Waiting for the clouds to part

As a Brazilian, I have always found the UK’s weather somewhat disappointing. Needless to say, that is putting it mildly.

January and February are especially dire. Since Britain’s winter coincides with Brazil’s summer, the risk of homesickness is exceedingly high. A wet weekend in Wimbledon is no match for Carnival in Rio de Janeiro.

In the end, though, patience is a virtue. Each year I reassure myself that bleakness, cold and rain will eventually give way to colour, warmth and sunshine – or at least some approximation thereof – heralding the return of brighter days.

This is a mindset with which long-term investors ought to be familiar – not because they fancy jetting off to the beach but because they appreciate that markets inevitably experience difficult periods. We find ourselves in the midst of such a spell today.

The conflict in the Middle East has sent oil prices soaring and pretty much everything else tumbling. Asian markets bore the brunt in the earliest days of the crisis, with South Korea, Vietnam and Indonesia among those hardest hit.

Understandably, volatility of this kind can be unsettling for investors. Yet here, too, the most sensible course of action is to stay calm and wait for the clouds to part – as they almost invariably do – while keeping an eye out for silver linings in the meantime.

As the manager of a fund that invests in Asian smaller companies, I can think of several reasons to remain composed – and even optimistic – in the face of the current turmoil. Here are three that I consider particularly relevant.

1. Smaller companies can defy the macro backdrop

To what extent should the geopolitical and geoeconomic landscape shape investment choices? A top-down perspective always has a part to play, but it may tell only half the story – and perhaps much less than that.

Smaller companies serve as an obvious example. Since relatively few have a genuinely global presence, there may not be a huge link between events on the world stage and the capacity of such businesses to survive and thrive.

Take a company whose focus is purely domestic and which operates in an emerging market. Many of the holdings in our fund tick these boxes.

The march of anti-globalisation, the crumbling of long-established international relationships and the radical rewiring of major trade routes are unlikely to undermine long-term growth potential in such a case. If anything, they may instead improve it.

2. It is still possible to unearth hidden gems

So how do investors find such companies? It is often easier said than done, as most investment analysts prefer to zero in on mega-cap and large-cap businesses – usually in the US and Europe – and so very seldom venture towards the lower end of the market-capitalisation spectrum.

Fortunately, specialist investment teams with on-the-ground presence and local knowledge have the ability to unearth hidden gems. This usually requires in-depth research and direct engagement with companies and their senior executives.

In our opinion, it is vital to have a comprehensive grasp of the places, people and practices at the heart of stock-picking decisions. We believe fundamentals matter enormously.

Regardless of whether the bigger picture is negative or positive, such a level of insight helps us identify new opportunities. Crucially, it also informs the tactical readjustments that are regularly applied to actively managed portfolios. Whether we buy, sell or hold is far more likely to be influenced by our understanding of a company’s unique attributes than by front-page headlines.

3. The investment case for China continues to strengthen

The Two Sessions constitute China’s most significant annual political gathering. One of the key announcements to emerge from this year’s meeting, held in Beijing in early March, was a GDP growth target of 4.5-5% for 2026.

Given that China has strived for GDP growth of 5% or more every year since 1991, this record-low figure was seized upon as a sign of an economic slowdown. But two points are worth noting.

First, the projection is based on a shift to “high-quality growth” – underscoring that the way ahead is now felt to lie in structural reform rather than in low-cost exports and other historical drivers. Second, 4.5-5% still outstrips the most upbeat estimates for the US, the UK and others.

There is little cause to expect this objective to change dramatically in light of what is happening in the Middle East. Reflecting its energy independence, which stems from sizeable oil reserves and increasingly acknowledged pre-eminence in renewables, China has stood strongest among Asian markets since the war began.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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