Overview

After ending on a strong note in the previous financial year, Asian small caps retreated by 1.9% in sterling terms over a challenging six months to January 2025. A triumvirate of macroeconomic concerns, geopolitical uncertainty after Donald Trump’s US presidential election win and tariff risks for China, as well as US monetary policy developments were brought to bear on investor sentiment. Some markets also faced the added complication of idiosyncratic or country-specific factors, such as Korea which was thrown into political turmoil. Across the region, we would highlight a reversal in fortunes for two of the region’s biggest markets – China and India. Small caps in China were by far the best performers, after a tough prior 12 months as hopes of a rapid post pandemic rebound faded and domestic macroeconomic challenges came to the fore. The central government made a major policy pivot in September towards targeted stimulus measures to stabilise a still-weak property sector as well as support domestic consumption and the broader economy. This resulted in a sharp rally. Towards the end of the review period, news of a low-cost Chinese artificial intelligence (AI) model, DeepSeek, led to a rally in AI related stocks and boosted sentiment in China, while triggering a sell-off in US tech and the associated supply chain in Taiwan as expectations for data centre capex and tech hardware demand came under scrutiny. In contrast, after a stellar prior run on a buoyant economy, growth in the corporate sector, and substantial foreign capital inflows, Indian small caps were among the biggest losers during this period on the back of profit-taking and a continued sell-off in small- and mid-cap stocks. The main reasons for the pullback have been a weakness in consumer demand and a slowdown in capital expenditure, amid the shifting policy priorities for the government following elections in calendar 2024. Most importantly, earnings growth started to moderate in the last few quarters. Elsewhere, in South Korea, political turmoil resulted in extreme market volatility, and the market was among the key laggards. The country saw then-president Yoon Suk Yeol declare martial law, the first ever imposition since Korea became a democracy in 1987. This sparked public anger and street protests but proved short-lived as the National Assembly vetoed Yoon’s imposition. Yoon’s impeachment and suspension from office followed soon after.

Portfolio Review

The portfolio significantly outperformed its closest reference benchmark by 8.8% over the review period. This was due to a few key areas of relative strength. In India, our underweight to the market, a laggard, and our stock selection there contributed significantly to performance. Among our holdings, the share price of Vijaya Diagnostic Centre, a leading healthcare services company, hit an all-time high in August following robust quarterly results. Vijaya’s good showing reflected its strong execution and differentiated integrated business model that led to the company maintaining its growth lead over its peers. Another solid performer was KFin Technologies, buoyed by continued momentum in investor flows and excitement about the potential for overseas expansion of its core registrar services. Its fundamentals remain sound, and its recent results exceeded expectations with continued prospects for growth. Elsewhere in Korea, our underweight to the market relative to the benchmark benefited performance, given the above-mentioned political woes. Our holdings also contributed to returns. Specialised microscope maker Park Systems Corp’s share price outperformed the local market despite lower-than-expected revenues for the third quarter, as sentiment remained positive on the company’s ability to continue to grow equipment sales. Demand for industrial-use atomic force microscopy is accelerating from a low base, driven by the transitioning to more advanced and smaller semiconductor manufacturing technologies in the foundry and memory industry. Hyundai Marine Solution, an engineering services company that caters to the shipping industry, also did well, as its results tracked well ahead of previous estimates. Its aftermarket division drove robust growth with volume, pricing, and mix all trending positively. The retrofit business, although in transition mode, showed a building backlog with multiple projects in the pipeline. Finally, China including Hong Kong was also a key performance driver. Strong stock selection drove returns. Gear and reducer manufacturer Zhejiang Shuanghuan Driveline rallied on anticipation that it will be a key beneficiary of demand from humanoid robotics. Dah Sing Financial also outperformed as it delivered a beat on its first-half earnings, with resilient net interest margins and an outsized contribution from its insurance partnership with Sun Life. It also announced a substantially higher interim dividend, reinforcing its robust financials despite the challenging economic environment in Hong Kong as well as management’s commitment to improving shareholder returns. Another contributor was Precision Tsugami (China) Corp, which sells high-end computer numerical control (CNC) machine tools. The company is benefiting from higher CNC adoption, market share gains, and margin expansion, with recent revenue and operating profit exceeding consensus expectations while the order momentum remained very strong. Meanwhile, we remain focused on our objective of investing in a diversified portfolio of around 50 well-run companies with industry-leading positions. Over the review period, we continue to refine and refresh our portfolio towards holdings with better growth prospects, steadier cash flow and clearer earnings visibility amid a still-uncertain backdrop. In India, we continue to find smaller companies across various sectors that merit a place in the portfolio. India is home to many attractive companies with competitive business models, high returns and appealing long-term growth prospects. We initiated a position in Cholamandalam Financial Holdings, a diversified financial services group. The stock trades at a substantial discount to its subsidiary, Cholamandalam Investment and Finance, which is a high-quality lender in India that is rapidly broadening its product portfolio and loan exposures. We also introduced Newgen Software Technologies, which helps companies organise their digital documents, streamline their workflows, and enhance how they communicate with customers. We view it as a niche software company backed by a solid product offering that is highly rated by industry consultants. Execution has been strong, evident from its successful track record in onboarding and retaining clients in its core markets, namely India and the Middle East. Another new holding was Phoenix Mills, a leading retail-led developer and operator, following a correction in its share price that made its valuation more palatable. The company has quality malls in top-tier and state capital cities as well as a good pipeline of new assets to be launched over the next few years. This provides a healthy stream of current recurring income for the business that should steadily grow.

The last addition was Poly Medicure (PLMD), a founderowned business that sells consumable medical devices. PLMD has a broad product portfolio, with infusion therapy being the largest segment, but it is also looking to expand further in cardiology and critical care. The company is on track for double-digit revenue growth in fiscal year 2025 and beyond with management expecting strong growth in India due to new launches and an expanded marketing team. It is also investing in several new facilities for export to Europe and the US. To fund these initiations, we sold out of a few companies in India including Map My India, Cyient and Medanta. Elsewhere in China, we introduced Kingdee International, which is the leader in enterprise resource planning (ERP) software products for SMEs in China. The company has first mover advantage and is poised to benefit from the rapid adoption of ERP software and cloud solutions, as SMEs become increasingly open to utilising home-grown digital technology. We also like the company’s move to a subscription-based revenue model which is relatively unique among leading Chinese ERP software players and provides greater earnings resilience. In Southeast Asia, we added a new holding in Philippine Seven Corp as a proxy for consumer exposure in the Philippines. The company runs 7-Eleven’s dominant convenience store chain network in the Philippines, with scale, strong execution over the years and healthy cash generation. Competition exists but the industry has a good runway for growth given low levels of penetration. The retail format of convenience store chains has also worked well across the country, driven by rising urbanisation and a growing middle class. Its management seems forwardlooking and has the benefit of being able to leverage off innovations across the global 7-Eleven network. In addition, we bought Vietnam-based Mobile World, a consumer electronics retailer which has branched out into grocery. It is the country’s biggest retailer with a broad store network and a first mover advantage in a country where informal food markets are still prevalent. We view it as an attractively valued company that is well placed to capitalise on the underpenetrated modern retail and ecommerce sectors, given the exciting growth dynamics as well as rising wealth levels in Vietnam. Against this, we exited Alchip Technologies, Bangkok Chain Hospital, Credit Bureau Asia and Millennium & Copthorne Hotels (New Zealand).

The last addition was Poly Medicure (PLMD), a founderowned business that sells consumable medical devices. PLMD has a broad product portfolio, with infusion therapy being the largest segment, but it is also looking to expand further in cardiology and critical care. The company is on track for double-digit revenue growth in fiscal year 2025 and beyond with management expecting strong growth in India due to new launches and an expanded marketing team. It is also investing in several new facilities for export to Europe and the US. To fund these initiations, we sold out of a few companies in India including Map My India, Cyient and Medanta. Elsewhere in China, we introduced Kingdee International, which is the leader in enterprise resource planning (ERP) software products for SMEs in China. The company has first mover advantage and is poised to benefit from the rapid adoption of ERP software and cloud solutions, as SMEs become increasingly open to utilising home-grown digital technology. We also like the company’s move to a subscription-based revenue model which is relatively unique among leading Chinese ERP software players and provides greater earnings resilience. In Southeast Asia, we added a new holding in Philippine Seven Corp as a proxy for consumer exposure in the Philippines. The company runs 7-Eleven’s dominant convenience store chain network in the Philippines, with scale, strong execution over the years and healthy cash generation. Competition exists but the industry has a good runway for growth given low levels of penetration. The retail format of convenience store chains has also worked well across the country, driven by rising urbanisation and a growing middle class. Its management seems forwardlooking and has the benefit of being able to leverage off innovations across the global 7-Eleven network. In addition, we bought Vietnam-based Mobile World, a consumer electronics retailer which has branched out into grocery. It is the country’s biggest retailer with a broad store network and a first mover advantage in a country where informal food markets are still prevalent. We view it as an attractively valued company that is well placed to capitalise on the underpenetrated modern retail and ecommerce sectors, given the exciting growth dynamics as well as rising wealth levels in Vietnam. Against this, we exited Alchip Technologies, Bangkok Chain Hospital, Credit Bureau Asia and Millennium & Copthorne Hotels (New Zealand).

Outlook

As we look ahead, the consensus is that Asia and emerging markets may face challenges due to Donald Trump’s policies, tariffs, and interest rates. US deregulation and tax cuts could bolster the US dollar, which is unfavourable for Asia. On the flip side, Asia's attractive valuations offer potential for upside surprises, driven by structural tailwinds. It is also encouraging to see a greater appreciation for shareholders, with the value-up theme being promoted by shareholders and authorities in South Korea and China. This has positively impacted our engagement efforts with companies across the region. We remain positive on Asia, expecting that China may adopt more aggressive stimulus policies to mitigate the tariff impact. At the Two Sessions parliamentary meeting held in early March 2025, the Chinese leadership reiterated their pro-growth policy agenda with a particular focus on stimulating household consumption which should help unlock excess savings accumulated during the pandemic. Elsewhere, Asian corporates are in good shape with low debt levels, strong competitive positions and a broadly favourable macroeconomic backdrop with little inflationary pressure. Challenges remain but the companies held in the portfolio have dynamic management teams, robust financials and high barriers to entry with globally competitive business models. They have fared well against several shocks in the past and we are very excited about their growth prospects looking ahead.

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

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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