abrdn Asia Focus: Beyond tariffs – finding alpha in Asia’s domestic markets

Hi, my name is Gabriel Sacks. I’m the lead manager of abrdn Asia Focus.

In terms of the tariff environment, the first thing to say is that no one is really completely immune from tariffs. As you might expect, the tariff regime globally is being upended, and therefore global growth might suffer, which will create second-order effects for the companies in the portfolio. So we do have to be humble in appreciating that we don’t know what will happen from here on.

Having said that, we do think the effect will be indirect. And why we say that is primarily because, when we look at the revenue generation from our companies, it is estimated that about 80% comes from Asian clients. Therefore, most of these businesses are really being driven by domestic growth in Asia. And in that respect, Asia does have very robust growth, low inflation, and many of these companies won’t be impacted by what happens in the US or Europe.

To give you a few examples, we have a very decent allocation to countries like Indonesia, India, Vietnam, and the Philippines. Those markets should be growing at 5%+ per annum. So if you find a business that is more domestically oriented, has high barriers to entry, there’s a lot of longevity to that growth given just the penetration of their services or goods in that market.

Where we do have export exposure—for example, in Taiwan—what we’re really looking for is what we call hidden champions. I was listening to the former president of Taiwan present here in London, and one of the things she was mentioning about the resilience of the Taiwanese economy is their focus on being open and the best possible partner for their clients. What that means is that Taiwan is littered with really good companies that potentially no one has heard about, but that are critical in a few components of the supply chain, particularly around tech and semiconductors.

In an age of AI, we do see a lot of businesses there that we are quite attracted to. So while that’s not the main focus of the portfolio, we are extremely confident that those businesses will have pricing power and will still be in demand, whatever the tariff environment. A few examples in Taiwan include Taiwan Union Corporation and Chroma Ate, which are the key tech holdings in the portfolio. In Korea, names like Park Systems and Leeno Industrial.

With regard to India, we did see a very sharp sell-off toward the end of 2024 and in particular early 2025 in the small and mid-cap sector, which has been a very strong area of performance for the Trust. We did add into that weakness for some of our core holdings, given the big drawdowns that we saw, but we haven’t been adding too many new names in India at the moment. As we speak, the Indian small-cap market is really back to where it was toward the end of last year, and therefore valuations remain quite a big hurdle.

Having said that, we have not been sitting on our laurels. We’ve beefed up our analyst resource in Asia with someone dedicated to looking at Indian small-cap opportunities. We have completed due diligence on several new names and we’re just waiting and assessing when might be the right time to initiate those companies in the portfolio.

As an example, we’re looking at a hotel chain operator across nationwide India, which is gaining share from the unorganised market. We’re looking at a healthcare name. We’re also looking at an IT services business. So plenty for us to do in India. Lots of activity in terms of secondary placements and even IPOs. But as I said, I think the valuations are still a bit of a hurdle. And given that we have over a quarter of the portfolio in India, we don’t feel we need to rush—necessarily—even though we do have an underweight position to the benchmark.

A couple of weeks ago, I was in China visiting companies on a one-on-one basis and also attending a corporate conference. Admittedly, the environment is still quite mixed. We did see a recovery in consumption at the start of the year, but that seems to have fizzled out, with most companies on the ground talking about a slowdown in consumption trends in March, April, and May.

I think that coincides with the ratcheting up of tariffs by the US and the pretty aggressive tit-for-tat we’ve seen between the two countries. So you might not want to extrapolate that into the rest of the year, but certainly, we do need to see a bit more support from policymakers in stimulating domestic consumption.

Most of the economists that we speak to still believe that the authorities are too focused on employment and not necessarily on tackling deflation. Therefore, again, we probably expect a bit more in the way of policy announcements in the coming months to support domestic consumption—but we’ll have to wait and see.

Having said that, there are still pockets of opportunity, particularly around IT, the AI story, and robotics. The way that we’ve positioned the portfolio is primarily toward areas of new consumption trends—such as music subscription, pet foods, travel, and internet platforms.

We also position the portfolio toward more industrial automation trends, which we think are structural in China as well, given the demographics. And we remain very excited about the prospects of our individual companies. But we don’t necessarily expect this to be a very strong year for growth in China, broadly speaking—at least not in the first half of the year.

We’ve had colleagues traveling across Asia over the last few months as well. In particular, I would highlight Korea, where you’ve seen a change in government and hopefully a more stable political outlook going forward. What’s particularly exciting about Korea at the moment is the potential for a new commercial law to be put into place, which will bring corporate governance and shareholder returns more into focus for corporates and boards of directors.

Much like Japan, Korea has the potential to see much improved dividend payouts and a narrowing of discounts in holding companies. You’ve already seen a big move up in share prices of a number of conglomerates in Korea. We do have some exposure to that in the portfolio, and we’re looking at ways of potentially accessing that in different ways—always keeping a little bit of skepticism as to how far these reforms will go. But certainly, in terms of our trips to the region, there’s still a lot of optimism and excitement about both the macro in Asia and the bottom-up opportunities we’re seeing.

The other major development in May is that we rolled over our convertible debt into floating debt. Some of that convertible did actually convert to equity, so our market cap has increased marginally, and we do have some cash to deploy at the moment on new opportunities.

So, as I said, we do have quite a lot of new ideas popping up, and we’re hopeful that we can initiate a few names in the coming months that will generate good returns for shareholders over the long term.

Thanks very much for listening. If you’d like more information, please visit our website.

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_{This is a non-independent marketing communication commissioned by aberdeen. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}