, we think that the evolution of central banks towards a more disciplined monetary policy, the development of local currency markets which means that countries are more in control of their debt servicing. Combined with China's economic might which is now on a par with that of the US, which makes emerging Asian countries more resilient and therefore default risk remains but is lower than it might have historically been, so that's another area where we feel that we can continue to generate good returns for shareholders

Cherry: And Jennifer the fund has exposure in the listed alternatives segment as well, could you explain a bit about that part of the portfolio as well and how they generate an income?

Jennifer: So yes, as you've pointed out the Trust invests in listed alternatives and that's a way to gain exposure to less liquid alternative assets in a liquid format. One of the most widely known examples is Real Estate Investment Trusts that we allow investors to access property assets such as social housing, private rented accommodation, supermarkets in a liquid format and these listed alternatives extend beyond real estate as well - so can also include in social and renewable infrastructure and more what we might call esoteric assets, such as music royalties, healthcare royalties, shipping marketplace lending.

And these investments can offer really attractive yields and also the potential for capital appreciation and importantly the income is derived, that's derived, from these investments - it's typically backed by assets that pay out a stream of cash flows and tend to be durable over time. But because they're listed these securities can often trade at a different level to the underlying net asset value of what's owned, so we are able to take advantage of those pricing discrepancies where we see them which also is an attractive feature

Cherry: Okay thanks and there is also some sort of conventional listed Equities in the portfolio, what does that look like - what's the makeup of that portfolio today?

Jennifer: Oh sure, so yes we do have a relatively I suppose small allocation to listed Equities and I suppose everybody who's listening would know, you know, it's essentially just allowing you to gain access to kind of some growth exposure and you know having some exposure to listed Equities allows the company to continue to grow its assets and to try to maintain that solid base from which the dividend is delivered. And you've pointed out quite rightly that we've made some changes recently so I think people may know that there has been a significant delivery of both monetary and more importantly recently fiscal packages, particularly coming out of the US and what that means to us is that we see continued persistent economic growth over the next three years, so to have some exposure to more cyclical areas of the global equities market makes sense.

And what we've noticed is that we feel that the UK Equity market is particularly undervalued - some valuations in other areas have run up - but the UK looks attractive and is a cyclical market, so we've added some exposure there particularly to growth Equities but also balanced out by a kind of larger cap index exposure. And then on top of that we have a European infrastructure equity exposure where we see that's a kind of a mega trend that will continue because of policies that have been put in place by administrations around the world and then those exposures are layered on top of a broad market developed equity exposure.

Cherry: Great thanks and Nalaka, just to finish off with you. Could you talk a bit about your outlook for the year ahead any key risks? Do you see any particular opportunities?

Nalaka: I guess my view would be sort of cautiously optimistic I'd say, the um you know - we're relatively positive on the range of opportunities that ADIG will get the chance to invest in over the next 12 months and beyond, but we're not out of the woods in terms of Covid. The unpredictable nature of the virus and how it's developing and the vaccine rollouts as Jennifer mentioned, there's been a huge amount of stimulus in the US which is positive for capital markets, so that will result in I guess more liquidity in the market and therefore you know we're somewhat concerned about asset pricing and what that means sort of in the near term and potentially the inflation outlook over the longer term. So I guess there's a broad range of risks that we're focused on but in terms of trying to look at opportunities within that, those risks do create opportunities and I think we're definitely seeing the benefits of being able to allocate capital to the private markets where we can generate still strong yields and if we think about all of that stimulus that's being put into the US around infrastructure for example that's, that's being translated in other parts of the world so you know US, European, Australian markets are all investing heavily in infrastructure which we're, which we're exposed to so, that capital expenditure.

Our mix between developed and emerging markets, I think will constantly evolve as we look at sort of global trade and the dollar and what that means in terms of FX volatility now that ADIG does hedge the majority of its exposure so, we hopefully won't see any of that FX volatility come through the portfolio. So we will really be focused on creating these income streams and in doing that private credit, you know providing liquidity to high quality companies that have got good business models but perhaps have you know strained balance sheets is where we'd be taking some of these opportunities and as Jen mentioned earlier, the risk of defaults around some of these areas are reduced and therefore we can generate excess returns for that segment of the portfolio. So overall it's really going to be a careful deployment and pacing exercise over the next 12 to 18 months, looking very carefully at business models and business model resilience for what the underlying investments are doing and then measuring our cash flows quite carefully to make sure that we can provide that stable dividend yield into 2022 and 23 announcements.

Cherry: Great okay thank you Nalaka and Jennifer for your insights today. If listeners have any questions about the Trust please do get in touch with one of the team here or check the website on www.aberdeendiversified.co.uk and thank you to everyone for joining us.

Cherry Reynard: Hello and welcome to the latest in the abrdn Investment Trust podcast series, I'm Cherry Reynard. With me today are Abby Glennie and Amanda Yeaman, co-managers on the Aberdeen Standard Smaller Companies Income Trust. We'll be looking at how the portfolio is positioned and the outlook for smaller companies and income, welcome Abby and Amanda.

Abby if we could start with you, there's been a significant change in market mood over the last six months. Can you just give us a sort of high level idea of how the trust has fared in this environment?

Abby: Sure Cherry, so I mean the strong value rallies you know as we saw in particular in November and December and when we first got the vaccine news flow and then we saw again strongly in February - you know those have really been challenging for our style of investment. You know the market has really been buying companies that have been particularly challenged by lockdowns, new cyclical recovery names and also the market's been paying less attention to the balance sheet strengths you know because it's been trading more of a risk on fashion. And our portfolio was obviously focused on higher quality resilient companies and these are the type of names that we've really seen investors reduce exposure to over the last four or five months. We have seen the discount narrow a bit in recent times, but it does still sit at over a 10% discount.

Cherry: And what about the underlying sort of earnings performance of the individual companies in the portfolio - has that generally been strong?

Abby: Yeah it definitely has been, I think that's been the most reassuring thing for us. You know, we've just been through reporting season where we've had updates from most of our companies and we've been really pleased about how businesses are performing. We've seen a strong degree of beats to expectations and earnings upgrades and that's the real focus of our investment process.

You know our companies are doing well, though that isn't really a surprise to us, you know we're deliberately investing in resilient reliable businesses where our operations have been robust, and you know sometimes they've even improved over the last year. We look for growth in businesses where companies are able to pull on many levers for growth and so they aren't just relying on external macro factors.

There are of course a handful of names in the portfolio that have struggled given lockdown and perhaps an obvious example would be Hollywood Bowl, but when lockdowns end and they can trade again - and we're definitely getting there now - you know we are confident that their customer demand will return, the balance sheet will self-repair over time and they will continue to invest in operational improvements and new growth opportunities

Cherry: And Amanda turning to you, dividends were obviously something of a casualty of 2020 - have you seen them start to return this year?

Amanda: Yeah we have, although thanks to the quality dynamic of our process we've had exposure to a strong contingent of companies who've continued to pay dividends throughout the pandemic or reinstate them pretty quickly as soon as visibility returned. We've now only got a handful of companies who are yet to resume payments but we're confident that they will do so when they receive board approval at their next meeting and these are names who have reduced salaries and or headcounts during the pandemic and so sensitive about resuming paying dividends until salaries have been restored fully.

Cherry: Okay great, and on both earnings and dividends has there been a pattern to the type of companies that have done well or badly - I mean Abby mentioned Hollywood Bowl there. Are there others that have been particularly strong?

Amanda: Yeah well, those who, those names and sectors are functions who are deemed to be essential and so allowed to carry on trading obviously did better than those who were forced to close - so those in Travel, Leisure, Retail, Hospitality were harder hit than names in say Tech Pharma, Media, but we noticed another pattern actually. We noticed that smaller companies who were inherently more nimble managed to adapt and innovate much faster and they cope better than large caps.

Generally though we own the highest quality names across all sectors so even those in hardest hit sectors have shown real resilience thanks to strong balance sheets and strong management teams and we expect those to bounce back really sharply upon reopening.

Cherry: And have you made any major changes to the portfolio over the past six months?

Amanda: Yeah, we have, I mean we're never short of ideas. We've added a variety of names across all sectors and the past year certainly thrown up opportunities and there are a few examples where you know, conviction has increased as companies who have been our watch list have been really proven their resilience throughout lockdowns or those where the investment case has been accelerated and we're now really comfortable with the investment case longer term. We've spent lots of time speaking to management teams over the past year while we've been working from home and that's thrown up a number of new ideas too

Cherry: Okay thanks, Abby turning back to you - do you have a sense of how long the value rotation might endure?

Abby: Yeah I mean we're really hopeful that this is now over. March was a much more settled period and actually April has really not been driven by value, you know in fact almost the opposite - we feel like it's been driven back by that focus on earnings and reporting. And in April you know we have outperformed our benchmark strongly, particularly in smaller companies. We think that reporting season often brings investors’ attention back to the true underlying performance of companies and you know who can really be the larger companies of tomorrow. And a lot of lockdown losers as well have recovered chart play in share price terms but what's still lagging for many of them is their earnings recovery and we think many of these sort of most Covid challenged companies have actually reached a stage that their shares are pricing in - actually you know previous norms - and we think that's very much still to be proven. I think that easy money has been made in the value space in recent months and it'll be a lot more challenging for that type of investment or that stock from now just given what they're pricing in and you know for many of them the outlook and where their recovered norm is, might not be where it was previously pre-Covid.

Cherry: And are you making use of gearing in the portfolio today, I mean, and how does that compare relative to the Trust history?

Abby: Yeah, we do have some giving in the portfolio currently, we haven't adjusted that recently. Saying that you know, we are optimistic about smaller companies and you know driven by the past our view would be that smaller companies tend to lead that market recovery and you know that enthusiasm and more risk on trade tends to lead to smaller companies doing well coming out of these type of periods.

Cherry: Okay great and finally Amanda, can you talk a bit about how you're feeling about economic recovery - do you believe it's kind of well-established and the are you optimistic that in this environment companies in the portfolio can continue to make progress?

Amanda: Well, I feel a lot better about it given the success of the vaccination progress. So, I mean we've learned to live with the virus now so at the end of the first lock down, GDP was 25% below the pre-pandemic high and at the end of lockdown three it was 8% below the peak and there are similar stats for manufacturing and construction numbers too. So now activity is roughly where it was after the economy unlocked last year and the bulk of the damage has been seen in services hospitality, the Arts, but as last year's reopening shows these industries can bounce back really fast, so it's good that we've adapted better.

But the vaccine program is working and the economy should reopen fully. We're still worried about employment though, I mean these jobs figures are still muddied by furlough and I’m not sure we've seen the fallout from any workforce mobility associated with Brexit or in fact what happens with the acceleration of automation. Of course, there's a long way to go now before the economy is back at its peak but there is reason to be buoyant and optimistic. Households have got excess savings to burn and corporate cash revenues are at record highs, we've also seen real sharp upticks in business and consumer confidence too. But yeah, if we in short assume the worst and we get more variance or the regional tiers become ineffective then we've at least got a playbook of how to manage this now. So, I think the shape of the economy will be different as we recover from the pandemic and we adapt to leaving the EU but of course be better in some ways and worse in others. But this brings opportunities for smaller companies, so we are really optimistic that our holdings can continue to make progress. I mean like Abby says, we've been delighted with the strength of the recent reporting season where we're seeing real tangible evidence now that momentum has been carried on for our holdings in the portfolio, so I mean we'll highlight again part of our process requires us to identify names that can grow in all environments and our smaller companies have certainly been tested over the past year and really proven the strength of the business models and management teams.

Cherry: Great okay, thank you Abby and Amanda for those insights today and thank you to everyone for tuning in. You can find out more about the Trust at www.aberdeensmallercompanies.co.uk and please do look out for further updates.

Hello and welcome to the latest in our podcast series, where we look at how the managers on the abrdn investment trust range are handling the crisis. Today, we’re talking to Jason Baggaley, manager of the Standard Life Investments Property Income Trust:

Welcome Jason

1. Clearly certain businesses are experiencing considerable problems, which in turn affects their ability to pay their bills, including rent. To what extent have the companies involved in your portfolio experienced distress? (worth saying how the trust has avoided some of the most vulnerable areas, such as retail, for some time)
2. Where companies have experienced problems, how have you handled it as a landlord?
3. Have you made any adjustments to the portfolio as a result?
4. What is happening elsewhere in the portfolio? Business as usual?
5. Do you see an impact on the trust’s income? (using reserves?)
6. Does the investment trust structure give you an advantage in this environment? (no forced selling, being able to capitalise on distressed pricing)
7. What do you see as the longer-term prospects for the portfolio?
8. What would you say to clients to give them comfort that carefully selected property should still play a role in their portfolio?

Thank you Jason for your time today, which we hope will provide some reassurance to investors in difficult times. Thank you to our listeners for tuning in. You can find out more about the trusts at www.slipit.co.uk

Podcasts from abrdn Investment Trusts, invest in good company.

Cherry Reynolds: Hello and welcome to the latest in our abrdn Investment Trust podcast series.

With me today are Bruce Stout and Martin Connaghan, managers of the Murray International Trust. We're going to be discussing where they're seeing opportunities today as the economic recovery begins in earnest, welcome everyone.

Bruce let's start with you. The last year has been unusual to say the least, let's talk a little bit about how the Trust has fared over the past 12 months.

Bruce Stout: Well, I think first of all you can say that nothing really prepares you for a year like last year because we've encountered things last year that we've never seen before, so I think to sum it up it was really a year to try and negotiate, to get through without losing any money and we did that just about. In terms of the net asset value, total return was roughly flat, and we did manage to increase the dividend ahead of the rate of inflation which is the investment objective of the Trust. And I guess the final thing was that through the adversity, we did manage to take advantage of many of the opportunities that presented themselves particularly earlier in the year when we switched a lot of bond money into Equities and enhanced the yield and dividend growth characteristics of the Trust.

Cherry: Great now Martin, there's been a notable change in market mood over the past few months. Could you talk a bit about how that's manifested in the portfolio and whether you've made any changes as a result?

Martin Connaghan: Yeah well, there's not been a change in Bruces’ or my own mood but there has been the yeah, the much commented on you know, rotation within the market, you know a little bit from growth, towards value since the end of October into November.

I mean how that's manifested itself in a portfolio and a geographic perspective, we've seen exposures to Latin America and emerging markets in Asia begin to you know perform quite well. I've seen exposures from the energy sector, from materials, industrials you know also begin to perform quite well. We’ve made changes in the portfolio during that time but not as a direct result of the rotation you know, we've reduced some of the airport exposure - for example we sold out a Auckland airport, we reduced AZURE Airport in Mexico at the margin, just because those stocks had rebounded quite well and there's still uncertainty around air travel. You know we've been adding to elements of consumer staples or utilities, pharmaceuticals as well which have been a little bit weaker. So you know, we've been taking advantage of the market environment but that's far more driven by opportunities that we're seeing at the stock level rather than us trying to play any theme that the market might be focusing on from one quarter to the next because the direction of travel is quite difficult to gauge as is the length of time that the market might be focusing on it.

Cherry: Okay great, thanks Martin and Bruce - how confident are you about the emerging economic recovery and does it really make any difference to your portfolio positioning?

Bruce: Yes, gauging the economic recovery is going to be very difficult I suspect, none of us have tried this path of recovery from a pandemic so I daresay there'll be quite a few pitfalls along the way. But what's of prime importance to ourselves is not so much the economic recovery but more the business prospects for the companies in which we invested and have in the portfolio. For some of those companies that suffered last year from lack of social mobility of people is a welcome relief that things will get back to normal, we'll start to see the businesses pick up again and a lot of them have done a very good job of protecting their assets during a tough period and it will be very interesting to see what operational leverage they have to recover as we go forward from here in some of the companies that we own.

Cherry: Okay and Martin, what other big themes would you highlight from the portfolio at the moment?

Martin: I guess the only thing that we would really only ever point to would be the one of diversification. You know we're just really always trying to buy, well-run, well-managed businesses, that they do, different things in different parts of the globe because you know last year that certainly helped with regards to securing the revenues that we need to generate for the Trust. And given the uncertainty going forward, we feel that that's probably the only theme that's ever really prevalent in the trust is one of being a globally diversified investment trust.

Cherry: And Bruce, dividends were obviously one of the casualties of the pandemic though less so for the kind of global markets in which you operate. But even with that in mind, are you seeing dividends come back and if so are there any patterns to where they've been strongest, you know, in terms of geography or sector?

Bruce: Well, dividends are absolutely key aren't they for an income trust and it's something that Martin and I have been obviously paying a lot of attention to. I think the key here is to be able to have geographical and business diversification and the last time we really had a full-blown dividend recession in the UK, you have to go back 20 years and it lasted for about five years and even if you take the dividend recession of 08/09 in the global financial crisis, it was quite concentrated in the banks, many of these banks are still not back to what they had before. So, I think the key to recovering dividends is to keep the diversification throughout the portfolio. If there is one trend that we kind of see is that the strongly financed companies particularly in Asia have been far less hit than some of the businesses in the more developed world, where we've seen dividends decimated particularly in the UK, I think the UK dividends were down over 40% last year, so it's all about diversification from here and strong balance sheets.

Cherry: Okay and Martin, you've talked about diversification just then but what does the geographic mix of the portfolio look like today? I mean clearly there are areas where it's easier to get dividends than others where dividends have been stronger, I noticed you've reduced your Japan weighting a little bit and increased your U.S waiting I think - can you talk us through what the, what the portfolio looks like today in those terms?

Martin: Yeah, certainly, I mean if you look at the sort of more recent additions to the Trust over the last you know 12 to 18 months, they have been from everywhere. We've put, you know, U.S tech companies in, we've put European insurance companies in, we've put Asian and Chinese focused real estate companies in, so the recent additions to the Trust have been from all over the globe as we would expect.

I mean in terms of the asset allocation and from the geographic perspective at the moment, you're quite right, we're actually now, since exiting Japan Tobacco, we actually have a zero weighting in Japan at the moment, just as a result of struggling to see companies that we're both happy with that have the sizable and growing and sustainable dividends that we like to see. Elements of the allocation that remain or have remained relatively stable, have been exposed to Latin America and Asia, those have remained where they have been for largely the last few years and yeah more recently the U.S weight has been creeping up, the North American weight is around 25% and if anything that's been, you know, funded from a sort of gradual reduction in the UK weight, the last few years the UK rate at the moment is around about 6%.

So in terms of activity, they've been from all over the globe and new stocks that we've been putting in, elements of stability within the asset allocation being you know Asia and Emerging Markets, but there has been a little bit of a shift from some developed markets in the UK and Japan to developed markets in North America.

Cherry: In 2020, there was marginally higher turnover on the Trust. Bruce, I wonder if you could just talk a bit about why that was?

Bruce: Yeah, this kind of follows on from what Martin was saying. A small part of that was due to necessity, where a couple of business models we owned I think they irrevocably changed because of the pandemic and we sold out a couple of banks, Bank of Pekao in Poland and Public Bank in Malaysia. But the vast majority of the increased turnover was because of opportunity, there's absolutely no doubt about that. And at times to be able to buy high quality, equities, good companies, diversified companies, trading with above six percent yields, double digit dividend growth over one, three and five year periods - it was an opportunity not to miss and we could finance it from particularly emerging market bonds and get yield pickup and dividend growth pick up so that was the main reason for the increase in the transaction activity.

Cherry: Okay thanks and Martin let's turn to the risk side now. I mean what do you consider the main risks in markets today and are you doing anything in the portfolio to kind of protect against those risks?

Martin: Where do you start - I mean it could be you know the risk of another pandemic, there could be a risk a tantrum within markets, if and when there's to be a movement on rates if you believe that, you know, inflation is going to be on the rise for longer. You've got special purpose acquisition companies, anything that labelled ESG ran quite hard last year, we've got heavily oversubscribed IPOs, you get geopolitical risk, you've got climate change - I mean you can come up with a million and one risks if, you know really, really put your mind to it, that could impact on capital markets.

The point I would stress is that if you ask us what our review for last year would have been at the beginning of last year in terms of what the largest risk would have been, we would have probably given you the wrong answer, so you know, what do we do? You know, we focus on the things that we can control - and that's quite simply stocks that we put into the trust, and the stocks that we don't. And in doing that we just ask ourselves, you know really, really, simple questions around the management team, and the business, and the financial strength of it , and the market in which operates, and the strength of cash flows, and the dividends and you know, I just really don't see that changing at all, and again that just brings us back to that session with diversification if you like.

Cherry: Bruce, the markets have obviously run up quite a long way but there's kind of been a lot going on under the surface. What would you say about valuations today? Are they, are they a mixed bag, are you seeing over valuations in some areas and under evaluation elsewhere - I mean what's your big picture?

Bruce: Well, I think Martin and myself, we're very much focused on what we can measure in terms of valuations because what we've seen over really the last five or ten years, is that when there is a scarcity of growth and there has been really during a period of uncertain policy in the world, then people are prepared to pay higher and higher multiples for growth and it's not something that we are prepared to do.

The other thing that we've noticed recently, people moving further and further up the balance sheet to try and justify ownership of businesses and using metrices such as price to sales or price to clicks or whatever and it's not something and that we can get a tangible hold on, but conversely in many of the businesses that were overlooked last year in the broader sense as the market focused on tech and e-businesses all over the place, those valuations look okay relative to what's achievable in terms of earnings and dividends and so that's where our focus you know continues to be as it's always been - we're looking to buy growth at a reasonable price.

Cherry: Great and then Martin, just a final question to you - do you have any sense of what will be you know the big themes for global investors over the next 12 months obviously nobody would have predicted the pandemic but do you think things like interest rates or inflation might dominate?

Martin: Yeah, I mean it would certainly be too, I think you know the market will probably first and foremost focus on the you know the unwind of lockdown and the opening up of economies and trying to speculate on who will be and then subsequently ultimately are the, you know, the winners and losers of that. ESG was a focus last year, elements of that suffered a bit more recently, so it'll be interesting to see what happens there. Growth versus value as we've mentioned, bond yields and yeah definitely then, you know, inflation feeding through too at some point, where and when on interest rates, would be just some of the things that market participants will probably be able to focus on in the next 12 months.

Cherry: Thank you Bruce, Martin for those insights today and to our listeners for tuning in you can find out more about the trust at www.murray-intl.co.uk and please do look out for future episodes.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts, invest in good company.

Interviewer: Hello, and welcome to the latest in the abrdn Investment Trusts podcast series. With me today is James Thom from the Aberdeen New Dawn Trust. We'll be talking about the recovery in Asian economies and how he's positioning the fund in this new environment. Welcome, James, I wonder if we can start by looking at the big picture across Asia – are you finding that economic recovery is in full swing there?

James: It is looking very encouraging. I think Asia is now clearly benefiting from the way in which it handled the pandemic through the course of last year. And an economic growth is racing back. And if you think about the two big kind of economic engines in the region, even last year, China managed to eke out 2% GDP growth, and that momentum is kind of continuing through to this year. India was pretty hard hit by the pandemic, but it has seen a remarkable rebound with case numbers now down substantially in the fourth quarter and into this year. And that has allowed the economy there to open up far quicker, I think, than anyone had expected. And across the region, you know, they're certainly not totally out of the woods. So some of the countries are still struggling and growth is still not there. But overall, I think the picture is pretty encouraging.

Interviewer: And there was speculation ahead of time about what the recovery might look like. Are there really noticeable characteristics about the recovery - any areas that have been particularly weak or particularly strong and any surprises?

James: I'm not sure, it's been sort of particularly surprising in the way in which it's playing out. So as you would expect, the sectors that were hardest hit by the pandemic are those that are now sort of coming back most strongly. So if you think you know, anything sort of consumer discretionary related, you know, we're seeing quite good growth come back there, whether it's, you know, auto sales, or retail, restaurants, those sorts of things. Maybe the bit that has arguably been a little surprising has been the sudden rebound in the kind of commodities area. So, metals and mining and oil and gas has come back quite strongly on the expectations that economies are going to continue opening up and demand is going to come back. So we're seeing that play out. And meanwhile those sectors that were kind of seen as beneficiaries, through the pandemic, have continued to perform pretty strongly. And that almost feels now like a bit of a sort of structural improvement. So if you think about the internet sector, ecommerce, the tech space, we’re still seeing very good performance there.

Interviewer: And what do you see as the big risks today? Is it still a revival in outbreaks of the virus? Or are there other things emerging that you're looking at just as closely?

James: The number one risk is still very much the pandemic and another wave. And, you know, as much as I said we've seen a dramatic drop in case numbers in India just in the last couple of weeks, we've seen, unfortunately, numbers pick up again. So still fear and concern there. We'll have to see how that plays out. Obviously, the vaccine developments are key here and India is now rolling that out much more quickly than it than it had been initially. So yes, vaccine and the virus still front and centre of the risk register, if you like. I think the one that's kind of reared its head that wasn't there previously, is now concerns about inflation and rising rates. We've seen the sort of yield curve pick up a bit. And so concerns that maybe Asia is on the cusp of another so called taper tantrum. If you think back to 2013, when the Fed sort of changed course in terms of monetary policy. I don't think we're there yet. And I think Asia is in pretty good shape, actually. But certainly, there's quite a bit of thought now going in to what this all means for Asian markets and economies. And then the third one would just be, you know, the continued concerns around geopolitics and relations in particular between the US and China and how that's going to unfold under the new White House administration.

Interviewer: If we could turn to the fund now, and the fund’s quality focus certainly helped during the pandemic. Have you shifted the focus at all as the economy recovers, perhaps moved into more cyclical areas?

James: Yes, a little. I mean, I would say that the focus on quality hasn't changed. So you know, I think there is no substitute for quality, particularly in Asian markets, where there are sort of risks to the downside. So we're still very much focused on quality companies. But yes, from a sort of sectoral standpoint, we have rotated a little to reflect that the opening up of economies and the growth that we're seeing coming back in some of these more cyclical sectors, as you said, and in the commodity space, as well. So, so yes, we've kind of reflected that a little bit in the portfolio in recent weeks and quarters.

Interviewer: And anything else you'd say about the current theme running through the portfolio and trust positioning?

James: So I would say I mean, overall, the portfolio remains a well diversified portfolio. So whilst we have still probably a third of the portfolio in China, and we're still positive on the China growth story, we have substantial positions across North Asian economies and markets, in India and in Southeast Asia. From a sector standpoint, we've got quite a significant exposure to the tech sector, as I said, that had been kind of resilient through the pandemic, but we've seen it continue to perform very strongly. So I think we're still positive on the outlook there, both on the internet sort of side of that sector and on the sort of tech hardware side where growth remains very robust. But otherwise, I think, you know, thematically, probably the new, or the newest theme that we've been thinking about and positioning around somewhat is the sort of shift to a greener economy and renewable energy and a move to electric vehicles, and all these things, which is, as we're seeing across the globe, you know, in Asia is gathering real momentum. And there's some great companies in this part of the world that we have the opportunity to invest in.

Interviewer: And what about the longer term themes in Asia that have sort of been recurring over the past decade or so - things like infrastructure and the growth in the middle class and urbanisation? Has the pandemic changed any of those at all?

James: My sense is, is not. I think those you know, those remain very real, long term structural growth drivers for the region. Asia is still in need of significant infrastructure build out - urbanisation is still a very real phenomenon, you know, maybe less so in somewhere like China today, given the huge progress they've made there. But if you look to a market like India, urbanisation is still very real and very much happening. And there's still a huge paucity of sort of housing, for example. So demand for infrastructure service providers, cement companies, paint companies, you know, we're seeing very good growth still in many markets there on that theme. And, the rise of the Asian middle class is continuing and continuing to drive growth and aspirational consumption. And we have quite a number of stocks in the portfolio that are a play on that still very kind of resilient themes.

Interviewer: Asia is has been quite resilient over the past year, particularly in China. Is that reflected in higher valuations for Asian companies? Or are you really seeing sort of valuations on a par between both kind of relative to their history and relative to the rest of the world?

James: So valuations have run up a bit. The markets have performed well and continue to perform well. Earnings are catching up but there has been a rewriting in valuation multiples. And I think it's fair to say certain parts of the market do look a bit frothy at the moment. And we are seeing quite a lot of new IPOs and issuances taking advantage of that. But overall, if you kind of chart valuations relative to their long term history, they're a little bit above that long term average, but not, you know, materially so, so they don't look overly stretched. And I think the key is that we see the earnings growth come through to support those multiples. So that's, I guess, the sort of the risk to this. But notwithstanding that, I would argue that Asia still looks pretty attractive, versus global equity markets, and certainly versus US markets. With the region trading on a still very wide discount versus those markets. I think there's the relative attractiveness is very much that still.

Interviewer: And you mentioned earlier that you have around 1/3 of the portfolio in China. Is that focused on any particular kind of stock or are there things that China is doing particularly well?

James: Well, it seems to be doing a lot of things very well. And there are multiple themes to our exposure in China in the portfolio. One is very clearly the internet sector. So one of our core holdings remains Tencent and that is still seeing very strong growth. And there are multiple drivers there, you know, everything from gaming revenues to online advertising, to FinTech now, so that remains a fascinating and highly innovative space with a lot of growth opportunity. As I mentioned, you know, that rising middle class, that's still very much a real trend in China, and the aspirational consumption that comes with that. So we have two or three holdings that are at play on that theme. We've got a couple of holdings in the healthcare sector. And again, China's been quite innovative, particularly in the biotech space. And I mentioned, renewable energy, obviously, China's just made this key pledge to be carbon neutral by 2060, which is a long way off, but the amount of investment and capital expenditure that we think that shift is going to require will be huge. And therefore we're seeing a lot of growth and investment into some of the China companies. And that's reflected in the portfolio as well.

Interviewer: And you mentioned the new US administration. Obviously, it was quite a tetchy relationship under the previous administration. But do you have any geopolitical concerns about China? And if so, how do you manage that in the portfolio?

James: So I think those concerns are still there. Yes, there's been a change in administration. And, you know, the hope is that we'll have a slightly more diplomatic relationship now. Less confrontational, but I think that the tensions aren't going to go away. And there is sort of broad based support for them politically on both sides of the house in the US. So I think and, you know, notably, in the first few months of the administration, Biden has not rolled back any of the sort of key sanctions, if you like, that have been placed on China under the prior administration. So there's been no relaxation, we're waiting to see whether there'll be a further escalation - my sense is that there could well be. So you have to be kind of alive to those risks, I think we, for our part, tend to focus on the companies and ensure that we're in the best quality companies that can sort of withstand any turbulence. But also, you know, when you look at our exposure, in China, a lot of it is kind of domestic focus. So we don't have a lot in companies that are kind of trade dependent or export dependent, or are sort of more politically sensitive, if you like. We tend to kind of shy away from those and I think that helps insulate us in the portfolio overall from some of the sort of real volatility here.

Interviewer: Okay. And I wonder if we could just wrap up by talking a little bit about what the last 12 months has done to the long term argument for Asia. And, you know, whether that's still kind of firmly in place, whether it's actually potentially got stronger?

James: Yes, I think I mean, there is an argument to be made here that Asia, well, if it doesn't emerge stronger in absolute terms, I think it may very well emerge stronger relative to the rest of the world. If you think about the sort of strength of the economies in Asia, in contrast to much of the developed or Western world. Asia, given the way that they've handled the pandemic, they have pumped stimulus into the economies to support them through this tough period, but not to the same level or extent that we've seen in western economies. As a consequence, they're much less indebted, and will emerge in a far stronger position from this as a consequence. And Asian central banks have largely pursued orthodox monetary policy since the global financial crisis going back a number of years now, so they still have no monetary policy levers at their disposal to keep stimulating the economy should they need to. And as I've already commented, Asia is racing back into growth and remains the fastest growing part of the world. And that will also continue to position it very well. And, you know, all of those long term structural drivers that we've talked about already, I think remain intact, coupled with the huge innovation that we continue to see in this in this part of the world and that's only accelerating - so I remain as positive on the region as I ever was, if not more so.

Interviewer: Great. Okay, thank you so much, James, for those insights. And thank you to our listeners for tuning in. Please check into the website, which is www.newdawn-trust.co.uk for any more information, and please do look out for our future episodes.

This podcast is provided for general information only, and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of abrdn. 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 returns, return projections or estimates and provides no guarantee of future results.

Podcasts from abrdn Investment Trusts, invest in good company.

Alan: Welcome to this podcast today. My name is Alan Brierley and I'm responsible for the investment company research product at Investec. Today I'm talking to Charlie Luke, who is the manager of Murray Income. Charlie and his team have constructed an excellent long term track record. In a recent research report, we found that over five years, the NAV total return of the company is ranked 4 out of 100 UK equity income closed and open ended funds. Firstly, would it be possible to give an overview of Murray Income, including your investment philosophy and process?

Charlie: Hi, Alan. Yes of course. So Murray Income is an investment trust which sits in the AIC UK equity income sector. Following the combination with Perpetual Income and Growth Investment Trust, we now have gross assets of over a billion pounds. And the investment objective is to do three things. Firstly, to deliver a high yield, and the current dividend yield is just over 4%. Secondly to grow the dividend, which the Trust has achieved for 47 consecutive years. And the third objective is to generate capital growth and the Trust has outperformed the FTSE All-Share over 1, 3, 5 and 10 years since I started to manage the trust which was back in 2006. Then I would like to describe the investment proposition as being focused on the three ‘D’s. And they are our aspiration to be dependable, diversified and differentiated. So, dependable through a focus on high quality companies providing resilient income streams and strong capital growth potential. And when we say high quality, we're thinking about the company's business model, management, financials and ESG credentials. We're also dependable in the sense that we benefit from the large ASI UK equity team, which is probably the best resourced team in the UK market. That allows us to cover all the companies in the FTSE 250 with our own in depth research, and we have excellent corporate access. And then finally, in terms of being dependable, we have a patient buy and hold investment approach, which allows the fundamentals to win out, which has proven itself over time. Then the second D is diversification - being diversified. And I think one of the lessons of 47 years of consecutive different growth is that it isn't necessarily wise to put all of your eggs in one basket. So we have a shortfall diversification by sector, by income and by capital. We’re also diversified because we can invest up to 20% of gross assets in overseas listed companies, which is helpful in terms of diversifying risk in some of the sort of concentrated sectors in the UK market but also providing access to great quality companies and industries that you can't find in the UK. And at the moment the overseas listed holdings account for around about 15% of the portfolio. We’re also diversified in the sense that we want to help exposure to mid cap companies, which is where the team's research really comes into its own. And mid cap companies currently make up just over a third of the portfolio. And then finally, in terms of diversification, we also have a very simple low risk option writing programme, which has been tried and tested for over a decade. And that's carried out in line with our fundamental analysis and research. And that helps to modestly diversify our income and also provides the headroom to invest in companies with lower starting yields, but better capital and dividend growth prospects. And then the final day D, the third D, is differentiation. And we acknowledge that there are a lot of UK equity income funds out there. But we think we're differentiated by the focus on good quality companies, our diversification, the overseas holdings, a really strong focus on ESG, the healthy mid cap exposure and as well as our option writing. And if you unite all of those characteristics together, you end up with a portfolio that provides an attractive dividend yield, the potential for capital and income growth has demonstrated capital resilience in challenging markets and some good performance but I think particularly good performance on a risk adjusted returns basis.

Alan: Excellent. Thank you very much. At a time when concerns have been expressed about managers over reaching for yield, could you talk a little bit about the relationship between capital growth and dividends?

Charlie: Yeah, absolutely. I think that's a really important point. So I think to my mind, I think that capital growth and dividends go hand in hand. And the reason for that is the simple premise that over the long term, if a company is going to grow its dividend, it needs to gross its earnings. And I think good quality companies are best placed to do that. So we want to avoid investing in companies simply because they have high dividend yields, which you find more often than not end up being cut, and think much more about the underlying ability of the companies that we invest in to grow their earnings, and therefore to grow their dividends over the long term. And I think as an aside, we find that one of the benefits of good quality companies tends to be that in more challenging times, they have greater earning stability, which leads to a much higher likelihood that they will maintain or increase their dividends. And in better times, income investors in good quality companies tend to benefit because these are the sorts of companies that usually have strong balance sheets, and that capital can be returned to shareholders in the form of special dividends.

Alan: Okay, thank you. Last year, the boards of Murray Income and Perpetual Income and Growth announced plans to combine the two companies. This has created one of the largest UK equity income investment companies. Could you advise how things have bedded in?

Charlie: So firstly, I should say that, you know, we were all absolutely thrilled to be chosen by the board of Perpetual Income and Growth and I'm pleased to say that shareholders are now benefiting from a lower management fee and ongoing charges per share, better liquidity and narrower spread, and hopefully a high profile which should make it easier to grow the trust organically. Things have bedded in very well, the whole process was made easier because the Perpetual Income and Growth portfolio was actually aligned with Murray Income before the combination. So we haven't inherited any illiquid or unquoted holdings, just the companies that we wanted to own.

Alan: Okay, thank you. We expect the closed end structure to provide inherent competitive advantages, such as the ability to focus on managing money rather than inflows and outflows, use gearing and the use of revenue reserves to smooth out dividends. Can you talk about these in the context of the pandemic?

Charlie: Yes, sure. So, as you say, investment trusts have a lot of competitive advantages, both in absolute terms and also relative to their open ended cousins. So investment trusts have an independent board and they’re accountable to shareholders. And Murray Income is fortunate to have an excellent and very experienced board with a diverse range of skills. As you say, trusts can gear or take on borrowing to potentially enhance returns over time. We've been very conservative in our approach and currently have gearing of around 10% and that needs to be thought about in the context of a portfolio that is less volatile than the market as a whole. Charges are generally lower, so Murray Income has a tiered fee structure with net assets over 450 million pounds charged at just 25 basis points. So the overall management fee for Murray Income is below 40 basis points which is very competitive, and I think helps to demonstrate that the board is doing a good job for shareholders. Also as you say, investment trusts have broadly speaking permanent capital. So distractions of inflows and outflows on a daily basis are generally not something that needs to be worried about. And then one of the main benefits of investment trusts is the ability to retain surplus income and smooth dividends, unlike open ended funds, which need to pay everything out and that has been helpful over the last year throughout the pandemic and has allowed us to maintain our long track record of dividend growth by dipping into our reserves.

Alan: Okay, focusing on the sustainability of the Murray Income dividend – can you talk about the outlook for dividends for both your portfolio and the wider UK market and also the strength of the revenue reserve accounts.

Charlie: Yep, so I'm not that optimistic about a rebound in dividends for the wider market. I think a lot of companies have been over distributing and now have other priorities which might be investing in their businesses or paying down debt. So you've seen large cuts from some significant dividend payers such as Imperial Brands, or Shell, that will take many, many years to regain their prior levels. I think a recent Link report suggested it could be 2025 at the earliest before dividends reach their 2019 level. And I think it may well take considerably longer than that. But I think, you know, if there is good news, quite a few companies that have cut their dividends have at least returned to the dividend list, and many others have signaled their intention to do so. For the Murray Income portfolio, we think the income generated by the portfolio in calendar 2020, will have fallen by around about 15% compared with 2019. And that compares to the dividends paid by the market which according to Link fell by 44%. So far more resilient, given the focus on good quality companies with strong balance sheets. And in the Murray Income portfolio, nearly all of the companies in the portfolio that have suspended their dividends have either started up again, or have said they will do so very shortly. I'm much more optimistic about the ability of the portfolio to grow its dividend on a sustainable basis rather than the market because, as I said before, good quality companies tend to have structural growth opportunities to help grow their earnings and can actually benefit from more challenging periods such as this. And then just to answer your question about the strength of the revenues. One of the quirks of the accounting with the Perpetual Income and Growth transaction was that we couldn't combine the two revenue reserves, so the Perpetual Income and Growth revenue account was paid out to shareholders as special dividends. So we have the Murray Income revenue reserves for the larger trust but the revenue per share has been diluted, and shareholders have given us permission, like actually like many other trusts in the sector, to pay dividends out of capital. Our forecast suggests that we won't - that won't be something that we will need to do. So we think we can continue to modestly grow the dividend while reveal rebuilding the dividend cover. But it is actually something that's useful to have the ability to pay out of capital, just as an option.

Alan: Thanks. And finally, for many investors, the UK has reached almost pariah status, with valuations at historically extreme levels. Can you talk about portfolio construction and where you see the greatest opportunities looking forward?

Charlie: Yes indeed and nobody likes the UK market. Global and European equity funds UK holdings are close to multi year lows, while valuations, even if you adjust for sector differences, are more attractive than many other regional equity markets. So to my mind owning mostly UK listed investments is a significant opportunity, particularly as we now have a Brexit trade agreement with the EU. And it looks as though our vaccine programme is going well compared to other countries. And we're also fortunate that there are lots of good quality companies listed in the UK that are still paying attractive dividends. So perhaps unsurprisingly, I think a quality income strategy focused on the UK makes a lot of sense. So to go into that in a little bit more detail. Clearly, it's been a very tough year – a tough 12 months for income investors. But I think it's important not to forget that income investing is still very important and meaningful. So you receive a significant part of the total return from the dividend, the yield acts as a valuation backstop, the dividend is a touchstone for the health of the company. And it also helps to reduce agency risk. Quality is also likely to remain very relevant given the world of modest growth, low interest rates, high debt and a lot of pressure on corporate profits. And I think there’s three reasons for that. So, we should see a premium for companies capable of delivering healthy yields and growing their dividends. So for example in the portfolio, we own Close Brothers, Intermediate Capital, Unilever, property companies such as Sirius Real Estate, Safestore and LondonMetric which fit into that bucket. Secondly, companies with strong balance sheets that can undertake M&A or continue to invest through the cycle should emerging in strong competitive positions. So examples of those sorts of companies in the portfolio will be Croda, Rentokil, Sanne, Mondi and Euro Money. And then finally, earnings growth in a world of modest growth is likely to be prized more highly than ever. So companies with sustainable competitive advantages and pricing power should benefit disproportionately. And again, companies in the portfolio that play to that that theme are the likes of XP Power, Dechra Pharmaceuticals, Smith and Nephew, Relx and Fevertree. So to sum all that up, I think that UK equity income with a focus on good quality companies is a very attractive and currently under appreciated place for investors. And a large and liquid investment trust is a very appealing vehicle for accessing that. And actually there's a lot more information about the trust on our website, which is www.murray-income.co.uk.

Alan: Excellent. I think that's a very clear message Charlie, thanks so much for your time today.

Charlie: Thank you, Alan, and thank you to all the listeners.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts - invest in good company.

Interviewer: Hello and welcome to the latest abrdn Investment Trusts podcast. Today I'm talking to James Thom, manager of the Aberdeen New Dawn Investment Trust. And we'll be discussing the Trust's results along with the outlook for the trust portfolio as we head into 2021. Welcome, James. And so let's start by looking at the results. And can you give us some top level messages that investors should be taking away from this year's performance?

James: Yes, I mean, it's been a remarkable six months, all things considered, with markets in Asia up surprisingly strongly over over six months, despite all the economic and financial turmoil that's resulted from the covid 19 pandemic. And really, it's been driven by a gradual reopening up of the economies. Here post lockdown, and large parts of the region getting the virus under control. And of course, there's been significant stimulus as well, both fiscal and monetary. And against that backdrop, the trust has managed to keep pace and actually slightly outperform the overall market for the six month period. And really, I think that's just a testament to the quality and resilience of the portfolio's holdings, and our bottom up stock selection process. And really, that's come to the fore, most notably in in some of the North Asian markets. So in countries like Taiwan, South Korea, and China, that's where we've seen some of the strongest returns in the portfolio. And from a sector standpoint, we've seen very strong performance in the tech sector be that internet or the hardware sector and in the healthcare sector. So I think that that's all contributed to the performance over this period. And coupled with the fact that we have really just doubled down on our focus on quality. So where we had any question mark on conviction on a stock investment thesis and the ability for a company to weather the storm. We weeded that out and really just focused on the best quality names in the region. And that has worked nicely for the trust.

Interviewer: And it's obviously been a very unusual year and the situation has been very fluid in terms of repositioning the portfolio, what have you generally been pleased that you did and is there anything you wish you'd done differently?

James: Hindsight is a wonderful thing, isn't it? Something we would love to have done was pulled back more aggressively than we did in in the stocks and sectors that have been impacted the most by the pandemic. But overall, in general, I think I'm pleased to say with how the portfolio has weathered this very dramatic period. So the quality of the stocks now has held up are focused on strong balance sheet. Companies with experienced management teams, strong market positions, these are the sorts of companies that have weathered this the best. So, that's been encouraging. And I think when you look at the performance of the trust, there's been a nice alignment over this time period between where our conviction lies from a stock perspective. And those, larger higher conviction positions, many of them that sort of top 10 holdings in the portfolio, driving a lot of the returns over this period. So that's, that's been good. And we were responsive to the pandemic and thinking about which sectors and which countries were going to be impacted the most by this. And we did react and call back to markets that were struggling to get control of the virus, like India, or some sectors that have been particularly in past like financials, of course, in retrospect we should have done more. But I'm pleased that we did that. And I think the final point I would just make here is that where there was a lot of volatility in markets, and we were able to take opportunity of some of that weakness in particular to buy either stocks that we own already, and to buy more at those prices or to initiate new stocks in the portfolio at attractive valuations.

Interviewer: Okay, and what does the fund positioning look like today, I mean, is it quite different to a year ago, or have you got the same kind of themes running through it?

James: So the underlying approach remains the same. Still very much a focus on quality stocks and identifying and holding those long term compounders. So that that hasn't changed. And it remains a very high quality portfolio. And it remains a nicely diversified portfolio, which I think is important during uncertain times like these, having said that, responding to the volatility that I that I was talking about a minute ago, we have managed to add quite a number of new stocks to the portfolio. So we've seen our exposure to China increase a bit over this period. And in contrast, we've pulled back somewhat in India and Southeast Asia, we've increased the exposure and found quite a number of new holdings, interestingly, down in Australia and New Zealand, which is part of the broader trust mandate within the Asia Pacific ex Japan mandate, and we saw quite abrupt share price corrections in the early part of the period. And that was a value opportunity, if you like to buy some names there. So we now have more in in those markets. We've got more in the technology sector, right across, internet hardware software, and also more in the healthcare sector as well. Many of these stocks have been actually beneficiaries of pandemic, interestingly.

Interviewer: Right. What about looking at Asian markets in general? I mean, it looks like Asia has come out of this first. Do you believe that economic recovery is reasonably well established? Are you confident going into 2021?

James: So yes, it does feel reasonably well established. But at the same time, it still feels a little fragile. So as with everywhere, the region is still prone to second, third or even fourth waves of the virus. And we've seen that in certain markets. But certainly relative to the rest of the world. I agree. I think Asia is looking comparatively in pretty good shape. And it is growing. Amazingly, if you think about what the what the region has been through, but China this year is forecast to grow a little over 2% increase in GDP growth terms. Taiwan should post just positive growth, Vietnam as well. And that's quite a stark contrast really to many parts of the rest of the world where we've seen very steep declines in GDP growth. So the region isnt out of the woods yet. And there's still quite a lot of restrictions in place, of course. I think relatively speaking, Asia is looking in fairly good shape.

Interviewer: And your latest update, you said that country and sector divergences could become more pronounced as Asia progresses through the economic recovery. I wonder if you could talk about that, and why you think that's the case?

James: Yes, I mean, I think this is a really interesting topic. And it's not obviously not as relevant to Asia. But you know, the question of whether COVID, and the pandemic, will have a lasting kind of structural impact on on economies and sectors and companies. And we're all trying to work out or work through that and decipher what it all means. And I think the answer is probably it does. And we're already seeing certain sectors, emerge as winners and others as sort of casualties if you like. So I think we've definitely seen the pandemic as a sort of catalyst for that shift from offline to online with Internet companies, benefiting. We've seen IT services companies, which is a large industry out here, has benefited from clients, increasingly moving towards cloud based solutions and needing help to implement that. We've seen diversification of supply chains, with multinationals wanting to have more than just, one supplier and not be quite so dependent on China, for example. And we've seen companies respond, as well in delivering cost reductions, but also just moving things to digital ways of working, which has increased efficiencies as well. So I think there are winners and losers. And we're still trying to work through what all this means. But I think the other interesting point here is just how Asia emerges relative to the rest of the world. And I think Asian growth is coming back. There will be less debt in Asia versus other parts of the world, interest rates, yes, there's been stimulus, but there's still room to cut. And I and I do wonder whether, relatively speaking, Asia emerges from there, compared to much of the rest of the world from this crisis.

Interviewer: And presumably, some of the themes that have driven Asia. To this point, the longer term themes like urbanisation and wealth management and new increasing middle class, presumably, those are all still kind of firmly in place. I mean, how are you playing those in the portfolio?

James: Yes, they are. And we are, well positioned to play many of those long term structural themes. So you mentioned urbanisation where we have quite a big exposure to cement companies, which are obviously involved in the construction of housing and so on infrastructure. Quite a big exposure to the financial services sector, which is a play on rising wealth levels and demand for basic sort of financial products, and so forth. But we've also been given quite a lot of thought to newer trends and themes, and how we should position around those. So we're seeing a lot happening here in the sort of tech sector, you know, very strong growth, still in demand to kind of high cloud computing, data centres, cloud solutions, and everything into 5G and artificial intelligence. Asian companies are leading the charge. And in that area, in many cases, particularly in the semiconductor space we've got a big exposure to that in the portfolio, the internet sector, we're well positioned there. And a big push more recently, on to all things green related and, you know, the drives for electric vehicles and so forth. And again, we're well positioned, owning some of the electric vehicle battery makers, for example, in the portfolio.

Interviewer: And what about the outcome of the US election? It could a change of administration make any difference to Asian markets?

James: I think on balance, the Biden victory, and the prospects of the Biden White House is, is on the margin positive for Asia. Obviously, the one of the big sources of uncertainty over the last couple, more than a couple of years now has been relations between the US and China and the trade war. And obviously, that's morphed into a broader set of issues. And I think it's been the style and approach that Donald Trump has adopted in dealing with China. That's fueled a lot of the uncertainty for the markets. And the expectation is that while these pressures or intentions aren't going to recede or go away, There is pretty broad bipartisan support, I think, for these measures in the US, our expectation is that Biden, and his administration will be a little bit more predictable, a little bit more diplomatic, a bit more multilateral, in their approach to dealing with China, which I think will help. And I expect, also that we're seeing some US dollar weakness on the back of the election outcome, if that remains in place. Generally, that's positive for capital flows into Asia and emerging markets as well. So I think, on the margin, this is this is a positive outcome for the region.

Interviewer: Okay. And so as we put a rather dismal 2020, behind us, are you reasonably hopeful for a better 2021?

James: Yeah, no one wants to repeat 2020. And I think that's not certainly what we're expecting, obviously, as I said, the region does remain, you know, prone to further waves of the virus. But I think now with the vaccines on the horizon, and the generally good job that Asia has done in bringing the virus under control, that looks considerably more promising and optimistic. And as I say, that is driving a recovery in growth in this part of the world, economies are getting back on their feet. And that is being feeding down through corporate earnings. And the market is expecting and forecasting quite a considerable rebound in earnings growth for next year. And when you contrast that with valuations, yes, the markets recovered quite strongly this year. But still, overall, valuations don't look overly demanding. And certainly relative to global equities, I think Asian equities look pretty attractively valued. So I think all of that combines to a quite optimistic outlook as a base case for next year.

Interviewer: Okay, great. Thank you so much, James. Let's hope for less eventful 2021. And thank you to our listeners for tuning in. And please check into the website, which is www.newdawn-trust.co.uk And please do look out for future episodes.

Important information:

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts - invest in good company

Interviewer: Welcome to the latest in our abrdn Investment Trusts podcast series. With me today is the manager of the Aberdeen New Thai Investment Trust, Orsen Karnburisudthi. We'll be talking about how Thailand is recovering from the pandemic and whether recent political developments are likely to have any impact on the company. Welcome Orsen. Now, economic data appears to be improving in the region, are you generally confident that the recovery is building momentum?

Orsen: Yes, if you look at Thailand, the GDP growth has recovered from the second quarter, the second quarter GDP decreased 12% year on year, the third quarter is still down compared with the third quarter last year, but down less with 6.4%. This is better than expectations of 8 to 9%. And if you look at GDP growth for the full year, the growth would be about minus 6%, which is much better than estimates earlier in the year at the peak of the Covid pandemic in March and April. Much of this will come from government spending. These have been strong, both normal spending by the government as well as capital investments. In the third quarter both of these have been positive. The biggest uncertainty remains Covid-19. Thailand, fortunately, is doing better than many countries, including neighbours.

Interviewer: And are there still some sectors set to recover?. I mean, how about the region’s all important tourism sector, for example.

Orsen: I'll start with the sector overall. And then touch on tourism. The private sector has recovered from the second quarter, understandably. The third quarter is still down year on year, the fourth quarter as well. And not back to the baseline of 2019. So it's still quarter on quarter momentum, but it could still take a few quarters to come back to levels of last year. International tourism is a large variable. We're expecting foreign tourists of just under 7 million this year. But take into account that 6 million is before the lockdown earlier this year. So just really not much tourist arrivals this year. The figure next year, the estimate is about 5 million international tourist arrivals, the latest estimate, and this is assuming a vaccine would be available in the third quarter of next year. So that's the one large variable for 2020. In the meantime, where we have seen, areas of improvement - government has been subsidising spending for consumers that ranges from cash handouts, to co-payment schemes, and even domestic travel schemes where the government subsidises up to 40% of a hotel room and dining. So this encourages domestic tourism. Besides these subsidies, if you're looking forward to global trade, exports look promising with the result of the US elections with Mr. Biden winning but this will take time to be reflected for global recovery in trade.

Interviewer: Okay, and I mean, there has been some political upsets recently with some kind of high profile protests against the king. Are these sort of isolated incidents, or can you see them having any economic impact?

Orsen: The short answer is immediately it's limited to economic recoveries and momentum continues. But more in the protesters the protest, rather, it's more across many issues, these including the monarchy - touching upon the monarchy as well. Most protesters are students, first time voters. And these protests have actually commenced before Covid-19 – it actually started earlier this year. A couple factors include angst, disenfranchisement, a popular party that they like was disbanded, not liking the government, the way the Constitution is written, the way the Senate is selected, and just having a Prime Minister since 2014. Quite a long time, along with the economic slowdown and the inequality that ensues. But on the fortunate side, the protests have been non-violent. It's been stretched out for several months already. I think the peaceful protests will continue. And it's the issue on how the institutions will be performed going forward. It will be stretched out because there has been quite a lot of reforms in those social, economic and political fronts.

Interviewer: And while this has been going on, what's been happening in the Thai stock market? Has there been any kind of notable winners and losers, what's been the overall performance?

Orsen: The market is still down year to date, like many other stock markets. There’s been different winners and losers over the course of 2020. If you start with the initial plunge with Covid, most stocks sell as well as energy. There was a recovery in May, June, July. The market was sideways August, September, October, a huge drop - a weakness - in October followed by the November rally of risk on attitude with prospects of a vaccine. So earlier in the year, low oil prices helped manufacturers that import including logistics companies and distributors, the lifting of lockdown helped retailers and the latest prospects of a vaccine, travelling tourism and competitors, for example, airports, hotels, hospitals, shopping malls. On the whole, the larger companies in each sector benefited more than overall, particularly those that are listed on the stock market.

Interviewer: And how do relative valuations look today, both regionally and compared to kind of international peers?

Orsen: If you look at the market earnings growth at the depth of the crisis, earnings estimates are down 18 to 20%. That's earnings for this year. This has improved to 11, 12% just by way of a better than expected recoveries since the second quarter, to rebound to 2019 level would take a bit longer. EPS is still down this year. So we're looking towards the end of 2021. Where earnings should pull back to the levels of 2019. And we're seeing 2022 growth of about 10%. If you look at PE ratings, the market is trading on 17 times 2021 and 16 times 2022. It is slightly elevated, I think historically, a level of 14 to 15 times would be more attractive. It's just the fact that there isn't much earning support at the moment. And expectations are running slightly ahead. Just given the developments of Covid-19.

Interviewer: Okay, and looking at the New Thai portfolio now, have you made any recent changes? Are there any sort of notable themes running through the Trust today?

Orsen: Yes, for the past three to six months, we have increased weight in several sectors. The first is services. We are underweight the sector but we have decreased this underweight so this would include services such as transport, for example, Airports of Thailand, and also increasing more weights in retailers, those that are benefiting from the recovery in spending. We have also increased weights in tech – technology, not only electronics companies, the assemblers, the exporters, but also the mobile telephony companies, the operators in Thailand. We are slightly underweight technology now and the underweight has decreased over the quarters. We have decreased weights in property and construction. For the most part, this is property developers, we don't hold property developers anymore, focusing more on asset owners with recurring rental income. We have also trimmed materials company particularly after the run up in the second quarter for example, cement companies. We have also decreased weights in financials, particularly insurance, several banks especially the large banks and some non bank financials. Within energy and resources, we also refreshed the sectors adding new utilities names. It's a mix of power utilities and water with some exposure to infrastructure investment. So these are the main changes: increased weights in services and technology, decreased weights in property, construction and some financials and just refreshing of names within energy and resources.

Interviewer: And what sort of feedback are you getting from companies that you're speaking to at the moment? Are they generally kind of optimistic or pessimistic looking into 2021?

Orsen: The drop in third quarter sales is less than initially expected. It's still down year on year, the third quarter, but the trajectory is better than expected. Again, a reflection of macro, you can see this in same store sales growth of retailers which is less negative year on year, asset quality from banks, meaning low, lower than expected, NPL formation, recovery in consumer durable sales like automobiles. Measurement is cautiously optimistic - the largest corporates with the best financial resources are improving their market shares. Again the concern overall is just that non listed, smaller companies are benefiting less or being less optimistic, suffering more from the implications of the overall economy.

Interviewer: And now the Trust currently has a yield of over 5% - how have dividends from Thai companies held up?

Orsen: Typically companies pay as a percentage of profits. And most would have a declared minimum payout ratio. This hasn't changed. At the margin, you've seen interim dividends for this year to be down slightly just by way of lower profits. Some companies do keep an absolute level stable. So even if profits are down, some companies do increase their payout ratios just to maintain the absolute level of dividends. What we're seeing this year is average dividend yields of the companies that we invest to be around 4%. I think that will be maintained if not improved upon. The upside for dividends from the Trust would be capital gains, or any gains, especially the market run up and the Trust also has reserves upon which dividends can be drawn.

Interviewer: Okay, what is the Trust’s current position on gearing, do you still have debt in the Trust?

Orsen: Gearing levels have ranged from 10 to 15%. It is currently towards the mid to high end of that range. The absolute debt level for the Trust is unchanged since the fourth quarter of 2019, it’s just as the percentage change with market movements. So if the market fell, for example, towards the end of March and the end of October, the gearing would increase just by way of the NAV of the Trust coming down. But nevertheless, we do intend to keep gearing within this range and with the absolute debt unchanged for the Trust.

Interviewer: And finally, there are more promising signs as we move into 2021. You know, the vaccine, better treatments, this kind of thing. I wonder if you could just give us a flavour of your thinking on the outlook?

Orsen: GDP will continue to be down year and year for the next one to two quarters just by comparison. It's better on a quarter and quarter basis. But if you look at the nine months, I mentioned third quarter earlier, of minus 6.49 – nine months is minus 6.7. So not bad and for a four year expectation of minus 6.28 so still a couple more quarters of weak year on year numbers and positive quarter on quarter numbers. The runway for 2021 would be a 3.5 to 4.5% growth, GDP growth. The momentum not only for stocks and for earnings will come from the improving macro and additional upside, just from tourism and travel, which I think is not yet totally factored into expectations.

Interviewer: Great, okay. Thank you Orsen for those insights today. And thank you to our listeners for tuning in. You can find out more about the trust at www.newthai-trust.co.uk. And please do look out for future updates.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns, return projections or estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts - invest in good company

Interviewer: Hello, and welcome to the latest in the abrdn Investment Trusts Podcast series. Today we're talking to James Thom, co-manager on the Aberdeen New India Investment Trust about how India is emerging from the pandemic. Welcome, James. I wonder if we could start with an update on India's economy - are there signs of a recovery?

James: Yes, there are signs now, which is quite encouraging because India has been amongst the hardest hit of the Asian countries. And we saw when the virus first hit, a pretty draconian lockdown, which had a very severe impact on the Indian economy. We saw a contraction in GDP growth of more than 20% in the quarter ending June. So it was pretty grim for some time there. But lockdowns have now been eased and removed. Economic activity is coming back. And I think there had been some speculation around whether this was just kind of pent up demand through the kind of lockdown period, and whether it could be sustained. But we're now into several months of sustained strong growth across industries, in fact. So it looks, it looks pretty encouraging at this point with a meaningful rebound.

James: And during this period, the Indian government's been quite keen to keep spending under control and retain its credit rating. Has that held back the recovery at all?

Interviewer: To some extent, I think that that is the case, though India, arguably to their credit has been quite disciplined in trying to stick to the budget deficit targets, which are in kind of a negative territory. And that has constrained their fiscal response certainly relative to many other countries in the region. But I think the bigger impact really on the economy was the lockdown that I just referred to. And clearly, that's now been lifted and the economy is coming back quite nicely. And although India has been somewhat constrained in a fiscal standpoint, there's been quite a bit of support from a monetary standpoint with a succession of rate cuts that have been put in place. And we have seen further fiscal support come through in recent months, and a raft of other kind of support measures to support the financial system in particular, things like loan moratoriums, and general kind of liquidity being pumped in. So overall, I think yes, it's not been quite the size and scale of response to be seen from other governments, but it's been sufficient.

Interviewer: And what's happened to stock markets during this period? I mean, have you seen the same sort of dramatic fall and then recovery that you've seen in other major stock markets?

James: Yes, we have. It really has been dramatic and the markets been surprisingly strong, it is now back into positive territory year to date, it's up about 7 or 8% and hitting fresh highs again, and that marks that kind of really quite staggering kind of trough to peak return of you know, almost 70% I think from the lows in late March in local currency terms. Having said that, I think India has still lagged the broader Asia region. So if you look at regional Asia Pacific ex Japan index, it has performed even better with some of the North Asian markets like China and Taiwan, Korea, outperforming India. And really that has just been, I think, a reflection of two things, one, just having got a firmer grip on the virus pandemic earlier and therefore, they've been able to emerge from that sooner than India. And we've seen very strong performance in the sort of technology and internet sector in these markets. And that's just not really a part of the market in India at this point.

Interviewer: And have you seen that same polarisation in Indian stock markets where the winners have won very big and the losers have really been sold off very heavily. So while there's been a kind of recovery in aggregate it's actually quite bifurcated as is typical in many of the other markets?

James: Yes. So I think there has been a big kind of dispersion of returns across sectors. It is a bit different to other markets, as I say, I think, you know, in northern Asia, China in particular, or even you know, if you look further afield to the US, it's been the tech companies, the internet stocks, like, you know, Tencent and Amazon, Tencent and Alibaba in China or Amazon, Facebook, Google in the US, those have really been sort of beneficiaries almost in the pandemic and other kind of tech semiconductor type companies. India doesn't really have those types of companies. So it hasn't had that same sort of very strong returns coming from the tech sector, although it does have a very strong and large IT services sector. And that has been a standout performer with these companies also I think being beneficiaries of as the pandemic as their clients push for more digital services and a move to the Cloud. And otherwise, it's been somewhat similar. We've seen the healthcare sector perform very well as you would expect, and seen elsewhere in the world. Consumer staples, have generally done their job and being quite defensive. And then at the other end of the spectrum, the harder hit sectors have been things like financials, banks, real estate, consumer discretionary. And that's been a very similar picture in India, although now with the news on the vaccine and the normalisation in the economy, we're seeing those sectors now bouncing back quite nicely.

Interviewer: Against that backdrop, what does the portfolio look like today, are there kind of themes you can pick up on that are kind of running through it?

James: Well, it remains a high conviction focused portfolio of high quality stocks that continue to select from the bottom up based on our own first-hand research. And we really continue to look to the long term compounders of companies with strong market positions and clear, sustainable competitive advantage, I think we've had put a big focus or emphasis on balance sheet strengths through this period. It's always a sort of core part of our stock selection criteria. But I think all the more important through a period of economic turmoil like we've just been through. So the balance sheets in the companies that we hold in the portfolio are rock solid and cash flows have taken a knock but are generally pretty robust. And I think we've kind of weeded out intentionally anything where we had question marks or doubts, from a sort of quality perspective. Having said that, it remains a well diversified portfolio. We have big positions, still in the IT services sector, which as I’ve said have been a beneficiary of the pandemic this year. And we've complemented that with a couple of newer holdings. And although as I said, the internet sector is not a big sector in the Indian stock market, at least not yet, there are a few listed companies there and we've added a couple that we like and that I think are high quality players on that scene, so those have gone in. We have a big position spread in the financial sector, favouring the leading private sector banks, and those have held up much better than their public sector rivals and they continue to take share and we've more recently complimented those holdings with a couple of stocks in the life insurance sector, which remains a sort of structural long term growth story. And then I think the consumer sector and material sectors which encompasses both cement companies and paint companies play on affordable housing and urbanisation, you know, those are large positions, too. So overall, I think the portfolio remains a concentrated, active portfolio, but well aligned to some strong multi-year structural growth trends and themes.

Interviewer: Okay, are there any favoured holdings that you could highlight just as a sort of example of your process in action?

James: Yes, I mean, maybe if I just focus on HDFC - Housing Development Finance Corp given that’s the largest holding in the portfolio currently at around 10% of the fund. You know, to my mind, that is the kind of perfect example of a long term compounder high quality stock that we've held for a very long time and has served us very well. It's a financial conglomerate and its core business is in low cost mortgages. But it also has a stake in a bank, a life insurance company and an asset management business which are kind of market leading businesses in their own right. And really what they've done over the decades is work out how to lend in a sort of risk adjusted way to the middle to low income segments in India, and have developed the right systems and processes. And on the back of that, they have a very capable and experienced management team who have been able to deliver very consistent growth, but also returns and asset quality over the years, and that, over time being reflected in very strong share price performance. And I think, you know, although, you know, this is a business you've held for a long time, I think that the growth potential for this business remains very compelling, as I say, as India continues to see further urbanisation and demand for housing and therefore mortgages and other financial services products. So hence why it remains our core position.

Interviewer: Okay, I wonder if we could skip about a bit here and look at Modi. Now, he's been in power now for six years and he's put in place a reform programme. I wonder what you think of that, and how it's sort of developing the Indian economy, whether it's been a success? Is it ongoing? And you know, the prospects in future?

James: Well, I think Modi remains an extremely popular leader in India, despite the struggles with the virus and pandemic, that we’ve talked about already. And despite some reform efforts that have not, frankly not been all that successful, he seems to sort of, say the Big Bang type reform. And sometimes those are quite effective. And they've been, I think, positive for Indians, and for the economy. But not always. I think the example that stands out where it was a bit of a miss, was demonetisation efforts of reform, which really wasn't effective and caused a huge amount of disruption in the economy. Having said that, I think some of his reform efforts have been, have been very encouraging and welcome. So he's implemented and used for the bankruptcy court code. And I think that's fundamental for the efficient working of the Indian corporate environment and to banks being able to work through and restructure loans to this banking system that remains kind of heavily burdened by bad debts. I think that's a big positive. And GST the goods and services tax, I think, is another fantastic achievements - one that taken, you know - had been the focus of successive governments over the decades, but finally, Modi managed to push it through, and there is your question more to come. And we are seeing and have seen in recent months and weeks, two big new reforms in the area of labour and agriculture - it remains to be seen how effectively those get implemented. And that, as with many things in India, is key. But certainly from a headline perspective, these look like very encouraging reforms too and there's a big focus on attracting foreign direct investment into targeted sectors as well. So I think there's more to come. And, you know, whilst there have been hits and misses, on balance, I think the hits outweigh the misses.

Interviewer: And so it could it could be a catalyst for stronger economic performance going forward as well?

James: Yes, potentially, as I say, execution is key. So if you take new policy around attracting foreign direct investment, as an example for his making India campaign that was launched was kind of much fanfare a few years back in his first term, but didn't really deliver in terms of, you know, new investment and flows into India. It's been revamped and rethought through and relaunched and is now far more targeted and supported with key kind of incentive schemes, and there is you know, some evidence of early success as India is attracting a huge amount actually of investment into the smartphone manufacturing supply chain with a large number, for example of Apple's suppliers, moving to India and setting up plants to manufacture parts. And the idea is that they will now roll this out into other sectors as well. So, if successful and I say, execution is key, then yes, I think it could provide a meaningful boost to the economic prospects of the country.

Interviewer: And how does valuations look today? I mean, India has historically traded at something of a premium to other kind of Asian markets. Is that still true? Or have you found that the pandemic has actually adjusted that a little?

James: It's still true. India's never been cheap. And even with the pandemic, and although India has lagged the broader Asia region as I said, it continues to trade at a premium. And that reflects the sort of longer term growth potential of a market which is structurally, you know, set to grow, given the size of the population and economy at a kind of relatively nascent stage of its development. So I think India will always trade at a premium. Valuations this year are a little hard to decipher, not just in India, but you know, right across markets, and given the kind of disruption to earnings, so I think we've tended to look at earnings on a sort of two year four basis or earnings multiples on a two year four basis, or on a sort of price to book ratio instead, which has been less disrupted than earnings. And there, I think you see, yes, India is still trading at a premium, but it's not looking too out of whack with historical levels. And inevitably, you have to really drill into the detail. And there are some very expensive stocks in India. But I think there is still some pockets of value as well. And I would point to a stock like HDFC. Where I think the valuation there is an example, in a financial sector which has been beaten down over the course of the year, I think they're, you know, there is still value there.

Interviewer: Great. And I wonder if we could just finish off by talking a little bit about the outlook for 2021?

James: Well, I'm more optimistic now, in my outlook than I have been for quite some time. India has been through a pretty rough two or three years, in fact, so if we rewind to 2019, it was kind of in the midst of something of a financial crisis, really, with bad debt in the financial system. And this was kind of weighing on lending and the availability of credit and therefore growth more broadly. And it felt like it was just about emerging from that. And then, of course, the pandemic hit, and that and the lockdown and the very severe impact that had on the economy. And now finally it feels like the country’s emerging from that. And whilst there's been a lot of caution and concern, understandably, when talking to companies now, there is a very clear sense that the tone is changing. Management teams are finally becoming a bit more optimistic. And as I say, there was speculation that a lot of the kind of demand that we were seeing post lockdown was just pent up demand. But that seems now to be sustained. And whilst there's a risk, of course, that we'll see a second wave of the virus in India and we certainly shouldn't kind of rule that out. Barring that, I feel quite encouraged that growth is coming back and can be sustained and that will make for quite an encouraging 2021.

Interviewer: Great, okay, thank you James for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeen-newindia.co.uk and please do look out for future updates.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns, return projections or estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts - invest in good company.

Interviewer: Hello and welcome to the latest in the abrdn Investment Trusts podcast series. With me today is Fran Radano, Manager of The North American Income Trust. Today we'll be talking about the election and whether it's made a difference to stock markets. Welcome, Fran.

Fran: Thank you.

Interviewer: Now, the election has obviously garnered a few headlines. And after some to-ing and fro-ing, we appear to have a winner. How have markets reacted to Joe Biden's victory and how has that affected the portfolio?

Fran: So first things first, Trump technically hasn't conceded yet. But obviously, for all intents and purposes, we're assuming a Biden presidency, and we're expecting a Republican Senate, which won’t be decided until early January, and a very narrowly held democratic House. I think the effect here of what that looks like will offer probably what we think might be the best combination of sort of pragmatism at the top, and sort of the benefits of a divided government, where the full democratic platform of higher taxes and large spending programmes on certain initiatives will probably be pulled back, if not pulled back entirely. And conversely, some of the Republican platform initiatives are also off the table. So I think you see a pretty good backdrop here. And obviously, it's pandemic dependent, but we do have a vaccine now with good efficacy. So if we look through that, you know, we feel sort of cautiously optimistic.

Interviewer: And have you made any changes to the portfolio in expectation of a Biden win or any other outcome to the election?

Fran: No significant changes, you know, sort of, per usual, but obviously, we're cognisant, you know, if you look at an industry like banking where under a democratic sweep, there could have been higher taxation and more regulation, and to be sure, the regulation is still on the table, taxation, probably less so. Something like that could impact their business in an already difficult time. So we did reduce some regional bank exposure, you know, not massively but thoughtfully. You know, conversely, in a sector like healthcare, you know, we maintained our overweight position, with the belief that the underlying businesses have predictable cash flows. They have demand visibility, and we just believe the single digit multiples of our two core positions, which are Abbvie and Bristol Myers, are draconian at current levels.

Interviewer: And 2020 has obviously been an extremely challenging year, to put it mildly. I wonder if you can give a brief overview of the performance of the portfolio and also any reshaping you've done in the light of the pandemic?

Fran: Yeah, well, as you as you know, 2020 has been you know, it's been a bit of a whipsaw. You know, we saw it at the very start of the year, strong GDP reading. And literally all-time records in both consumer net worth and low unemployment. And wage growth was also strong. So we had a great backdrop coming in, probably something we hadn’t seen in quite some time. And as we know, this fairly abruptly changed as the markets pulled off in February. And the US economy, you know, came to a screeching halt, almost literally by mid-March. Currently, the backup of the second and now third wave during the truly unprecedented presidential election has made it especially difficult for dividend focused managers as dividend yielding stocks were shunned despite very few dividend cuts here in the US. When we look at it, maybe it was the perceived risk of increased taxation on dividends under a Biden sweep, or simply the focus of investors on all things technology related. As far as the portfolio changes, we've made nothing - you know, reshaping is a good word. I think we’ve reshaped some things in the margin. I think what we've done on the whole is that we were able to pick up some very high quality names, that are growers that also pay progressive dividends that had been on our watch list for quite some time, but had high valuations. And in the spring, when we saw stocks sold off indiscriminately, we were able to buy some of those.

Interviewer: Okay, and now we have a potential vaccine, although there's still a couple of stages left to go. The markets have been quite excited about that. Has that changed market leadership at all? Has it changed the sort of balance of valuation for the US market?

Fran: It seems like some days it has and some days it hasn't. I think, you know, as long term investors we do see a light at the end of the tunnel, given the vaccine, you know, test readings from two different providers. But, I think the way we look at it, as long term investors is, we still like our healthcare space, we think the risk total is largely priced in. We also own two defence companies, Lockheed Martin and L3 Harris trading at mid-teens multiples, which seem to be pricing in an outcome that we simply don't foresee. And finally, on the banking side, we own four domestic banks of different shapes and sizes, and we just believe the valuations there do not align with the cash generation or the balance sheet strength. And oddly enough, the bond market of all people would agree with us on these banks, but the equities still have lagged.

Interviewer: And the aim of the Trust is to pay above average dividend income and generate long term capital growth. As you mentioned earlier, it's been a tough year for income. Can you give an update on the portfolio income and the levels of revenue reserves?

Fran: Yeah, so the typical stock in the fund, you know, yield, say 3.5, maybe 3.75%, it grows its dividend at a high single digit clip. Year to date, dividend growth is a bit lower because some companies have just sort of kept their dividends flat. So right now we're looking at dividend growth, and they say 4 to 5% range. And of our 40 stocks in the fund, we've only had 2 dividend reductions. One was a small 14% cut, and the other was a company, Blackstone, who actually pays a variable dividend. And they just announced their final dividend of the year and actually year over year it’s essentially flat now. So you know, the other 38 companies in the fund have paid either a flat dividend or progressive dividend. So that puts us in a pretty good place on the revenue front. Revenue reserves are calculated annually. And, you know, we entered the year with roughly 10 months of revenue reserves. We believe when we close the books on this year in January, that will put the board in a very good position to once again pay a progressive dividend and actually increase reserves even further. We feel very good about our performance on this front in an otherwise, you know, very difficult year.

Interviewer: Yeah, I mean, do you think the worst is over on the dividend front? Or can you still see companies continuing cuts?

Fran: No, I think we feel pretty good about it. I think, you know, what makes the US market a little bit different is there's two ways to return cash to shareholders. There’s share repurchase and there's dividend. You know, for a typical company in the North American Income Trust, majority of that return of money to shareholders is through dividends, but often our companies buy back stock enough to keep the share count flat, or even shrink the share count, you know, 50 basis points, or percent. And what we've seen is, our companies sort of turn off the share repurchase spigot and continue to pay out dividends. So we actually feel pretty good about that. If we look sort of beyond our universe, we actually see some companies actually reinstating their dividend. So I think the visibility is there, and obviously, the vaccine and the promise there, you know, lends some credence to that. So, otherwise we feel very good about dividends and revenues and the ability to pay a progressive dividend.

Interviewer: And just finally a bit of crystal ball gazing if we can. I mean, how are you as 2021 approaches? How are you feeling about the future? Are you reasonably optimistic that companies can bounce back or even thrive after the crisis?

Fran: So it was interesting in the States here, I think, the crisis, what we saw here with many of the large well capitalised companies is that they were actually able to sort of sustain their business and sustain their business model, and many of them have grown share. Unfortunately, it was these small, private, less well capitalised companies that you see on Main Street - they've not only lost share, but they are still feeling a lot of pain. And given the political theatre, you know, in not renewing fiscal stimulus bills, it's continuing. So I think it is a little bit of a bifurcation on that front. I think the biggest learning going forward with corporates and companies in the Trust is a lot of them realise, you know, they can actually manage their business with far fewer expenses than they thought were needed. I would expect more automation, I would expect more use of technology. And the business travel component that people have talked about, I think that will be reduced on a semi-permanent basis or, you know, for quite some time. And then, importantly, I think on a personal level, life in a post vaccine world for many who have been sheltered has the potential for people to embrace life, like they have never before, you know, which will be a fascinating time. I think that that will sort of stimulate the economy and make at least the back half of 2021 a very interesting time when we look back in the history books.

Interviewer: Let’s hope so, that's great. Okay, thank you, Fran, for those insights and for your time today. And thank you also to our listeners for tuning in. You can find out more about the Trust at www.northamericanincome.co.uk. And please do look out for future episodes.

Important information:

 

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts: invest in good company.

Interviewer: Hello and welcome to the latest in our abrdn Investment Trusts podcast series where we catch up with the Trust managers to explore how they're navigating these difficult conditions. With me today is Pruksa Iamthongthong from the Asia Dragon Trust to give her insight. Thank you for joining us today Pruksa. Now you're aiming to find areas of structural growth in the Asian economy, and obviously digitisation and the move to online has been very important during this pandemic, but can you explain why longer term e-commerce and online activity have such strong growth potential?

Pruksa: Well they have really been a force to be reckoned with during this pandemic. But if we were to look at how the growth has been and looking for a long term trajectory, I think online and e-commerce has clearly been very disruptive to traditional retail and simply because I think it’s the answer to various consumer needs, whether you think about the breadth of choices that the online world can offer at the click of your fingertips, the personalization of choices as well - as they gather more data about you, they can make recommendations according to your browsing habits. As well as the increased convenience in the increasingly fast paced world that we live in, it is convenient with deliveries coming to your doorstep. And ultimately, if all these things are done extremely well by an online provider, an e-commerce retailer, it does produce a very good customer experience. So I say why not - I think we are all converted during this Covid period. And therefore from a growth perspective, we do see a long runway for e-commerce and online activity or digitalisation across many verticals of the economy. And this applies to many parts of the world.

Interviewer: Okay, and what type of companies are you investing in to access this trend?

Pruksa: Well, we can access this trend from many ways, actually. Firstly, we can think about the ecosystem players that could be the providers of such online services. So for example, the likes of Tencent which is our core holding. Tencent as part of the business helps to digitalise the local small shops within the community. They provide Tencent Wechat pay - it has mini programmes that provide these shops with CRM or customer relationship management. And essentially, that allows small shops to convert their offline presence into an online and ultimately mostly an O to O model, which is an online to offline model. And that's how consumers today are actually accessing this service. And I think we actually see an acceleration of this happening during the Covid situation in China, where many of these offline retailers - businesses - have to be forced to go online to remain in business. So that could be one way. Another way, is in the enablers of digitalisation. And what I mean by this is it could be the investment into the building blocks of digitalisation. So, if you think about it, there is no secret that data is the key in digitalisation, and in others, and we go back to my earlier point about customer service. In order to provide that seamless customer service and experience, the ability to process data to store data, to facilitate interaction and exchange of data is extremely important. And all this needs to be powered by things like advanced semiconductor chips. And that is manufactured by the likes of TSMC. Taiwan Semiconductor, which we have in the portfolio and Samsung Electronics, both are core holdings in the Trust. We also invest in data centres in China, which will be the key infrastructure is supporting the rapid growth of cloud providers that are a key enabler in this area as well. And the third way could be a bit more traditional, it may be a traditional consumer goods company. One example that we can think of is a company in India. It’s an old company called Hindustan Unilever, which is the Indian subsidiary of Unilever. It is a household name that is well known for their consumer goods. But perhaps what is less known is how they have played a central role in the digitalization of e-commerce activity in India, which we know is - penetration of [modern trade] is actually very low. So a lot of trade in India happens on what you call a general trade and the small neighbourhood shops call Kirana which is - you can think of it as a little hole in the wall. It is very much a central part of that. So what this company does is they help to digitalize the Kiranas. They provide the app interface called Mykirana that allows these offline small Kiranas to go online again. And if you are a consumer in India, you open the app up, you can actually search for the Kirana that is closest to you and order online – again, it will be delivered to you at your doorstep. So something very, very handy during the Covid situation India as you can imagine.

Interviewer: Thank you so much Pruksa for your insights today, and thank you to our listeners for tuning in. For more information on the Trust, please do check our website, www.asiadragontrust.co.uk and do look out for future podcasts.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments and products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns. Return projections are estimates and provide no guarantee of future results.

Hello, my name is Ben Morris and I'm the Senior Equity Investment Specialist at abrdn and I'm delighted to share a short update on Japan. I'd like to cover three areas. Firstly an update on the market and why Japan still remains an important asset class. Secondly, how we invest at abrdn. And thirdly, and finally, a brief outlook.

So in terms of an update on the market, we've seen Japanese equities advance in the third quarter of this year on expectations of policy continuity after Yoshihide Suga succeeded Shinzo Abe as Prime Minister. In addition to maintaining fiscal and monetary stimulus Suga pledged to speed up structural reforms, promote digitalisation in the government and society as a whole. He has also aimed to consolidate small and medium sized enterprises and regional banking sectors to help optimise their operations. Similarly, he has pledged to promote more competition among mobile phone carriers to drive down prices and sentiment has generally lifted as regional authorities including the Tokyo Metropolitan Government that downgraded their COVID-19 alert levels as a result of the receding infection rate. And in addition, there was some general optimism that the US Federal Reserve's revamped approach to handling inflation would keep interest rates low, lower for an extended period of time. So with these sort of thoughts on the market in mind, it is worth reminding ourselves of the opportunity in Japanese equities. As you know, Japan is one of the largest single country markets in the world, around 7 or 8 per cent of MSCI world. With a similar number of companies as the US, we know that coverage is poor. It's probably the most under covered developed market in the world. And this really means that there are genuine opportunities for active managers. Secondly, investing in Japan is not only about investing in Japan, there are many high quality companies that are operating across the world, that just happen to be based in Japan. A key example of this would be Makita, the power tool manufacturer or Seismic, the medical equipment manufacturer. And thirdly, ESG. Historically, governance has been poor. We have seen numerous issues in the past around the likes of poisoned pills, weak controls, inefficient capital allocation. So really this is coming from a low base and the manager is looking at these characteristics and engaging with companies certainly provides an opportunity there.

So onto the second question, why abrdn and what's our approach. Our long term quality approach really is driven by fundamental in depth bottom up research with the ESG analysis fully embedded within that and we're seeking to uncover high quality Japanese companies that we can invest into for the long term. The team, on average, meets with about 150 Japanese corporates a year. And we do certainly benefit from our large experienced investment team across Asia. And actually the wider global equity research platform that we have, that we benefit from, helps us both in terms of coverage, but also cross checking investment opportunities. And being a long term, shareholder - long term investor - certainly does help the company engagement. And as we know, that engagement aspect really is supportive to managing those potential sort of governance risks. The outcome of this approach enables the team to construct portfolios, where you know, if you think about portfolio metrics, they are typically above average on a number of areas. Firstly, profitability. Our focus on expanding on strong economic notes and premium and high profit, operating profit margins than the broader index stands the portfolios in good stead. Secondly, dividend growth, looking for rising powers of growth and those that are growing faster than the index, strength of balance sheets and having strong balance sheets, low levels of net debt to equity and in many cases net cash, hugely supportive and offers up those high quality characteristics that you might expect. And thirdly, returns - having higher return on equity than the index. So, growth from these companies that we are investing in. And from these underlying companies that we've identified and invested into, we’re able to draw out several themes from that. So things like automation, smart initiatives, structural reform opportunities and technological and pharmaceutical innovation, would be some attractive areas that we’ve seen that are finding and have found companies that we invest in. These opportunities combined with attractive valuations for Japanese equities certainly give us a reason to consider an allocation.

And then finally, on to a brief outlook. Essentially, the medium term outlook is relatively hazy. We're seeing a fresh wave of coronavirus cases throughout the world. And this could certainly stifle the start of a recovery. We have seen some promise in terms of vaccines and definitely things like the timeline and the success of these treatments are still pretty unclear. And then we add on to that the uncertainty and the tensions a break between Washington and Beijing - finalising in the context of the US presidential election in early November. Certainly there are challenges, but we do believe that the solid fundamentals of the companies that we invest in to, combined with management agility should allow the recovery of these companies to occur faster than the broader market. And we may remain absolutely committed to our bottom up investment approach. And we have an emphasis, as we've discussed, on good quality companies at attractive valuations while actively engaging with their management to ensure robust levels of corporate governance and high standards of sustainability. Our holdings retain healthy balance sheets and generate strong cash flow. And it's you know - the management experience and the knowledge that we have of our company management who've been able to successfully navigate previous crises that give us more confidence in the valuable addition they can add to the portfolios. Thank you very much for your time today. And look forward to speaking with you again soon.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts, invest in good company.

Interviewer: Hello and welcome to the latest in our abrdn Investment Trusts podcast series, where we catch up with the Trust managers to explore how they're navigating these difficult times. With me today is Adrian Lim from the Asia Dragon Trust to give his insight. Thank you for joining us, Adrian. Now let's start by looking at the philosophy and approach of the trust – the Asia Dragon approach focuses on finding quality companies, and how are you defining quality?

Adrian: Well, quality means basically identifying companies that we think have the best attributes that position itself with the best possible chance of outperforming its peer group and its competition over the long term. This usually means that it requires a combination of good people and talent, not just managers, but throughout the company. It requires responsive and resilient business models that are effective, and the ability of the company to execute as a whole. We also look out for financial strength as well, which gives the resource that provides companies with a better chance of taking advantage of weaknesses within the competitive landscape that do come from time to time.

Interviewer: And you mentioned people there - what characteristics are you looking for in a management team?

Adrian: That's, that's quite easy to explain, but quite difficult to assess. We look for management teams that work well together as a team, that demonstrate competence within the fields that they operate or compete in, or the disciplines that they’re engages in. And, more importantly, but more difficult to measure is we like management teams that demonstrate integrity. Where they don’t just make sure that they do what's best for the company, but they make sure that the company does what's best for all shareholders equally.

Interviewer: And how are you incorporating ESG considerations into your process?

Adrian: ESG considerations are very much embedded into our search for quality. Often when we look at business models, and when we talk to management teams, and we assess them, we need to make sure that these management teams and their business models are sensitive to effectively manage the environmental, social and governance issues that are now coming to the fore in the investment community. Many of these issues we have been looking at over the last few decades of investing for the Trust. But increasingly it's coming up in discussions and we need to make sure that our management teams are aware and can communicate effectively about the things that they do to manage these issues.

Interview: Great. Okay, thank you so much Adrian for your insights today and thank you for listening. For more information on the Trust, please do check our website, www.asiadragontrust.co.uk and do look out for future podcasts.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments and products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts fromabrdn Investment Trusts - invest in good company.

Interviewer: Welcome to the abrdn Investment Trusts podcast series, where we get an update from our investment trust managers on their current positioning and the prospects for their sectors. Today we welcome Evert Castelein, Manager of the Aberdeen Standard European Logistics Income Trust, hi Evert. This has been a difficult time for commercial property generally, but in contrast it's also been a favourable time for some of the key long-term drivers on the Trust, such as online retail. Can you give me a top level perspective on the logistics sector across Europe in recent months?

Evert: Yes, of course. I think if you look at the logistics sector, in the last few years, it has been one of the strongest performing sectors in the real estate market and we expect that to remain the case going forward. If for example you look at our house view, we assume that logistics is going to outperform retail and offices, sectors that are being challenged by the working from home situation. And also the growing online consumption which is actually beneficial for logistics, as you said. So of course, logistics has not been immune to what has happened with the Covid virus as it’s an integral part of the economy. And now that there’s a recession across Europe, we clearly see that some companies are struggling, but as a sector logistics has proven to be very resilient. If we look at what’s happened this year, we noticed that the logistics supply chain was disrupted, especially in March and April when several countries went in lockdown in order to flatten the curve. And this has had a disruptive impact on supply chains that were very much focused on efficiency, ‘just in time’ deliveries, making it vulnerable. And if one of the steps is falling away in that supply chain, then goods will not be delivered on time. So that's what we saw initially. And especially companies focusing on international trade, or the automotive industry, or high street fashion and retail or restaurants - they have been, and maybe still are, struggling. But at the same time, we've also seen companies that have benefited from the situation such as groceries, the pharmaceutical industry, and ecommerce in particular. So it’s a mixed picture of how companies are experiencing the current situation. Some may struggle to survive, which could potentially lead to a small increase in vacancy levels. A good thing is that the starting point for the occupier market is really strong as there is an undersupplied situation across Europe with only 4% vacancy on aggregate. So that's extremely low. And there are a couple of structural trends supporting demand side for logistics space such as the rise of ecommerce, which I already mentioned, but also the reshoring of manufacturing activities and building up of inventory levels. If you start with the first one, ecommerce, we strongly believe that the growth of online sales is a structural trend. And yeah, more people are buying more online and in Europe, in 2019, online sales made up 10% of the total retail sales. And this is expected to increase to 15% this year, so that's quite a steep increase. And of course, as always, the best example to look at is Amazon. If you look at what they have done in the last few months, they have recruited 100,000 additional staff and they're expanding their logistics stock by 20%. So that's a big trend. But other big trends are the reshoring of manufacturing facilities - also called de-globalisation - which is a very strong trend. Many companies right now are moving their production activities from China back to Europe. And part of that maybe is related to an increase in wages or the trade war between the US and China. Another very important reason is that many companies wish to make supply chains more resilient to external shocks such as the virus outbreak and lockdown situation. So bringing production back home makes them less vulnerable, and for the same reason many companies are increasing their inventory levels. Something that was seen as weak management in the past because of extra cost, but now we realise that supply chains were maybe too efficient and focused on ‘just on time’ deliveries. And this is now changing, resulting in more demand for logistics space in Europe on aggregate. So this is what we see happening in the occupier market but if you look at the investment market, it's very clear that investors are recognising the opportunities making logistics as an asset class very hot. New fund launches are taking place, fund managers are reviewing existing strategies, for example moving away from hotels and retail and directing capital towards logistics with a strong focus on quality. So high demand will lead to competition and probably result in yield compression and higher property values. So we like to believe that ASELI (Aberdeen Standard European Logistics Income) is very well positioned to benefit from this flight to quality with the portfolio that we have.

Interviewer: Okay, that's great. Can you talk us through the portfolio is as it exists today, and in particular, your focus on the more liquid part of the market?

Evert: Yes, we have a very high quality portfolio with 14 warehouses in the portfolio across five different countries in Europe. Eight of the warehouses actually have been erected in the last few years so they are almost brand new. The majority of the capital has been invested in the Netherlands, where we have six assets right now. And this makes perfect sense to me as the Netherlands is seen as the gateway to the west European market thanks to its strategic geographical position and the largest port in Europe, which is the port of Rotterdam. And that's the starting point for large transport corridors leading towards Germany, Belgium and France to the south. So besides the Netherlands, we have also built up exposure in Germany with two warehouses in the Frankfurt Rhine-Main, two in France, two in Spain and two in Poland. It’s a very high quality portfolio. In sourcing deals, one of the key things to look at for us is liquidity. And with the Trust, we are investing in the most liquid part of the market where there's a lot of demand from both occupiers and investors. So within the segment of big boxes, we are focusing on mid-sized assets, as we think the ultra-big boxes with lot size above 1 million sq ft, for example, leased out to likes of Amazon has absolutely a role to play. But there's probably no alternative if a tenant leaves or gives you a hard time in renegotiating the terms or the maturity of the lease. So these buildings are so big and bespoke that we think it's better to invest in smaller sized assets that typically have a lot size of around 30, 40, maybe 50 thousand square metres.

So that's one. Another focus points for the fund is on urban logistics, a part of the market that we lack in particular. Urban logistics are the last mile delivery hubs. It’s the final step in the supply chain that is needed to deliver the goods that people have ordered online to the end consumer. And the way these operators are competing with each other is on delivery times so you need to get close and at the same the urbanization trend makes cities grow bigger. So there's a lot of competition for land and land prices are going up. And that ultimately will be reflected in higher rents. So we have very high growth expectations for urban logistics where we have built up quite a bit of exposure with the portfolio. The way I look at assets to get an idea of the liquidity is always by asking myself the question, if the warehouse has a second-life, in case the tenants would leave? Am I spending capital on a very large, bespoke, not flexible building with a long lease and a strong tenant on a secondary location, hoping the tenant won’t leave? Or am I investing in an established location with a lot of dynamics and with a building that, due to modern specification, can easily be leased out to another company? And I prefer the latter. I think that's a more liquid investment. And all our assets, I think are located on established locations and have these modern specifications that are needed in today's market. And, yeah, this is what you need, I think to build a durable income stream and pay stable dividends to investors.

Interviewer: Okay, so we can look at the income side in a bit more detail. I understand that rent collection has been reasonably robust, but where you have had tenants in some distress, what sort of conversations have you been having with them?

Evert: Well, I'm very happy with the rent collection so far. Our current estimate for the full year 2020 is that we will collect 97% of annual rent this year. And in today's market, I think that's really high. It's fair to say that the second quarter was challenging as companies started to feel the impact of the lockdown situation. We have collected 85% of rents due for the second quarter. And then the third quarter that number was 96%. Discussions evolve around rent deferrals or rent-frees in combination with material lease extensions. So these were the two options on the table. The majority of the discussions on rent-frees took place in our multi-tenant buildings, where we are dealing with shorter lease durations and where we normally would have had the same discussion on prolongations within the next few years or so. So on balance, there's hardly any difference, I think between the three year cash flow projection pre-Covid and now. And for me as the fund manager, I’m based in Amsterdam, it's really important to have support from our local resources within Aberdeen Standard Investments. ASI is the second largest real estate investor in Europe. And we have local boots on the ground, asset managers that are taking care of day to day business so they are liaising with our tenants, and making sure we make the right decisions together. And it really helps if your colleague based locally speaks the local language to get the best deal together. And, yeah, the property business is really a local and people's business. And that's why scale and local presence is really important. And it's something that sets us apart as a house.

Interviewer: And the Trust has recently maintained its quarterly dividend, which gives some stability for the shareholders. But how are you feeling about the rest of the year and looking into 2021? Are you kind of optimistic, pessimistic?

Evert: I'm not going to predict the future. But all I can say is, based on what we know today, that the logistics as a sector is really hot, and that we are in a really good position with ASELI. So overall, I'm very optimistic and the quality of the portfolio is really high, we have very liquid assets that are all fully leased out, and there's no vacancy, and we've managed the impact of Covid on our tenant portfolio with a satisfying result. And also the loan portfolio, it's very important to realise that there's sufficient headroom on the financial covenants that we have agreed with banks such as LTV and ICR ratios. So risks here are limited which ultimately resulted together with a strong rent collection to keep paying out the dividends, like we've done in Q1 and Q2.

If we look at the future of the logistics sector overall, I think it's really strong thanks to structural drivers such as the growth of e-commerce, which has really given a boost to the sector. And as a Trust, we have ambition to grow as well and to diversify risk with more assets in the portfolio and also focus on our existing portfolio by adding value to these assets with our local teams, for example, by extending our buildings, or by putting solar panels on the roofs and reduce the carbon footprint. So for me as a fund manager, the focus is very much on rent collection, keeping our tenants happy, adding value through active asset management, and growing the fund with new assets with the credit facility that we have put in place, which is a facility that allows us to buy an asset first before we go back to the market for a new capital raise. And at the moment, I'm looking at quite a few interesting deals with local transaction managers, both on an on- and off-market basis.

Interviewer: Great. Okay, thank you Evert for those insights today. And thank you to our listeners for tuning in. You can find out more about the trust at www.eurologisticsincome.co.uk and please do look out for future episodes.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets.. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn Investments. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at how Covid-19 is impacting their portfolios. Today, we welcome Ben Ritchie and Louise Kernohan, co-managers of the Dunedin Income Growth Investment Trust (DIGIT). Welcome.

Can we start by looking at the stock market landscape today? There's obviously been a meaningful rally from the very lows seen last month, but which areas have proved particularly resilient and which still look vulnerable? Ben, I'll put that to you first.

Ben Ritchie: Thanks very much Cherry. I think when we look at it overall, it's really quite a complex picture and the environment is as challenging today as it has been probably at any point in my career when we look at what's going on in terms of evolution of markets. I think the important things to remember are that whenever something terrible happens for the economy, whether it's going back to the financial crisis or whether it’s the effect of the virus today, is the future is always uncertain and we don't know what's going to happen and we have to work on the basis of the information which we have available to us. I think when we look at the portfolio today, we feel very well positioned and we think we're in companies that have, generally speaking, got pretty good prospects even if the near term is tough. Where companies are facing more pressure on earnings, they’ve generally got very strong balance sheets, good cash flows or good cash balance sheets which are supporting their businesses through this tough time. And then we've also got a reasonable percentage of the portfolio which is continuing to trade, not completely without effect, but continuing to trade relatively robustly. When we put that all together, we have had less exposure to some of the areas that have been hit pretty hard. I think that that makes us feel that we're reasonably positioned going forward and the areas that have been hit hard, funnily enough have not been that surprising really. I mean, be it areas like travel and leisure, aerospace and defense, the banking sector, which I guess is always going to end up picking up some of the credit tab for the issues that we face, and then oil and gas which has been weak on the back of the challenges there. All in all we’re relatively light in all of those areas and we’re overweight to areas where the prospects look a little rosier, and we've been positioned like that for quite a while. I think when we put that all together, it's tough but we’re cautiously optimistic really about the prospects of the portfolio from here.

Interviewer: And Louise, would you add anything to that?

Louise Kernohan: Yes, just to add, as Ben says, it's a very complex landscape and we've seen quite a wide dispersion of performances between sectors. So you'll have some sectors that have performed very robustly throughout this period so far. So key examples there would be the pharmaceutical sector, which is being held up by being defensive - people still need their medicines. And it's actually those characteristics which are the reasons why it's attractive for us to invest in with DIGIT, and we indeed have an overweight position to healthcare, so that's been a positive. You've seen some sectors where they saw a really sharp decline in March, but then we've seen a subsequent sharp recovery and that is actually perhaps not unfair. For example, the construction and house building industry, we have Countryside Properties, which is an industry where there's a structural supply demand and balance and the government will be keen for that to resume as soon as safely possible and that is possible for those industries to resume in some way, shape, or form.

So there are positives on the horizon there. And then you've seen some industries which suffered badly throughout and haven't seen a recovery where there's just more longer term structural issues at play. So as Ben said, good examples are airlines, aerospace industry, and tour operators, where the outlook is just much more opaque at the moment and challenging. And also banks and oil, which has the structural challenges where again, it's because of these reasons to start with as to why we are underweight those industries. So it's been a tough period, but thankfully for DIGIT, we have been well positioned coming into it.

Interviewer: Okay, and Ben, individual sectors aside, do you think that the measures taken by governments and central banks have largely brought the systemic threats under control?

Ben Ritchie: I think there's a couple of pieces to this really, which is I think first of all, you've got to look at the financial plumbing and it was pretty clear in the first half of March that that was starting to creak and that you were seeing a failure of trust between counterparties within the financial system, be that investment banks, retail banks, hedge funds, asset managers, insurance companies. That whole circle was starting to stop. And when that does happen, we know that the impact of that is extremely bad. But the good thing I think about that element of it is that the central banks and policy makers have had relatively recent experience of how to manage that, both in the financial crisis, and in the Eurozone crisis and they have acted very-very quickly and very-very aggressively to provide effectively cash to actors within that area to support that. So I think that sort of systemic crisis caused by collapsing of natural system, which I think certainly looked like a possibility a couple of months ago, has been taken off the table. I think that's good news. I think the bigger challenge though if we think about it in a wider context is if this is a sort of Lehman Brothers and main street type situation, how the policy makers set about addressing those challenges because that's a lot more complex. You know, you're not just dealing with a couple of hundred financial institutions, you're dealing with literally millions and millions and millions of small businesses and millions of consumers. That's quite tough. So I think from the positive side, I think that the financial system is being insulated and I suspect that policy makers and central banks can make sure that that doesn’t recur through the deployment of their cash flows. I think the bigger challenges are now coming on to how do we manage unemployment, how do we keep the real economy alive during a period of time when activity levels are going to be very, very depressed and that is just perhaps a more complex and more challenging prospect for governments and policy makers globally, particularly I would say in Europe and the U.S.

Interviewer: Louise, I know it's very early days, but I wonder if any of the feedback that you're getting from companies gives any sort of insight or clues into those longer term prospects for companies?

Louise Kernohan: Yes, I mean, when it comes to speaking to the companies and talking about trading trends, the company management really don't know much or any better than any of the rest of us really. I think all of us are feeling our way through here and it can be interesting to hear comparisons to previous downturns, for example, the financial crisis, which can be interesting. So it might be the case that demand slumped for six months, but snapped back quickly before so there's reason to think that it might do it again, but really, because this downturn is so different, being more high street footfall related than being a financial crisis, those comparisons aren't always even going to be valid. So on the trading front, there's not really a huge amount that management can give us insight on. But what there has been a lot focus on, talking to management, has been the factors that they can control. So the primary focus there has first and foremost been on the safety of staff and companies are doing the best that they can to operate the best they can under the current conditions. So with staff either working at home or working on site with strict social distancing. Another focus is on cost, so many of the companies are using the furlough scheme – that scheme is seeing substantial take-up. We’ve seen dividend cuts, and conversations moving onto liquidity. For example, how long can a company operate at this low level of activity without coming into liquidity problems? We're finding that most companies are actually doing a really good job with this. Survivability isn't an issue for the vast, vast majority of companies, and really the question has sort of moved on to now to how can companies operate in a prolonged period of social distancing. And thinking about the fact that social distancing wasn't even a concept for any of us even a few months ago and now whole businesses are having to adapt to that. How do you adapt to a world where say, your demand might be half of what it was previously because of social distancing, but your cost base might not be that flexible. So that's the sort of thing that we're talking to companies about and there's just a wide variety of answers to that. Some companies are more straightforward, others are much more complex and so really sort of taking it on a case by case basis.

Interviewer: You have made some changes to the portfolio over this period, I believe, including raising gearing to reinvest in certain areas. I wonder if you could talk a little about the changes you've made Ben?

Ben Ritchie: Yes, so we acted as markets were performing pretty aggressively during mid-March to raise some additional debt to invest. It wasn’t a huge amount, four million pounds, but it was sort of indicative of the fact that we did see some reasonable opportunities developing to put money to work. And the kind of companies we were buying were businesses which we thought still have pretty solid dividend pending prospects, but where the valuations looked more attractive. Things like SSE, Coca-Cola Hellenic, a Coca-Cola bottling company, but primarily operating in Europe, and Rio Tinto - all businesses which we felt would be solid companies which were then trading perhaps 25% to 30% cheaper than they had done. The timing as ever on that wasn’t perfect as markets continued to go down a little bit more over the course of the rest of March. But we've added again to things like Coca-Cola and SSE a second time and in recent times we've actually been looking to add to some new things as well. So we've taken advantage of a very significant decline in the share price of Intermediate Capital Group, which is an alternative asset manager to be able to build a small position there. We've done the same with Hannover Rueck taking advantage of our overseas capability to buy what we think is one of the world's best reinsurance companies at a pretty reasonable price at a time when the reinsurance markets look like they are poised for growth. We've also bought a stake effectively in the Chinese company Tencent through a Dutch listed company called Prosus, which owns a very large stake in Tencent and trades at a big discount to the value of its assets. So we've been quite active in terms of looking to add things to the portfolio during this period of time. Especially by our standards - we tend to take a fairly long term view, but there have been a few opportunities that are being thrown up by events.

Interviewer: Okay, Louise, how are you making the distinction between companies that are in temporary trouble and those where the outlook has fundamentally changed? Have you exited any positions on that basis?

Louise Kernohan: So that is really the key question for any investor right now - making that distinction between companies where this is a transient problem and where actually this is a longer term issue which fundamentally changes the value of the business. So ever since the start of this crisis, Ben and I have been fully focusing on that and thinking about the businesses. Not just about which ones will survive, I mean that is obviously key, but it's not just that, it’s about also which ones will not only survive, but which will come out in a stronger position. While none of us can predict the future, you can choose winning businesses within an industry that have structural advantages, good financial firepower, which leaves the business in the best possible position. So I mean, an example here would be Rightmove where clearly the UK housing market isn't moving at the moment. Rightmove’s customers, being the estate agents, are in an extremely challenging place, which is naturally going to affect Rightmove and it's easy to paint a bad near term scenario for them because their competitors are offering free services to their customers trying to steal what little business there is out there. But what’s important for Rightmove in terms of thinking about has the outlook fundamentally changed longer term? Well, the reality is that Rightmove’s network remains far, far superior to any of its peers. So, they can try and charge cheaper, but at the end of the day Rightmove’s customers want the website that has the most property on, and the most viewers and they’re head and shoulders above the rest. Very little can threaten that and they have a very strong balance sheet which allows them to not just be able to survive, but to be able to invest in their business and proposition through this period where competitors can't, and so that they come out stronger again. And you know, I don't think any of us are in any doubt that the housing market will start moving again at some point in the future. I don’t know how much or how soon, but people will still need to move houses. So, that's kind of how we've been thinking about focusing on the long term in that respect.

Interviewer: Okay. I wonder if we could also look at the income side. Louise, a lot of companies have been cutting dividends, and while I recognise the type of companies in which you invest may be more insulated from that, how are you managing that in the portfolio? Are you having to take the decision on, where a company has cut, whether you hold or whether you sell out?

Louise Kernohan: I think it's fair to say that this level of dividend cuts hasn't been in anybody's scenario planning. So I think the last time that I checked there were 41 companies in the FTSE-100 that have cut or suspended, and 96 in the FTSE-250. So this is - you know, unprecedented I think is an overused word at the moment, but I mean, it's the right word. So yes, it goes without saying that this is not an easy scenario. A positive for our situation is that our focus on high quality businesses, with, as we’ve spoken about, strong business models, resilient earnings, strong cash flows, strong balance sheets, has led us to start this in a strong position and we estimate that the level of income cuts for us is around 15% to 20%, which would be, I mean, it's moving around quite a lot, but it's less than half of the broader market. So, by not owning the UK banks, by only having minimal exposure to oil has been really helpful during this period. We also entered the year with almost a year's worth of dividend in reserve. So, we're in a strong position on that front. We've always generated some additional income, up to 10% from option writing and that will be helpful this year too. Also to remember that given our strategy that we've been implementing for the past few years of actively choosing to sell higher yielding companies such as the oil majors, which have high yields but low growth prospects, to reinvest in lower yielding companies with higher growth prospects - as part of that process we were planning to run with an uncovered dividend this year anyway. So, whilst the situation isn’t one of anybody's choosing, we started it in a very strong position, so sitting here today we're feeling that we're in a strong position. In terms of what we're not going to do - we're not going to start chasing yield. So, we're not knee jerk selling out of companies that have cut the dividend if we still believe in the long term prospects of that business, and we're not investing in companies that are still paying the dividend at the detriment to investing in the high quality standards that we always do.

Interviewer: Okay. Looking a bit longer term then, it seems clear that the economic growth will be harder to come by as we recover from the virus. You mentioned healthcare earlier, do you think it will be a case of finding pockets of structural growth?

Ben Ritchie: Yes, it's quite interesting actually, Louise and I were chatting the other day, and looking through the portfolio and we actually have more opportunities to deploy money than we have things that we want to sell at the moment. So, I think it’s a good, good position to be in. And we skipped through the portfolio and there wasn't really anything we wanted to sell which is always helpful. You need something to sell to be able to buy, but I think that focusing in on those opportunities is a positive for us at the moment and I think that's absolutely the case. I mean, healthcare is an obvious one in some ways, and we’re operating in an environment where a) that's a relatively stable business and b), there's likely to be more investment in it going forward, but actually when you look at our healthcare exposure, it is more sophisticated than just owning the big pharmaceutical companies. Louise in her other role as the pharmaceutical analyst on the UK team has made a great call on being very enthusiastic about Astra(Zeneca) and Glaxo(SmithKline) for much, much longer than the last few months. Over the last couple of years they've been really good investments for this particular portfolio, but we've also been able to benefit from exposure to companies like Genus, which helps with the production of food through its expertise in production of the sort of reproducing, reproduction capabilities for pigs and for cows. Things like Dechra, which again, is a veterinary science business. Something like Abcam, which is all about antibody production, owning things like Novo Nordisk, again taking advantage of our ability to invest overseas. So we do have that big healthcare exposure, but it's not just big pharma, it's also little businesses as well. And when we look across the picture, we see some interesting opportunities in a number of different end markets to be able to grow. But I think the point is, is that you do have to be very selective. You do have to be niche, but actually there are those potential opportunities out there and I think we are looking at a world going forward from this, and it may be a bit different with a sort of three to five year view, but I'm pretty sure in the near term the environment is going to look a lot like the environment which we've been in. Which is low growth, low inflation, low interest rates. And that is going to create an environment, which as you eluded to earlier, where growth is probably going to be at even more of a premium than it was before. And I think when we look across the portfolio we see good opportunities in a range of areas and also quite a diverse range of different earnings drivers as well, from insurance to clothes, life books through to emerging market asset managers through to branded consumer goods and on to specialty chemicals. You know, we see lots of little areas, but there probably isn’t a big unifying theme behind all of that. It's just lots of little, lots of little areas which we're looking to try and take advantage of, and it's that combination of lots of stock picks all put together that ultimately builds quite an attractive portfolio overall.

Interviewer: Okay. Louise how comfortable are you with valuations in today's market? Do you think they fully reflect the problems out there?

Louise Kernohan: Well, the problem with valuations at the moment is that all the multiples require some estimate of earnings or cash flow. And so that number in the equation is obviously extremely uncertain at the moment. So that means that valuations are uncertain. So if we see a good recovery from here, so what people call the V-shape, then valuations are attractive right now. But on the contrary, if we're standing at the start of deep recession, then on the whole valuations will be expensive, and particularly considering the recent recovery. I think it's also fair to say that we entered at the start of this year with valuations on the whole not being particularly cheap. It's actually quite difficult to summarize on the whole, but I think what is fair to say is that given how volatile markets have been and still are, the markets clearly have a lot of inefficiencies at the moment. So there's a lot of opportunities. So the key is really to look on a stock by stock basis and try to find those companies that have been hit due to concerns, but in fact actually those concerns aren't valid. We have seen that already so far, for example companies like Coca-Cola Hellenic, the soft drink company. It's share price was hit along with some of the worst during March. But at the end of the day, it's a soft drink bottler across a range of geographies, and so whilst not immune because not many companies are, it should prove relatively resilient through this and so we topped it up and we have seen some recovery. And there's lots of examples where there are mis-pricings so that's really what we're trying to find. And as Ben said, there's a lot of opportunity at the moment. Where we really benefit as well is that Ben and I both work on large equity teams. So, we've got a 16 strong UK equity team with full coverage of the FTSE-350, doing a lot of individual analysis of companies, talking to management, doing lots of in depth work. And we’ve got the same size European team, doing the same for European stocks of which we hold a number in the trust. So, we have a really good position in terms of having a lot of resource focused on this and I'm sure there's going to be a lot more opportunities that arise through this situation for valuations.

Interviewer: Okay, and just finally, what reassurance would you give to investors in the Trust that they should hold on through this period of rather nasty volatility?

Ben Ritchie: Yes, a very good question to ask, that one. I think, as Louise said earlier, from an income perspective, we feel in good shape. Though you know, we’ve taken a very, very hefty hit, but it's been a lot less than the wider market. So we think from an income perspective that we're still, given our reserves and potentially the ability to distribute income from capital, from an income perspective we think we're in good shape. From a capital perspective, we don't see any companies in the portfolio that are showing any signs of distress at all and we actually think if anything, there’s a very, very significant percentage of the portfolio which is actually in a pretty good place and provided things recover to some degree, will actually do pretty well. And some of those companies may even do a lot better than that over the longer term. And I think that the point that Louise was making earlier, we both run unconstrained money as one of our key elements and so everything we're asking ourselves about every investment we make is do we think that this is a really attractive total return investment opportunity? That's the first point, and then we look at how much of that return is going to come from income and then we look at what the income requirements of the Trust are. I think that gives us a very different perspective. It's almost like looking down the pipe the other way from a lot of income managers - we start with well, what’s the yield and what's the dividend going to grow at, because ultimately at the end of the day the dividend is just the output of the business and we like to start with the business. I think that's a key thing as opposed to starting from the dividend end of things. If you do that, then generally speaking you're going to end up with a portfolio of really, really good businesses and that's ultimately what makes myself and Louise feel positive is the fact that we've got some really great businesses in the portfolio and their prospects are looking good. At the end of the day, I think as Louise was mentioning earlier, we think that the companies are being managed well and we are ultimately delegating control and management of the businesses to the management teams. You know, by and large we think they've been doing a pretty good job throughout this crisis and meeting the challenges well. And while we don't know how things are going to evolve, assuming, I think it’s fair to assume that over the coming months and perhaps years we will see a recovery of maybe slow but a steady recovery out of this, this trough, then you know, we think we're well placed to go well from here. You know, the performance over the last sort of three or four years since we've taken the helm of the Trust has been good. And if anything, this environment we think sort of suits our style and approach.

Interviewer: Great. Okay. Thank you so much Ben and Louise for those insights today. Thank you also to our listeners for tuning in. You can find out more about the trust at www.dunedinincomegrowth.co.uk and do look out for future episodes.

This Podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. 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 returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts. Invest in good company.

Interviewer: Welcome to the latest in our abrdn Investment Trusts podcast series. With me today is the manager of the Aberdeen New Thai Investment Trust. Orsen Karnburisudthi will be talking about developments in the Thai market over the past three months. Welcome Orsen. Now when we spoke last time, we talked about how Thailand had been relatively lightly hit by the virus with a few cases and even fewer deaths. Has that kind of relative success continued?

Orsen: Yes the success has continued. We've had virtually zero local transmissions since May. So it's been over two months where there have been no local transmissions. The only cases coming in would be returning Thais. 99% of these are returning Thais from other countries. The other 1% would be certain cases like diplomats or army military drills. But all in all, the figures are very controlled. The total number to date is just about 3,300 cases with 58 deaths, and that number of deaths hasn't changed for really the past two, almost three months.

Interviewer: And what has that meant for the Thai economy? I mean, has it meant that key sectors such as tourism have bounced back at all?

Orsen: The economic data were stressing monthly high frequency data just tilt down, compared with the same period last year. For example, June exports and imports are down in the range of 20%. What's improving is that this degree is less compared with the previous two months. So it's really coming from a shutdown, a lockdown, that began in March. So the low point was around April May and you're seeing resurgence, companies starting to start production again. The challenge with tourism is that your ports remain closed. And there's no plan yet. And in the next several months, probably the rest of this year, to allow international commercial flights. So we're expecting tourist numbers to be down to about seven to 9 million visitors this year. That's down 85% from 14 million last year, so it's down almost 80%.This is a figure coming from the Tourism Authority of Thailand. So we're struggling along with many other countries in terms of tourists. That said there was a domestic tourism scheme with a 22 billion baht stimulus that encourages Thais to travel up country, in the rural areas with subsidies in hotels, restaurants and transport. So to some extent that would offset the much lower figure from international tourists.

Interviewer: And so is most of the weakness in the GDP numbers coming from that tourism hit?

Orsen: From -- that's one of two areas. The other area would be exports. As you know, global trade US China for the past several quarters has affected not only global supply chains. So these two factors, tourism and global trade has really caused GDP to be very weak this year. So the latest forecast is in the range of 8 to 9% down for 2020. So central bank is expecting negative 8.1. The finance ministry just a few weeks ago came out with minus 8.5. So that's the figure we're seeing. The earlier estimate was in the range of 5 to 10%. So this is really a fine tuning of forecasts.

Interviewer: And looking at stock markets now, I mean they were obviously very volatile across the world for a period of time, but as they’ve calmed down a little and the picture has become a bit clearer, have you made any adjustments to the portfolio or are you largely happy with where it lies?

Orsen: In terms of the market, the big drop was in March followed by the very swift rebound in April. The past two months, June and July have been pretty flat. So pretty much the rebound, the drop from February March back to the levels of June, the markets are pretty much back to the levels of around February right before the Coronavirus hit. So the asset allocation, in terms of the rebound overall in equity has pretty much been back to the levels like I mentioned. And what's changed is now how stock selection is more important in the sense that if you choose to make stock adjustments -- as you say to the portfolio -- for the past three months, we made several changes to the portfolio. We trimmed down several sectors, concentrating holdings for example, property and banks. These two sectors, we exited several stocks. We also added new stocks to the portfolio, initiating stocks iin transport and retail and also in mobile phone information, communication technology type businesses, so it's more strategic adjustments in terms of sectors which we like and also specific stocks.

Interviewer: And how does the portfolio look today? Are there any kind of big themes that you’d draw out?

Orsen: Yes, the biggest exposures for the Trust -- the largest sector is energy and utilities. We are underweight that sector however, it's a bigger sector but it’s underweight. Just by way of we're new to energy but underweight utilities because of just valuations. The next largest sector is construction materials. This is strategically overweight, in the sense that the lower oil prices since March has benefited margins, especially since March and April. So you're seeing these in better relative performances in construction material stocks. These would include cement and tiles. The third largest sector is commerce. This is a big – a reasonable overweight in a sense. We like specialty retailers now so consumer staples are retailing in a sense in a relatively resilient sector within the stock market. For these three sectors, energy and utilities, we have about a 16% rate, construction materials 13 and commerce about 10%.

Interviewer: And, obviously you're talking to companies all the time. What feedback are you getting from them – are they generally optimistic, pessimistic? How are you finding their mood?

Orsen: I think they're more on the cautiously optimistic outlook in the sense that there’s been a gradual loosening of restrictions, but still wary, as is the government of whether there will be a second wave. That's what we're seeing in other countries. So far, we haven't seen any wave but I believe corporates are just being prepared and not being overly optimistic about the trajectory of growth. So retailers have seen a rebound. Rebound since March, April lockdowns. Banks are reasonably cautious in the sense that they have forbearances in terms of their loans. But they have set up a lot of provisions just to be cautious. Construction materials I mentioned, most companies have a pretty muted top line growth, demand will be flat and not down. But their margins will be better just because of lower input prices, lower energy prices, for example. I think overall, what you're seeing from second quarter results, companies are reporting weaker numbers, especially on the top line, most have weaker margins. I think the outlook is pretty, pretty cautious. Just looking at how spending -- how people are spending or how businesses are investing at this point.

Interviewer: And what about the impact on dividends? Is that caution reflected in companies still holding back on dividend payout?

Orsen: Dividends are paid typically as a percentage of profits. So, for the most part companies are maintaining their dividend payout ratios as a percentage of profits. The main exception would be banks where the central the central bank is encouraging banks to reevaluate the capital position to conserve capital and discouraging paying interim dividends. That said, banks capital positions are quite strong -- capital ratios of over 15, 16%. And any worst case scenarios could just take away one or two percentage points. So, I think companies, or at least banks, are just being conservative at this point. Other corporates have declared interim dividends thus far. And it's really just reflecting if profits are lower, then the dividends would be lower proportionally, but dividends are still being paid.

Interviewer: And the Trust has historically had a reasonably high yield. Are you reasonably confident that can be sustained for the year ahead?

Orsen: Yes, looking from the company’s -- the dividend yield, and the amount of yield that corporate and the Trust are paying, it still seems reasonably optimistic that the Trust could maintain a good dividend.

Interviewer: And I mean, looking at markets today, do you think they fully reflect the risk that is still out there? Or is it very much kind of sector by sector. Are there still kind of bargains to be found really amongst volatile markets?

Orsen: I think there are still surprises. Even when companies report their second quarter numbers, there’s still an immediate reaction to the share price either way, either it's a positive or negative surprise. For example, banks that announce large provisions, front loading their provisions, for example, had an immediate drop. That creates opportunities because these are the more conservative banks that are setting these provisions early. For example, construction materials companies, for the most part, have much better margins just because oil prices are low, because spreads have improved because of these dynamics and energy prices. So you're affecting that in the share prices as well. So, the market still sees opportunities, especially across sectors for views, sectors, which we believe will do well in this environment. And the way that our portfolio is positioned, we do like materials just by way of margins. We like commerce, just by way of the resiliency as well as prospects of top line growth.

Interviewer: And what is the Trust’s current position on gearing? Have you been able to use it to your advantage through this period?

Orsen: The gearing is currently 12, 13%. Pretty much unchanged over the past three months. It's just been used just -- as the market hasn't been too volatile. So we haven't really changed the gearing much. Part of it was used to pay for the Trust’s dividend that was paid earlier. But I think we're comfortable keeping around the 10 to 13% level in these circumstances. Of course, if the market drops sharply or increases either way, then I think we could readjust accordingly.

Interviewer: And just finally, could you give some of your views on the outlook for the second half of the year and what investors might be able to expect?

Orsen: The second half is going to be a recovery kind of outlook, just following the trajectory of the economy. The second quarter GDP numbers aren't announced yet. But that would be in the upcoming weeks. We're expecting the GDP drop of low double digits. I think the consensus is 13% compared with the second quarter of last year. If you work out how first quarter is, second quarter and the forecast for full year of about 8 to 9%, then we're seeing slight growth, positive numbers for the second half. So that's what we're expecting in terms of top line and profit momentum for sectors. Of course, this would affect certain sectors, for example, domestic oriented consumption, investment type, government spending type of exposures, and I think our Trust is quite well positioned to that respect.There's still challenges in the tourism and export sectors. Tourism would be reflected in the hotel companies and the airports companies. Even also medical tourism, these are seeing these same poor numbers before in the second quarter. And the outlook is still challenging, at least for the second half of this year. Beyond the second half we’re just thinking a continuation of the recovery. Back to spending, back to a certain sense of normalcy over the course of 2021. And for 2021, we're expecting a GDP growth of in the range of 3 to 5%, which isn't too bad. It isn't back yet to the level of 2019. But going to a certain level of normalcy, granted that global trade through exports or tourism isn’t likely to come back very quickly.

Interviewer: Great. Okay. Thank you Orsen for those insights today, and thank you to our listeners for tuning in. You can find out more about the trust at www.newthai-trust.co.uk. And please do look out for future episodes.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only, and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn Investments. 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 returns, return projections or estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts, invest in good company.

Interviewer Hello and welcome to the latest in the abrdn Investment Trusts podcast series. With me today is Hugh Young, manager of the Aberdeen Standard Asia Focus Investment Trust. We're going to be talking about the ongoing fallout from COVID-19 and how he's managing the Trust in these uncertain times. Welcome Hugh. The last time we spoke we were in the early stages of the COVID-19 outbreak and the outlook was still very uncertain. Have you been able to build any clarity around both the economic and corporate outlook in the intervening couple of months?

Hugh: Well, I wish I could be clearer but of course, things are still quite uncertain. Asia has been dealing with COVID arguably much better than many other parts of the world. And COVID has been substantially under control in large economies such as China and smaller economies such as Singapore. Although we have seen second waves of COVID coming in Australia which has caused further lockdown, so I think at the moment it's very much a matter of reacting day by day to news on COVID. I think what has happened, and what has stabilized, is the way much businesses is done within Asia. So I think people have been quick to adapt to new circumstances, change business practices and employ novel practices where necessary. So that's stabilized, but the outlook for broader economic growth is still uncertain given COVID. And of course, we have some of the traditional issues cropping up again. So in recent weeks, we've had the renewal of tension on the US-China trade front, which has really been running sore for a couple of years. So as ever, life is not terribly certain - it never has been. But of course, we're still finding plenty to do and luckily plenty of value within the portfolio.

Interviewer Okay, so how would you kind of describe your current mood? Are you generally optimistic or pessimistic – where do you lie on that?

Hugh: Well, as a fund manager, I think one always borders on the pessimistic and is always looking out for the worst things that can possibly happen and trying to protect things on the downside. And it's certainly hard to be super optimistic about economic growth and this year economic growth is going to be very, very poor. I think to a large extent markets are discounting that and recognising that, so no one expects economic growth to be exciting this year. There are expectations and indeed, growth should pick up next year - there should be a rebound. Not necessarily a complete V-shaped rebound, but nonetheless still a strong rebound in economic growth and in earnings growth. But this year we're not expecting great shakes out of growth in either economies or indeed corporate earnings.

Interviewer And markets have obviously moved a long way. I mean, to the point where people are suggesting that they're looking rather over-optimistic. I mean, to what extent do you think they're adequately reflecting the risks?

Hugh: Yes, I think there's, in broad market terms, I think there is a degree of truth in that when you look at the major indices. Of course, if you dig down and look at the major indices, you'll see that they've really been fueled by the stock prices of a handful of companies and typically that’s the Amazon and Netflix of this world that have been powering the global indices. So as far as we're concerned, where we have a big hunting ground for opportunities among small caps, thousands of small cap within the Asian region. There's still the opportunities, but certainly I worry, looking at some of the major markets, that things have become a little stretched. But that’s largely among the larger cap companies, and very much focused on the internet.

Interviewer And as markets have become a little less volatile, have you made any changes to the portfolio?

Hugh: Yes, we have. Not huge changes, so the portfolio is still very much recognisable from when we last did a podcast. We've added sort of one new holding in Australia – an investment management company, we've been topping up a relatively new holding in Singapore of a hospital company, and various other companies we've been topping up - a financial company in India, for example, where the market’s been quite weak. Conversely, we've been continuing to tidy up in areas where we don't see that tremendous growth. So these are companies that might be in the financial sector. So conversely, having topped up a company in India in finance, we sold our holding in City Union Bank in India which has done well since we bought it. And we’ve been top-slicing various companies in Thailand, Hong Kong, and one in Sri Lanka.

Interviewer And looking at the top 10 holdings today, it's a real eclectic mix. We've got a precision toolmaker, a life sciences company, property company, convenience store chain. What binds them all?

Hugh: Yes, we do – and in a sense it’s been deliberate. We haven't put all our eggs in one basket. We spread our eggs, between countries and between sectors of the economy. And in fact our largest holding is to do with internet shopping which has done fabulously well in Taiwan. And really what binds them, is that in their fields, they're all typically market leaders. That might be a small market - so for example, in Sri Lanka, we have one of Sri Lanka's largest conglomerates who are involved in a variety of fields. But because Sri Lanka's a small country, it's also a small cap. And then we might have a highly specialist company involved in microscopes and the like in Korea, for example, but they're all leaders in their field. And the other thing that binds them is their strong balance sheet. So financial strength has been a key really since day one of Asia Focus all those years ago, because certainly when you're small cap, you never quite know when something goes wrong, and you don't want to be in the grip of the banks if something does go wrong. So that was one reason we've survived various crises quite well, given financial strength.

Interviewer Yes. And presumably that was important during this crisis as well.

Hugh: Absolutely, because certainly for some of our countries, and we do have a couple of hotel companies, about 4% of the portfolio also, which would have seen earnings just disappear. But both groups that we have are backed by a very solid parent, very strong balance sheets – they’re not developing, they're just running hotels. So they don't have huge capital expenditure demands, and they've got through it and they're now seeing business pick up again.

Interviewer And are there any areas where you're finding opportunities or looking around at the moment - either by country or by sector, that are sparking an interest?

Hugh: Funnily enough, I wouldn't say there's any particular area. Given price movements in markets and volatility in markets, suddenly something that you think is not of interest one day might be of great interest the next because of price movements accordingly. And then, of course we're always on the lookout for new investment opportunities. So that might be through initial public offerings, and also uncovering new stocks that not even we have heard of.

Interviewer And where is the trust on gearing at the moment?

Hugh: Oh, yes, that's an important point. Gearing has come down slightly. So we're give or take at about just under 10% geared on a net basis, which is a bit lower than we've been historically.

Interviewer And how are you feeling about the rest of the year? Do you believe earnings will bounce back or is it sector specific or really are we looking into 2021 before anything gets back to any kind of normality?

Hugh: I think general normality - yes, we're probably looking at 2021 for a return to normality. We are seeing, as we speak, a normalisation - so as I mentioned, companies having seen their business drop off the edge of a cliff in many areas. I mean, not all areas – again, a substantial amount of our portfolio has actually been a beneficiary of what's gone on. Certainly the newer companies, the tech companies and the like, even some of the retailers have been beneficiaries. So you’re going to see a mixed pattern, but certainly a better quarter coming ahead. So the bad quarter will have been the second quarter of this year, when the full effects were felt, and now you're seeing a steady improvement, but not a return to normality as yet. I think we have to wait until next year for that.

Interviewer And what about the major risks? I mean, obviously everyone's very minutely focused on coronavirus at the moment, but are there other things lurking in the background that might surprise markets should the coronavirus risks ebb?

Hugh: Yes. They're the broader risks that have been ever present and that we've dealt with since day one of the Trust’s existence. So they’re the broader economic risk of the resurgence of the China-US tension. We've even had India-China tension on the border. It hasn't affected the economies as yet, but again, issues such as geopolitical tension can always throw things off track. And then you have things peculiar to individual countries. It can be due, again, typically things to do with elections, and the like - changes, change of control, new regulations coming in, but these are the things that we've lived with for the last 25 odd years that the Trust has been going. So always things to worry about and we spend our lives worrying.

Interviewer Great. Okay, thank you Hugh for your time today and thank you to everyone for listening in. You can find out more information about the trust at www.asia-focus.co.uk. We're working to keep you updated throughout these tricky times. So please do look out for future updates.

Important information:

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned here in and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn Investments. 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 returns. Return projections are estimates and provide no guarantee of future results.

Transcript of audio recorded on Thursday 30th July

Podcasts from abrdn Investment Trusts - invest in good company.

Interviewer: Hello and welcome to the latest in the abrdn Investment Trusts podcast series. With me today is Abby Glennie manager on the Aberdeen Smaller Companies Income Trust. We'll be talking about how smaller company dividends have fared during a tough time for company payouts. Welcome, Abby.

Abby: Hi

Interviewer: Hi. The most recent statistics paint a difficult picture for dividends. UK dividends have fallen by more than half in the second quarter. How have companies in the Trust fared by comparison?

Abby: Yes, so I think the dividend environment has clearly been difficult for all types of companies and that’s been for a variety of reasons. So you know, some companies have actually had challenging operational periods, but some of even the best performing companies have this pressure let’s say of not paying dividends, either because they’ve taken part government schemes, so the furlough scheme or some of the other assistance schemes, or they’ve just felt a bit of pressure to be cautious and hold on to cash reserves because the high level of uncertainty. And you know, there was pressure that sort of if you had taken part in schemes, you shouldn’t really be paying out to shareholders at the time. And I also think there just became a very sort of general view in the market that because of the unusual situation we were in, it was okay not to pay dividends. So companies weren't really being punished for not paying dividends. Now actually, what we've seen across the portfolio is, because we invest in quality businesses they have been businesses with good balance sheets, and they've gone into this in strong positions. Actually a lot of them because of the sectors that they're in and the services that they provide, are actually very resilient throughout this. So right through this period, we saw a lot of stocks in the in the portfolio continue to expect to pay dividends. The thing we've been looking at more recently is that there were some that have surprised us by saying they weren't going to pay a dividend when we thought they were in a position to be able to. And what we've noticed in the past couple of months is that that's really coming back again. So companies who didn't pay before, actually, they're starting to pay dividends quicker than the market expected. Some of them are even making up for the dividends they didn't pay before. So I think overall, while we're definitely not going to be immune from this sort of lower income situation, and where earnings are lower, dividends are going to be lower. But actually, we've been very pleased by the sort of high proportion of stocks in the portfolio that will pay dividends this year.

Interviewer: Okay, and you mentioned that companies are giving a bit more clarity on the outlook. I mean, what feedback are you getting from companies - has that generally left you feeling more positive or negative?

Abby: Yes, so I think there’s still a huge amount of uncertainty in markets, and the degree of that really varies between different industries. So, for instance, if you're in travel and leisure at the moment, I think there's still a high degree of uncertainty. But other industries who have operated throughout this for them more settled environment. So for, like food producers or technology businesses, you know, I think they're in a position to actually feel more certain about their outlook. Some of these companies have even been seeing improving trading through this environment. I think the challenge for a lot of companies from here is that there's a lot of areas that are just outside of their control. So for example, government rate restrictions, and what are demand levels going to be like. But for me, the highest level of uncertainty is probably about unemployment levels, because we're just not really seeing evidence of that yet. Certainly people are still on the furlough scheme, and when I talk to companies, a lot of companies are talking about just not the need to take back everyone off furlough, because they’ve sort of learnt how to operate more efficiently, to be honest. So I think how the government unwinds that furlough scheme and how companies sort of adjust staffing levels, not for cost expenses but just to balance the demand path I think will be tricky. And the other thing that we're seeing is that, I think a lot of the, a lot of the recovery is really going to be about things like consumer confidence and unemployment levels. So in that way we think that the market outlook is much more about main street than it is about Wall Street.

Interviewer: Okay, and with that in mind, have you made any changes to the portfolio in recent months?

Abby: No, we really have made any changes recently. We added a few new stocks at the beginning of the COVID environment. We saw a few interesting investment ideas. We marginally increased our fixed income exposure you know for security of income. But actually, no, in the past few months, we haven't made any changes. I think we feel very comfortable with the positions we have, and how those companies are trading. And importantly as well, the performance of the Trust has been very strong this year so we're really continuing to run with those winners. And we're pleased, you know it's quite a busy reporting season again now, and we're very pleased with the positive reporting we’re seeing at our holdings. And importantly, as well as the sort of share price reaction to those. So even the sort of quality growth businesses which have held up well to this environment, when they are reporting good results, they are also again, seeing share price appreciation.

Interviewer: And, obviously markets have improved quite a long way, although it does seem to have been quite narrowly drawn. I mean, are there areas where you're still finding kind of good value?

Abby: Yes, I mean, because we haven’t been trading the portfolio kind of tells you that we still think there's value in the holdings that we have. So we think because of their operational performance, actually they continue to offer strong investment outcome. I mean, in tough environments, which I think is what we have for at least the rest of this year, probably going into next year easily. You know, I think investors will pay up for that quality growth, and certainly what we've been through the past few months, and just with the level of uncertainty we have in markets and we are going to have increasing unemployment, we're going to have tougher economic growth, how the government's going to pay back and fund all that they've done in recent months is hard to understand. So I just think in that environment, actually sort of resilience and quality and companies you can still grow irrelevant of, you know, all the headwinds against them. I think those become even more valuable businesses. And so when we think about valuation, you know, it's embedded within all of our investment decisions, but actually the value in terms of multiples on our businesses at the moment, even those which have re-rated, they're not at a level that puts us off being long term holders. I think we might see some short value rallies which tend to be bad for our investment process. We saw that in late May but really, I just don't think in this environment that those value rallies are going to stay.

Interviewer: Are there any kind of themes you’d highlight in the portfolio, or any sort of examples that highlight that?

Abby: Yes, I mean, so the themes are really outputs rather inputs of our process. For us it's much more about companies specifics and that bottom up stock analysis. I mean, we're pleased that even where we have exposure to more cyclical sectors, like for example electronics – you know, the names we hold within that very much focuses on those higher quality growth names, that have been resilient and performed well. I think also we’ve seen that through, we've got quite a few asset manager type related stocks that have traded well, so things like Liontrust, AJ Bell, Intermediate capital. But I mean, I guess the key theme in our portfolio is really an investment style which persists throughout. You know, we’re very true to that and we don't step away from that. So the real theme is about that quality and growth, that resilience.

Interviewer: And I mean, obviously there are still risks out there. Coronavirus hasn't gone away. We've seen, you know, a resurgence of the US-China poor relations. But I mean, does the price of smaller companies today reflect those risks do you think?

Abby: Yes, I mean, I think one of the challenges is that smaller companies often just get treated all with the same brush. So despite what resilience they might actually offer at an individual level, we see markets panic towards smaller companies. So we saw them trade off the most when we started this COVID-19 situation. It's the same as when we saw Brexit, back in 2016, when we saw that first trade up, everyone sort of rushes out of smaller companies because they have this risk perception. I think firstly, our investment process is set up to invest in smaller companies in a lower risk way. We do that through the quality focus. And actually, what I would say on an individual level is that often smaller companies can adapt more quickly, you know they're more nimble, and perhaps they play to market niches where they can still grow. And I think the easiest way for people to see examples of that actually is just to look at the businesses in their local community. And what many of them achieved during the lockdown situation. Now actually, a lot of them have thrived and you know it’s been much easier for those companies to adapt.

Interviewer: And just finally, there's been a lot of problems for traditional income funds with areas like banks and the oil majors hit quite hard. Do you think investors should be being more creative in the way they hunt for income, and in particular obviously, should that include a greater focus on smaller companies?

Abby: Yeah, so I mean, I guess what we've been pleased about is the resilience of many of the smaller companies. And, you know, I talked about their ability to actually continue to pay their dividends through the crisis or to return to them more quickly. And I think it'll be really interesting at the end of the year to look back at how smaller companies and income portfolios like this have held up relative to large cap. Because I think some investors will be quite surprised by that outcome. You know, within large cap in some of these sectors which the income funds rely on heavily have been some of the most challenged. Some of them are from pressure by their regulators to not pay any income. And a lot of them are big businesses, which are heavy users of government schemes, which also limits their ability to pay. So actually, you know, I feel like when, where we've positioned ourselves within the smaller companies with that quality resilient business, we sort of capture two elements – we’ve captured businesses with good balance sheets who have been in a strong position to pay. And we've also captured enough businesses in sectors who have traded well through this environment. They've also been in a position to pay. So I think, yeah, I think some people could be surprised at the end of this year.

Interviewer: Great, okay. Thank you so much Abby for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeensmallercompanies.co.uk and please do look out for future episodes.

Important information:

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.