Tulloch and Lau, who earlier this year took over the £253m Scottish Oriental Smaller Companies Trust from Susie Rippingall, have upped their exposure to India but believe that like other parts of Asia difficult reforms are needed.
“Tough and unpleasant decisions need to be taken in order to achieve long-term benefits,” the pair said, adding that volatile politics remain a problem for India, along with its slowdown, which looks structural and as a result growth will not be encouraged with a rise in rates.
Like in India, Tulloch and Lau said that issues surrounding leadership will remain an “interesting theme” across much of Asia. China saw a change in the guard earlier this year and its new regime is unwilling to spend its way out of the slowdown. Similarly, Korea also welcomed a change in its leadership, though the managers said the widening gap between rich and poor is an issue for both countries, and in Hong Kong and Singapore, where reforms aimed at resolving property ownership difficulties have squeezed low earners out of the market.
Against this backdrop, Tulloch and Lau, who took over from Rippingall in April, have managed to defy many of the difficulties hitting Asia to grow their trust’s share price by 21.7% over the 12 months to the end of August. This compares to a 14.2% rise in the MSCI AC Asia ex Japan Small Cap Index in sterling terms and a 10.1% gain in the MSCI AC Asia ex Japan Index.
But looking forward, Tulloch and Lau warned that the Asian slowdown looked set to continue and tapering in the US would only amplify this concern, with increased volatility in both share prices and currencies set to follow when the Federal Reserve turns off its stimulus tap.
Despite this, Tulloch and Lau said Asian leaders could capitalise on weakness to push through the reforms that have been needed for some time. While they increased their exposure to India because of its “excellent franchises” and companies with solid management teams trading on reasonable valuations, the pair added that its government “must take advantage of the economic slowdown and sense of political paralysis to impose economic reforms in areas such as infrastructure”.
“Such reforms will aid growth longer term,” Tulloch and Lau continued. “China can use its current slowdown to push through more radical reforms aimed at addressing the country’s mounting socioeconomic and political problems. It is clear Chinese citizens are demanding more of their government; they want to see more transparency, and require real changes in areas such as the environment.”
