Fidelity Asian Values PLC (LON:FAS) Investment Director, Catherine Jung, explores opportunities in Asian markets.
The recent activity in Asian markets has been a useful reminder of why macroeconomic changes are not necessarily a good guide to stock market movements. While China’s trade resurgence and India’s buoyant growth have undoubtedly boosted the region’s stock markets, the timing has been unpredictable and the beneficiaries not always clear. He showed why a careful understanding of the merits of an individual company is vital.
China’s stock market staged a wild and fast rally after the government’s U-turn on its zero-Covid policy. Investors quickly anticipated a resumption of normal economic growth patterns and felt confident enough to reinvest in previously unloved parts of the market – namely the “reopening beneficiaries”.
However, investors waiting for clear signs of the economic impact of the reopening would almost certainly miss the rebound. Companies most affected by the shutdown — such as retail, entertainment and travel stocks — rallied quickly. Investors considering many of these stocks today will find that they are now completely discounting the earnings boost from the reopening. That’s before the gains are reflected in economic data and despite the market’s recent pullback.
The reality is that investors had to be in these areas before the government took action. For us, valuation considerations led us to some of these beneficiaries to reopen ahead of time. Trip.com, for example, was a fast-growing market leader before the pandemic. However, travel restrictions caused his rating to plummet. Yet it remained ahead of its peers and a major beneficiary of the resumption of travel, whenever that happened. We saw the potential to achieve long-term structural growth at a reduced valuation. After the market rally, we took some profit on the name.
We also held back Chow Sang Sang, a 100-year-old jewelry retailer with a presence primarily in Greater China (Hong Kong, Macau, Taiwan and Mainland China). Although Covid-related lockdowns over the past few years have resulted in lower earnings for the jewelery store compared to history, we have exposure given its low valuation to assets and strong brand recognition. The company is also expected to be a key beneficiary of the “reopening”.
Careful stock selection has also helped guide our distribution in India. The country had strong economic growth, which left valuations looking extremely high. Investors had little margin of safety when the recent Adani Group controversy destabilized markets. This particularly hurt top-rated companies and confirmed our focus on higher value areas of the market with stable cash flows and growth – including utilities, pharmaceuticals and banks.
Buying high-quality companies when they’re out of favor can help us make sure we’re ready for structural changes ahead of time. This works well during this recovery period.
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The question for us today is where to look next. We have taken profits in many of the companies that have come together and need to spin that capital into opportunities elsewhere. There are fewer obvious valuation opportunities and we are increasingly selective and nuanced in our stock picks, with no broad portfolio allocation themes.
“Value” still looks cheap compared to growth. While 2022 has seen some pivot from expensive growth companies to cheaper value companies, this appears to be only the beginning stages of a broader mean reversion. In fact, what we’re witnessing right now is somewhat similar to 2000, when smaller-cap stocks were trading at an all-time high premium to smaller-cap stocks—even though those growth stocks hadn’t delivered as much. -good profits from the two decades before. Importantly, since 2000, Asian small-cap stocks have grown their earnings faster than growth stocks.
The rally in value stocks is notable in that it happened despite, not because of, monetary policy conditions – China remains on a different monetary policy trajectory than the rest of the world. If we see some mean reversion in China, we should see another driver for earnings revisions for our holdings as well.
China remains a significant source of opportunity and our largest overweight position in the trust. Chinese consumption is still an important long-term trend and there is significant pent-up demand to be realized. After strict lockdowns, Chinese want to meet, travel and spend money. It’s also worth noting that China’s household savings rates have risen from 31% to 35%, so there are significant military funds to be pumped into the economy over the next few months. Growing the consumer side of the economy also remains a key priority for the Chinese government, as does the recovery of the domestic property market. If we start to see a recovery in the property segment, we could get another boost to the earnings environment.
Our focus at Asian Values Trust is always on finding good businesses run by good management teams on a margin of safety (good valuations). There will invariably be companies that disappoint and others that exceed expectations in this new environment. We ensure that our positions are guided by the reality of the company’s position and whether this is reflected in its valuation.
Fidelity Asian Values Plc (LON:FAS) provides shareholders with differentiated exposure to Asian markets.
Important information
Investments can go down as well as up in value, so you might get back less than you invested. Changes in exchange rates can affect the value of investments in overseas markets. Fidelity Asian Values PLC may use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and may result in greater than average price fluctuations of the investments. This investment trust invests in emerging markets, which may be more volatile than other more developed markets. This trust invests more than others in smaller companies, which may carry higher risk, as their share prices may be more volatile than those of larger companies and the securities are often less liquid. The investment trust’s shares are listed on the London Stock Exchange and their price is affected by supply and demand. An investment trust can gain additional exposure to the market, known as gearing, which potentially increases volatility. Reference to specific securities should not be construed as a recommendation to buy or sell those securities and is included for illustration purposes only. Investors should note that the views expressed may no longer be current and actions may have already been taken. This information is not a personal recommendation for a specific investment. If you are unsure about the suitability of an investment, you should speak to an authorized financial advisor.