Invesco Asia (IAT ) is ending its run on a whimper after the China rally stalled and proved a drag on performance ahead of its merger with Abrdn’s Asia Dragon (DGN ).

The £220m trust is joining forces with Asia Dragon in February, creating a near-£1bn portfolio.

While Invesco Asia managers Fiona Yang and Ian Hargreaves will run the enlarged fund, the duo ended with a downbeat note. Half-year results for the six months to the end of October delivered a net asset value (NAV) total return of 6.3% which lagged the MSCI All Companies Asia ex-Japan benchmark return of 8.6%.

The shares were ahead of benchmark, up 9.6%, which narrowed the discount from 13.4% to 10.7%.

China stalls

China proved volatile over the period. The ‘remarkable’ September rally stalled in October as markets became disappointed by the lack of detail in Beijing’s stimulus plans, ‘specifically those expected to support consumption and property prices’, said Yang and Hargreaves.

So far, policy announcements have focused on taking pressure off over-indebted local governments, falling short of investors’ hopes for direct support for consumption.

‘We expect further stimulus measures, but history tells us the authorities are likely to tread carefully, being wary of encouraging speculation, leverage and unnecessary financial risks,’ they said.

Casino operator Sands China, a relatively new position, retailer JD.com, multi-media giant Tencent, and noodle maker Tingyi all positively contributed to performance. However, this was offset by a lack of exposure to financials, which performed well over the period.

Not holding enough of shopping platform Meituan proved detrimental, while restaurant operator Jiumaojiu and dairy products manufacturer Yili struggled against the macro backdrop.

While online game developer NetEase had proved resilient in recent years, its share price derated over the period as a result of concerns about the way it monetises games.

‘The market has overreacted to the near-term impact on earnings, underappreciating NetEase’s impressive track record of delivering blockbuster titles, with a strong pipeline of new games to launch,’ said the managers.

Samsung disappoints

They also believe the market has been overzealous with the derating of South Korea’s Samsung following operational issues. The shares now trade ‘below book value, close to trough valuation levels’ and while Yang and Hargreaves are unsure of when the issues will be resolved,  they point out the market is not pricing in a near-term resolution.

In their opinion, investors are failing to factor in that Samsung’s other businesses are performing reasonably well, and the company’s very strong balance sheet has enabled it to recently propose a 10trn South Korean won (£5.7 bn) share buyback programme.

Samsung wasn’t the only problem faced by Yang and Hargreaves in South Korea as president Yoon Suk Yeol’s decision to declare martial law ultimately led to his downfall, and the government voting to impeach him.

While removing Yoon from government will be tricky and this is a ‘testing period’ for the country, the managers said ‘we believe Korea’s democracy will withstand current pressures and stability will return’.

There is a concern that the political upheaval will see Korea’s ‘Value-Up’ initiatives fall by the wayside, including tax reform. However, Yang and Hargreaves note that investors’ enthusiasm for the theme had already started to wane after the surprise swing towards the opposition Minjoo Party in April 2024’s parliamentary elections.

The left-leaning party means tax reform is now less likely but this is ‘not a reason to lose all hope’, they said, as it has launched its own ‘Korea Boost Up Project’. This proposes making changes to commercial law to ensure boards of directors have a legal obligation to consider the interests of all shareholders, not just majority shareholders.

The duo said policymakers ‘remain committed to closing the ‘Korea discount’.

Value to be found

Asia may be facing issues but shares across the region offer ‘double-digit earnings growth, with reasonable valuation levels’ and still trade at a discount to global equities, the managers said.

Yang and Hargreaves said China’s stimulus measures ‘could be a turning point in 2025’. Even if US president Donald Trump’s policies force trade away from China, other Asia countries could benefit. This could result in ‘further growth in intra-Asian trade’.

Over the past three years, Invesco Asia’s shares have returned 10.9%, lagging an average gain of 12.5% by the average trust in the AIC’s Asia Pacific Equity Income sector. Asia Dragon has fared less well over this period: its shares are down 9.7pc. 

It is a different story over the past 12 months. Asia Dragon’s shares are up 24.1pc versus 19.8% by Invesco Asia and 20.6% by the average trust in the sector.