Aberdeen's Australia Equity Fund (IAF) - July 2025

Mike Taggart, Aberdeen's Head of Closed-End Fund Investor Relations, joins Eric Chan, Portfolio Manager for IAF, to explore the unique dynamics of the Australian market. In this brief conversation, they reflect on the first half of the year and share insights on what lies ahead.

Transcript

Aberdeen Australia Equity Fund (IAF)

Podcast Transcript

July 2025

Mike Taggart: Welcome to the latest podcast for the Aberdeen Australia Equity Fund, ticker symbol IAF. I'm Mike Taggart, Aberdeen's Head of Closed-end Fund Investor Relations. With me is Eric Chan, IAF Portfolio Manager. Eric, thank you for joining us. 

Eric Chan: Thanks, Mike. Happy to chat. 

Mike Taggart: So, Eric, what's been going on in the Australian markets so far this year and what's the outlook? In other words, why invest in Australia? 

Eric Chan: So Australian equity markets have had a really volatile year. The year started off really strong with continued momentum for the fourth quarter of last year on kind of declining interest rate outlooks and the start of interest rate cuts from the RBA. However, the February earnings season was kind of a difficult period for everyone, and the market sold off in the second half of February. What's funny about this is that actually the majority of companies in the Australian market actually reported a profit beat, but a generally more cautious commentary, an environment where, when the market was expecting a positive outlook kind of spooked everyone and that caused the market sell off.

It didn't help also that this coincided with increasing tariff commentary from the US Trump administration, and that also resulted in a reversal of the gains made in beginning of the year. So by the time that April's Liberation Day came around, the market was already down about -1% or so in US dollar terms. And then the Liberation Day itself caused the market to fall an amazing 12.5% in US dollar terms. And that kind of trough that mid-April. 

Mike Taggart: Was that. Okay. So in two weeks it fell another 12%. 

Eric Chan: Yeah. It was really incredible. But but I'd say that similar to other global equity markets, there was a pretty big rally after that. So, subsequently, kind of when the Trump administration started capitulating on the kind of the severity of the tariffs and started coming back a little bit, kind of that taco trade that everyone was talking about.

The Australian market rallied very strongly. 

So actually, year to date today, the total return of the ASX 200, which is the benchmark Australian equity market, has actually returned 14.3% in US dollar terms, which is an amazing outcome.  

Mike Taggart: And that's as of mid-July a year. 

Eric Chan:  So that as of mid-July. And like you have to put that in context to where 14.3% is, it's way above the S&P return, about 7%.

So it's really been a phenomenal period during the time. But a lot of ups and downs. 

Mike Taggart:  Yeah. And how about the outlook. So is the outlook for continued strength. Continued weakening dollar benefiting the Australian markets. Is that the weakening US dollar I should say. 

Eric Chan: Yeah actually. So it's funny you say that there's been that the US dollars. Absolutely. One of the reasons why you're getting a better Australian equity market return on a US dollar basis. So of that 14%, about half of that is FX related, as in a weakening US dollar resulting in a better Australian market. But but even so, the underlying market of the ASX 200, even in local currencies terms, is still up 7%.

So you're seeing both strength and domestic equity market returns, as well as, a currency kind of tailwind. And there are a few reasons why you're seeing a strengthened in the Australian market. 

First of all, is on that tariff front, even though we did see the equity market fall on that announcement. It's funny because Australia is actually relative, be more immune to US tariffs and the US actually has a trade surplus with Australia.

So actually there's not a lot of reason for the US to really tariff hugely. The in markets. So that's actually quite helpful from a, from a relative standpoint on a global equity basis. The other thing is that if you look at fundamentally, the Australian economy has gone through a very difficult period, but we seem to be seeing signs of bottoming.

So the fundamental story is getting better. And then on top of that, you're seeing that interest rate cut narrative that's coming from the RBA. So that should help to boost again that domestic consumption. The housing market. It should help kind of boost a lot of segments of the Australian economy. So that's also one of the second reason that's really positive.

And then again, the third reason is that you are seeing a little bit of that kind of dollarization trade these investors trying to reduce their US dollar exposure. And for all the reasons that I said previously, Australia is actually not a bad place to be. 

Mike Taggart:  Excellent. And then, you know, I always like to highlight the importance of active management when it comes to investing in Australia. Can you discuss? I know we've done it before, but can you discuss again the market structure in the Australian equity market? 

Eric Chan: So the Australian equity markets are very funny market in that it's a highly concentrated market. Why that's special is that it really does become a stock pickers market. So to give you an idea, the four major banks in Australia in addition to BHP and Rio, account for a little bit more than a third of the overall index.

I think if you'd expand that out to the both the financial sector and the material sector, that accounts for a little bit over half of the the index. And then if you expand that out to consumer healthcare and industrials, you're getting almost a majority of the index. I guess what I'm trying to say is that just take the materials and financials.

It's a it's a really, really, really concentrated index from a sector perspective. And again six stocks make up a third of the index. So what you can as a stock picker you really can just pick the one say bank for example, and pick the one that's going to outperform the others. And you can actually generate quite a bit of alpha there.

The other thing is that you can cover quite a lot of benchmark with fewer stocks. So that means that with the rest of your portfolio, you can really go out there and try to find these exceptional, companies that are high quality and, and have amazing fundamentals. And Australia, surprisingly, for people who don't look at the market, there actually is a large amount of stocks that are both amazing domestic champions or are actual global leaders in their respective fields, and those are stocks that we like to own in the portfolio.

Mike Taggart:  I always like to point that out to investors, just that concentration. 

And then finally, I have a two-part question here to keep things fair and balanced. First, where have you been facing the strongest headwinds in the portfolio in terms of, you know, sectors? And then second, where are you finding the most attractive opportunities? Is there a certain sector that looks particularly compelling, you know, heading into the second half of 2025?

Eric Chan: Yeah. So I'd say the strongest headwind in Australian is kind of a function of how strong the market has been is actually valuations as a whole, partially because of foreign flows, but partially because of that underlying domestic story. A lot of the sectors in the Australian market are now actually quite expensive. When you're looking at it from a historical basis.

So it's kind of like a double edged sword here. But generally you're seeing a lot of high valuations, particularly in the say, the banking sector, which again, like I said before, accounts for a large part of the index. So it, you're seeing some expensive valuations in the consumer space, you're seeing some expensive valuations in the - even just telco sector, so it's getting harder and harder to find very obvious, pockets of value in the market. 

But on the flip side, what I'd say is that the sectors that do kind of screen a little bit more attractive, and particularly in, in light of, kind of a declining interest rate environment, are sectors such as the real estate sector actually screens relatively well, they're not really that expensive considering they're about to get this very strong macro, tailwind behind them and just a better consumer environment. So that's one sector that we're looking at. 

Another area and this is related to that US trade is that there are a lot of, Australian stocks that have quite a decent amount of U.S exposure. So because of everything that's been going on in the US, a lot of these stocks have been kind of indiscriminately sold off. So some of these again are a really, really amazing companies. Very high quality will likely maintain if not gain market share during this period. So that we're using this opportunity in this kind of valuation, volatility to increase or take positions in some of these US exposed names as well. 

Mike Taggart: Thank you, Eric, for that informative update.

Eric Chan: Thank you very much for having me on. 

Mike Taggart: There are three convenient ways to learn more about IAF. Visit our website at Aberdeeninvestments.com. Second, you can email us at InvestorRelations@Aberdeenplc.com, or give us a call at 1-800-522-5465.

I'm Mike Taggart of Aberdeen. Thank you for listening.

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