Aberdeen Asian Income Fund Limited

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An update from our investment manager, Yoojeong Oh - 18 May

The outlook for Asian corporates this year is shrouded by uncertainty due to the coronavirus. Volatility is expected to persist as Asian markets try to balance a loosening of lockdown restrictions to control unemployment and reinvigorate economies against corporates fighting to protect margin and cash flows. We do not expect a clear improvement in sentiment until a proven cure or vaccine is discovered, reinforcing our view that uncertainty is always just around the corner.

A further constraint has been the difficulty to access financing and capital markets. This is a real concern for corporates and for the resumption of economic growth as a lack of cash flow can hinder a company's ability to pay their workers, invest in manufacturing and pay dividends. As a result, we have seen companies globally making the difficult decision to hold back dividends for this year in order to protect their balance sheets and weather this period of uncertainty. Another physical constraint has come from the postponement of annual general meetings (AGMs) to comply with social distancing measures, which means that shareholder voting to approve dividends has also been delayed.

During this challenging time, we continue to focus on balance sheet strength and cash flow generation as key measures of both quality and ability to pay dividends. It has been our long held belief that good quality companies that can emerge as winners through various market cycles are those that do not need to rely on external capital markets or short term borrowings. This can be seen in the fund characteristics where the underlying net debt to equity ratio of the fund is better than that of the benchmark, whilst returns on equity and assets are higher for the fund than the benchmark. What we have done during this period of volatility is to opportunistically buy more of the companies that we like that are cheaper today than they have been historically. We believe that although the disruption has been severe, the virus impact will likely be temporary and quality companies will emerge as winners longer term given their business strengths.

Whilst we expect markets to remain volatile in the near term, we are encouraged by the swift and decisive measures put in place by governments across the region to help consumers and stimulate the domestic economies. Looking ahead, we believe that the structural growth trends in Asia will remain intact and that current valuations present opportunities for long term investors such as ourselves. For now, fixed payout ratios in Asia point to a risk of dividend reduction given lower profitability from business disruption. However, our focus on robust balance sheets and resilient cash flows means that our holdings are better prepared to manage this dividend risk given lower gearing levels and larger cash balances, and look increasingly attractive to income investors relative to bond yields. We have also built up a cash reserve which covers over two thirds of the annual dividend commitment which helps to provide a further cushion during these unprecedented times.