AEF Fund Update August 2023

In this episode we are focusing on global infrastructure investing with a manager of the abrdn Emerging Markets Equity fund  - ticker AEF.

Transcript

Paul Blane: Hello everyone and welcome to the latest in the abrdn Closed-end Fund podcast series where we catch up with our portfolio managers from around the globe to gain some perspective on the state of the markets and the abrdn closed-end funds. I'm your host, Paul Blane, Senior Director with the National Accounts Team,and today we're focusing on the abrdn Emerging Market Equity Income Fund (ticker AEF). It's my pleasure to welcome Nick Robinson, Senior Investment Director with the Global Emerging Markets Equity Team. Hi, Nick. It's great to see you.

Nick Robinson: Hi, Paul. Thanks for having me on. It's a pleasure to be here.

Paul: Absolutely. So, Nick, if we could, it would be great to start with a general overview of the emerging markets, in particular in the closed-end fund space?

Nick: Sure, yeah. So, emerging markets essentially is dominated by China, China's about 30% of the emerging market benchmark with other countries like India, Korea, and Taiwan being the next largest countries that we invest in. Yeah, in terms of how emerging markets have been doing this year, the emerging market broad index is of about the same level it was now at the start of the year. So, we had quite a strong rally at the beginning of the year, really driven by China's reopening and the very sudden U-turn that they did on zero COVID. And then a bit of a sell-off after that, when the reopening in China didn't really go as quickly as a lot of investors had anticipated, and economic recovery didn't occur as quickly as we'd hoped. And then more recently, there's been a bit more of a sell-off and that's really been on the back of increasingly weak economic data coming out of China. Elsewhere, we've seen quite a mixed performance in emerging markets. So, India has been quite strong as a major market, really benefiting from a lot of momentum but still continuing in terms of economic growth post the COVID reopening. Also, some parts of Latin America have done quite well, this year - Brazil has been quite strong and actually we've started to see some rate cuts in Brazil, which would be positive for domestic demand. And then also Mexico has been a real beneficiary of the nearshoring trends in EM. So we've seen that market also perform quite well this year.

Paul: Well, great. Thank you very much for that overview, Nick. Would you please share the overall strategy of AEF, the abrdn Emerging Market Equity Income Fund?

Nick: Sure, I'd be happy to Paul. So, the overall strategy is really to invest in companies according to abrdn's investment process and that's namely to select high-quality companies and essentially run a fairly diversified portfolio in terms of countries and sectors with a real focus on investing in these, what we define as being, high-quality companies. And that really comes down to three characteristics that we see, typically, in these quality companies. And that's companies with strong financials and strong balance sheets, so companies that are really in a good financial position to survive the cycle, or even thrive in the cycle as other competitors in weaker financial positions come under stress. It's companies with good governance, strong management teams, and that's really important in EM specifically, given the weakness of legal and regulatory frameworks that you get in many EM. So, you really have to be a bit more reliant on the governance structure within companies and specifically the behaviour of the controlling shareholders. And that's actually probably one of the big governance differences between emerging markets and developed markets,which is that, in developed markets, you tend to have companies with quite diffuse shareholder bases, whereas emerging markets, typically there's a controlling shareholder. So, you have to be comfortable, essentially investing alongside that controlling shareholder and confident that the controlling shareholder won't take advantage of their more powerful position within the organisation structure of the company. And then finally, in terms of quality, the other aspect to highlight would be just companies that are a bit more in control of their own destiny. So, companies which are in industries with nice tailwinds in terms of demand, and also a little bit less exposed to kind of government interference and regulation. So, we try and find those companies that meet all those quality characteristics, and then essentially build a portfolio around those companies.

Paul: So Nick, in terms of sectors that you're investing, or perhaps not investing in, where are you finding opportunities that you feel are most relevant to AEF?

Nick: Yeah, so there's a lot of opportunities in emerging markets these days. I would say, you know, emerging markets have been broadened out significantly in the last 20 years in terms of the opportunity set. So, there's a lot more exciting businesses that you can invest in now in terms of businesses that are exposed to AI, online businesses, which have recently listed as well within various countries. So, we find a lot of opportunities in the information technology sector, particularly as a lot of companies that are in the artificial intelligence semiconductor supply chain. So, there's a whole range of investments in IT, which we find very exciting within EM. Also, we think the financial sector is quite interesting in emerging markets - a lot of very high-quality emerging market banks, but also local stock exchanges within emerging markets like the Vespa, which is a Brazilian Stock Exchange, and also the Hong Kong stock exchange as well, which is really benefiting from the internationalisation of Chinese stock markets. So, you know, there's a couple of examples of where we find more attractive investments. And then, in terms of where we have less capital of the fund invested, it would be sectors like, as I mentioned earlier, where there's a bit more risk of government interference. So, we have less in the energy sector, for instance, which is dominated by state-owned companies, where often those companies end up being tools of fiscal policies for governments, rather than being run entirely in the interest of shareholders. And the same is true as well in say the utilities sector and the telecom sector to some extent. So, we find less good investments there. 

Paul: Nick, final question for you in two parts, if you will. First, would you mind sharing your thoughts on why investors listening today should consider allocating to emerging markets in general? And the second part of the question, where appropriate, to the abrdn Emerging Market Equity Income Fund?

Nick: Yes, I think emerging markets are at a pretty interesting point, in terms of your first question. Valuations have become very attractive, particularly in China, given the sell-off in that market. And we think there's particular opportunities now emerging in a lot of the consumption driven stocks within China, which have been sold off. You know, we do think that there's going to be a stimulus coming through from the Chinese government at some point, which should benefit the earnings of those companies. I think another reason, as well, for owning emerging markets at the moment is the rate cycle, as I mentioned. You'll be well aware that we're getting close to the peak of a rate cycle in the US and certainly, we're beginning now to see rate cuts in emerging markets, where we saw Brazil and Chile cut at the beginning of August, other central banks are more or less on hold. So, we're coming into a part of the cycle that typically is quite interesting in emerging markets, particularly if we start seeing rate cuts in the US, which will do a couple of things. Firstly, they'll give a little bit less support to the dollar, and a weaker dollar is generally good for EM, but also it provides some cover as well for emerging markets to also cut interest rates. And then I think one of the most exciting things about emerging markets and why investors should be considering allocating to the asset class is really just where emerging markets sit in a number of really important supply chains for the future of economies. So, I mentioned artificial intelligence and the number of companies that are in that semiconductor supply chain, but emerging markets are also very critical within green commodities. So, emerging markets host some of the largest copper producers on the planet, in Chile and Peru, also one of the largest lithium producers on the planet in Chile, all investments that we have exposure to within the fund. And then I think also, in terms of the attractiveness of emerging markets, there's this big kind of supply chain reorganisation going on around the world at the moment, where essentially there's diversification out of China into other countries in the nearshoring trends. So, places like Mexico and Vietnam, which are really benefiting from this and certainly we find good opportunities there. And then why AF as a vehicle for gaining exposure? Well, I think firstly, it benefits from our tried-and-tested long-term stock picking process, which has driven good results over the long-term for the strategy. But also, I think the closed-end fund structure is really beneficial in emerging markets, because emerging markets do tend to be a bit less liquid. And as a result of a closed-end fund and not having daily redemptions or inflows, you can be a little bit more, or you can go down the liquidity spectrum a little bit as a result of not having to buy and sell these positions each day to meet client requests. So yeah, that essentially opens up a larger opportunity set for us to invest in and has given us some really exciting companies, in places a lot of other emerging market managers won't or are less likely to go, like Kazakhstan, for instance, where we found a really attractive payments company. So yeah, that's the summary, really. Hope that's been helpful.

Paul: Very helpful, Nick, thank you. I have to say it's been great speaking with you today. We appreciate you sharing your time and your insights.

Nick: No worries, Paul. It's been a pleasure to be on. Thanks a lot for the questions.

Paul: Absolutely.

Nick: Thanks so much.

Paul: So, for those interested in learning more about the abrdn Emerging Market Equity Income Fund (ticker AEF), I’m gonna give you three options to contact us. You can visit us at abrdn.com, that’s abrdn.com, you can email us at investor.relations@abrdn.com, or feel free to call 1-800-522-5465 Nick, thanks again.

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