Four Asia-focused investment trusts to keep an eye on

Funds that specialise in Asian companies have yet to price in the full short-term effects of the coronavirus

For all the doom and gloom over the coronavirus, mortality rates are low. And in the next few weeks we should hit the peak infection rate and the public health experts will then start to get a handle on it. The bad news, however, is that in my opinion the effect on the economy of China and Asia has been hugely underestimated – and the share prices of regional funds have yet to factor this in. 

Many analysts have downgraded their forecasts for Chinese growth to reflect the shock from the outbreak. Barclays has cut its 2020 GDP growth estimate by 0.4% to 5.4%; for the first quarter it expects growth of 4% year-on-year, a 1.8% reduction from its previous estimate. It also thinks that the outbreak “poses significant risks to growth” in emerging Asian countries, “with Thailand and Singapore among the most vulnerable”. 

Counting the cost 

According to risk consultants at CheckRisk, Sars cost the global economy between $35bn and $40bn. But the coronavirus, because it is much more infectious,“will cost a lot more”. They reckon that if the virus spreads to over 100,000 people then it could cost $400bn for China alone. The government in China has already set aside $175bn so far in liquidity to manage the crisis and protect the yuan, but my guess is that this won’t be nearly enough. 

We’re already starting to see the knock-on effect on supply chains. CheckRisk reckons that global GDP growth in the first quarter could fall to just 0.5% as a result of the virus, while Chinese GDP growth could go negative in the first quarter.

What seems to reassure investors is the notion that the Chinese central bank, the People’s Bank of China (PBOC) will do all it can to back the economy as it inevitably rebounds. This seems highly credible in the medium term. CrossBorder Capital is a London-based research firm that charts global liquidity flows, especially from central banks. It suggests that the PBOC’s liquidity injections have accelerated since the lunar new year period in response to the coronavirus crisis. It says these actions reinforce existing trends that coincided with the signing of the trade agreement in January and the lunar new year. 

According to CrossBorder Capital, in late 2019 economic growth was at a 29-year low, so easing was already on the cards. But this huge liquidity injection will take its time to work through the system and in the meantime there is likely to be a nasty downturn. This crisis has been a boon for home-delivery, movie-streaming and health-waste disposal firms. But for everyone else, it’s been a nightmare.

The funds set to bounce back

Not that you’d guess this from the share price of the main investment trusts that invest in China, Greater China and Asia Pacific generally. In many cases the share prices are actually showing positive returns year to date. Oddly, the biggest falls have been seen in funds that invest in nearby countries. Many Vietnam funds have seen falls of as much as 5%. 

None of this makes sense. The effect on China will be huge and the monetary easing won’t be enough to dig the national economy out of its hole in the next quarter. I think we need to see price declines of between 5% and 10% before the market has fully priced in the likely short-term effects. We might also see discounts to net asset value (NAV) start to widen from their current 5%-10% range and become closer to 15%. 

But the good news is that once the market has properly priced in these losses, investors will rediscover these trusts, especially as all that central bank largesse starts to kick in. I think Invesco Asia (LSE: IAT), Schroder Asian Total Return (LSE: ATR), Schroder Asia Pacific (LSE: SDP) and Scottish Oriental Smaller Companies (LSE: SST) will disproportionately benefit as the quality plays in this sector. 

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Where to find deep value in investment trusts
Share tips

Where to find deep value in investment trusts

Professional investors Nick Greenwood and Charlotte Cuthbertson of the Miton Global Opportunities trust pick three of their favourite investment trust…
15 Feb 2021
Why investment trusts are the connoisseur’s choice of fund
Investment trusts

Why investment trusts are the connoisseur’s choice of fund

Investment trusts have justified their reputation as the best type of collective investment in 2020, says Jonathan Davis.
7 Dec 2020
Why investors should take investment trusts up on their free lunches
Investment trusts

Why investors should take investment trusts up on their free lunches

Investment trusts are brilliant, says Merryn Somerset Webb. Perhaps the most brilliant thing of all about them is the fact that investors can meet and…
16 Nov 2020

Most Popular

A beginner’s guide to bitcoin: where to store your bitcoins
Bitcoin

A beginner’s guide to bitcoin: where to store your bitcoins

Once you've got hold of some bitcoins, you need somewhere secure to keep them. Dominic Frisby outlines some of the best options, from exchanges to col…
4 Mar 2021
A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
The great rotation is firmly underway – what does it mean for you?
Stockmarkets

The great rotation is firmly underway – what does it mean for you?

As investors move away from “jam tomorrow” stocks and back into “old economy” stocks that should benefit from the post-pandemic recovery, the tech-hea…
5 Mar 2021