Dan Buchanan: Welcome to the latest in our Aberdeen Standard Investments Closed-End Fund podcast series, where we catch up with our closed-end portfolio managers and gain some perspective on these complex market conditions. Today, we are focusing on the Asia-Pacific credit markets with our Singapore-based Portfolio Manager, Adam McCabe. Adam is a manager of the Aberdeen Asia-Pacific Income Fund, ticker FAX, Aberdeen Global Income Fund, ticker FCO. Welcome Adam McCabe.
Adam McCabe: Thanks Dan. Welcome, everyone.
Dan Buchanan: Thank you, and Happy June. It would be good to start Adam with a look at credit markets in general, from your perspective in the Asia-Pacific region where you're based?
Adam McCabe: Thanks, Dan. I think one of the key things that is worth highlighting for bond markets and credit markets more generally around the world is that the economic environment is emerging as one that is very optimistic. It's very well supported by fiscal policy that is extraordinary in terms of the size, particularly that in the U.S. but also around the world, both in the developed world and the emerging world, but also and importantly that that pretty consistent monetary policy stimulus. Now I know that the Federal Reserve and other central banks have begun to question the need for the monetary policy support. But the one thing that is driving economic conditions at the moment is this fiscal and monetary policy support, and that's really the tide that raises all boats, be that in the U.S. and the developed world. But importantly, in Asia, and in particular, in Asia, as many of the economies in our region are export oriented, we are able to benefit from the spillover impact of that fiscal stimulus and indeed, that economic improvement, the optimism particularly as economies reengage after the COVID lockdown, as people get vaccinated, we are beginning to see optimism spill across the corporate sector.
Having said all of that, the COVID challenge is not behind us. In Asia, there is a significant amount of challenges in terms of vaccine rollouts in terms of second and third, fourth waves. We've seen very dramatic and troubling stories in much of the emerging markets, particularly in places like India, in places like Vietnam, Malaysia, Thailand, many, many countries have not been spared these miseries around the COVID challenges. While that does pose a threat to economic growth, there is a key tone of resilience across Asia and very importantly, whereas the Federal Reserve and other developed market economies that are somewhat ahead in terms of the vaccine rollout, and somewhat ahead in terms of their economic recoveries, are contemplating, a tightening of monetary policy, as we've heard very recently from the Federal Reserve. We expect that many central banks in Asia in particular, will err on the side of caution, and continue to maintain an extraordinary amount of stimulus support from financial conditions, support for economic growth, and indeed, all of that is rather supportive of the credit markets going forward.
We continue to see valuations in Asian credit as being very resilient – has been very attractive relative to the developed market peers. The U.S. market in particular did run ahead of any other markets, courtesy of the Federal Reserve's supportive liquidity in that market and we continue to see the Asian markets lagging somewhat behind that. But nevertheless, there is a fundamental underpinning that I mentioned as being rather supportive as well. So we've got a valuation appeal, and also that fundamental resilience that I'll call out.
Dan Buchanan: Adam, you mentioned a tone of resilience. Curious, from your perspective, what is the mood or sentiment among companies and management that you're speaking with currently?
Adam McCabe: I think companies are optimistic. I mean, they look over, they look around the world, and they see the future as being one that is, is broader than the last 12-18 months that we've experienced. We see in some sectors where there have been severe dislocations, particularly in the consumer cyclical sector, the discretionary spends, those sorts of sectors that have come under a lot of pressure in the last 12 to 18 months as economies have been locked down. Everyone's got an eye on opening. Economies are looking, and companies are looking forward with optimism to getting reengaged with the consumer, getting to meet the demand that's out there. I think the very very important thing beyond that optimism about reengagement of economies is the support from policymakers that has been coordinated and indeed very stimulatory.
I think that environment has meant that in many cases balance sheets have been – companies have been able to repair balance sheets where they came under stress, they've been able to look forward to growth and prepare for that growth going forward as well. In many cases, the new growth model is definitely being put in place, whether that is a heavy reliance on technology, on innovation. We definitely also see a very strong push in the region towards climate transition, and indeed, the focus on values is becoming very, very prominent across the emerging Asian world.
Dan Buchanan: Adam saying that, have you reshaped the portfolios at all in light of this change environment over the past say six quarters?
Adam McCabe: We've stuck to our guns over the course of the last 18 months. I think the key thing is that a lot of the opportunity that we see in Asia-Pac is really centered around the very robust economic fundamental story, the emergence of the middle income consumer. But more importantly, as it pertains to bond markets that's continued resilience with respect to Asian economies and the exporters in the role in global trade, but also, importantly, the capacity and the willingness of policymakers to provide support for domestic demand growth. Those conditions ensure economic resilience, they ensure market performance of Asian credit markets of Asian local currency bond markets, that is very resilient, time after time. And even though we saw a significant increase in volatility in this spring period in 2020, the Asian markets outperformed on a risk-adjusted basis, many of the developed market peers many of the non-Asian emerging markets, and we believe that that is very, it's not a fluke. It's not a coincidence. It's largely driven by choices that were made over the course of the last 20 or 30 years by the policymakers, very hard choices in many ways because of the Asian financial crisis that occurred in 1998 where many policymakers lost face, many businesses were brought to the wall. There was pain, financial pain and suffering that was borne by the household sector. As a result of that pain and suffering that was caused 30 odd years ago, there were some very prudent policies put in place, and indeed, that has given the foundations for much of the Asian region be them sovereigns, corporates or the household sector to be very resilient in its most recent crisis.
Dan Buchanan: Well, that's very interesting, Adam. I want to switch gears for a moment if I could. Products that you run here at Aberdeen in the closed-end space, come in a closed-end fund investment vehicle much different than an open-end fund or an ETF. I'm just curious from your perspective how does the closed-end fund structure help you to effectively manage a portfolio like the Asia-Pacific Fixed Income, number one and number two, closed-end funds historically or many of them apply leverage or gearing and curious on your position on leverage?
Adam McCabe: I think the answer Dan is very, very simple. It allows us to focus on the long term, the long term opportunities. In the bond funds, the opportunity for us is to provide income to the owners of the funds and that's what we're able to do. We're able to, in a large part, because of the closed-end structure able to look through a lot of crises, and indeed, maintain positions and essentially clip the coupons to deliver the income. That longer term-- but that longer term focus is very important in positioning, and really benefiting from those structural benefits of the Asia-Pacific region that I highlighted. We do use leverage to support our objective of earning income, and that is something that has added value over time and it's one that we continue to see as being strategically created in that we are able to borrow in a very low interest rate environment at rates much lower than we are able to invest in and so we enjoy a positive carry.
What's more, I think, if you just step back from the closed-end fund space and if you think about what we're trying to do here, we're invested in the bond markets. Bond yields are very low, and for the most part across our fund complex, particularly fixed income funds, they do trade at a discount. And so what we're able to do is actually provide a cheaper alternative for investors to that of buying bonds directly. We can obviously earn income but as the funds trade at a discount, that is a way to actually enhance the income generation from a unit holder’s or shareholder’s perspective. So it’s quite an appealing investment prospect, not just the benefits to us as the investment manager and what that brings it as a derivative benefit to you, it also brings the benefit of capturing the yield at a discount to the market rate.
Dan Buchanan: Adam, I imagine – Adam, I imagine cash drag as a factor is certainly a concern for a lot of investors. Tell us a little more about how you position cash or – actually, you know what, I will edit that part out, sorry. I was going to mention just that the cash – cash drag components, so when you don't have incoming, money coming in at the top of the market and, money coming out like an open-end fund, but we could skip that.
Adam McCabe: Yeah.
Dan Buchanan: So Mr. or Ms. Editor, we can scratch that last part out. Finally, Adam, what would you say to clients to give them comfort today, new investors today that they should invest in the Asia-Pacific region in fixed income?
Adam McCabe: Well, I think that I've highlighted a number of the reasons why I think it's a very appealing opportunity. I think the key reason for me, to be very optimistic about the fortunes in the Asia-Pacific market is, first and foremost, built around that very strong policy foundation. That creates resilience of the economies, it creates resilience in markets. But more importantly, as the market, as the middle income consumer emerges in Asia, there is ongoing and building pools of savings in Asia, that those savings domestically are becoming more and more institutionalized. And so what we're beginning to see now is the emergence of pension funds, insurance sector. And what that brings to the capital markets is institutional demand for fixed income, institutional demand for what we call is as practitioners for duration, and that demand for duration locally underpins the support for the local capital markets.
So not only do you have policymakers that have created an environment where there is resilience in terms of economic outcomes, they've got policy capacity, but now you have participants in the marketplace that have a natural demand for interest rate risk, and those three or four factors together mean that the outcomes and the expectation for us around Asian Fixed Income as an asset class will work very appealing on a risk adjusted basis over the medium to longer term.
Dan Buchanan: Well, thank you, Adam, for those insights today, and especially thank you to our listeners for tuning in. You can find out more about the funds at www.aberdeenfax.com, www.fco.com. I'm Dan Buchanan with Aberdeen Standard Investments. Do look out for future episodes.
