Given the recent bounce back in regional equities, are markets pricing in a true reflection of the economic and social impact of Covid-19?
The market has recovered strongly but this has been from a level which looked to be oversold in March. That said, over the first four months of the year Asia ex Japan markets have seen double digit falls in dollar terms.
The decline in Q1 earnings was broadly in line with market expectations. Even when companies reported very sharp falls the stock did not tend to react. Interestingly, tech companies like Samsung in Korea and TSMC and Mediatek in Taiwan delivered expectation-beating earnings in Q1.
In terms of what comes next, I don't anticipate a V-shaped recovery as consumers remain cautious when it comes to spending given the uncertainty over the outbreak. An interesting on-the-ground anecdote came out of an internal survey Fidelity recently conducted with our local staff in China. Here, we saw, for example, that more people are generally more willing to go out locally, but a majority are not planning an overseas holiday until 2021.
How do you factor in the differences in lockdown between north Asia - where activity is slowly retuning - and south Asia?
I am a long-term investor and I invest with that view. At a high level, I think Covid-19 will have a maximum one-year negative impact on business activity although it is important to note that it will be less than that in certain areas. This underlines the need for fundamental research and rigorous company analysis in the current environment as perception and reality differ significantly.
For instance, China Life Insurance was shunned by investors earlier in the year amid concerns that the lack of agent engagement would significantly curtail its new business. When its results were released, the reality proved quite different for the naysayers as it proved to be the best performer in the industry. This underlines the importance of assessing fundamentals and understanding that in certain areas local market dynamics may actually be taking a turn for the better.
The picture in south Asia is more nuanced. Thailand and Malaysia have had some success in suppressing the virus and are now reopening but India and Indonesia have been more impacted. India's recovery will therefore lag north Asian economies but high-quality holdings like Housing Development Financial Corporation (HDFC) are faring relatively well. At a time when private non-banking finance companies are being viewed with extreme caution in India, HDFC is less likely to face challenges in raising funds in the market. I maintain such long-term winners in India will gain market share in this period and emerge stronger.
How will Covid-19 impact consumption behaviours over the long-term?
The crisis has accelerated long-term shifts that were already underway. Penetration in e-commerce has increased further over recent months, particularly in areas like online groceries and entertainment. Outside of consumer-related areas, demand for life and health insurance in China will also increase as people become more aware of the risks of not having coverage.
The virus outbreak could also have implications in terms of how the Chinese government provides policy support to accelerate innovative drug development. Biotechnology holdings WuXi Biologics and Innovent Biologics have both performed relatively strongly over recent months as they have demonstrated encouraging execution skills.
Working practices have also changed. In Hong Kong, we started to work from home in late January and I think that the option of working flexibly and the overwhelming reliance on video conferences will increase. As a result, demand for office space and business travel will not be as high as it used to be. This has a direct impact on certain sectors such as commercial property and travel where the outlook has worsened.
Where do you currently see value emerging for long-term investors?
The Asia consumption story is a long-term opportunity that will continue to evolve. Innovative and well-run companies like Shenzhou International, which manufactures for global sportwear brands such as Nike and Adidas, is a future winner that will continue to benefit from the growth in athleisure and apparel.
In financials, the long-term prospects for HDFC Bank has not really been impacted - it should continue to grow earnings by around 20%, yet its share price had dropped by 40% which presented a good buying opportunity.
Core holdings such as Alibaba, Tencent and TSMC have been the winners of the last decade. Will this continue?
Alibaba, Tencent and TSMC have unique offerings and strong franchises due to their technological leadership. Importantly, they also continue to innovate and develop new products with Alibaba's digital payments arm Alipay being a prime example.
Tencent is essentially China's equivalent of Facebook. It enjoys an enormous customer base and is China's number one gaming platform which is growing rapidly, especially in the current lockdown environment. I expect Tencent to remain the leading social media company in the region.
As a semiconductor manufacturer, TSMC is the backbone of the technology we all use each and every day. It is unique due to its entrenched technological leadership position which supports the long-term outlook for the company. As demand for computing power in personal devices increases, it offers a long runway of growth for this chip manufacturer.
All-in-all, I think all three companies are long-term winners that should deliver sustainable and consistent earnings growth over the next five years.
Have you made any major changes to the Fidelity Asia Fund portfolio throughout the recent market volatility?
There have been no major shifts in positioning. In volatile times, it is important to maintain a long-term view of the structural growth opportunities available by investing in strong franchises with experienced management teams at their helm.
I have therefore used the market weakness in March to add to high conviction holdings in the likes of Alibaba, AIA Group, Tencent, HDFC Bank and Bharti Airtel.
In terms of new additions, I participated in the IPO of credit card company SBI Cards as it has a long runway of growth with strong tailwinds in structural penetration and digitization. Hong Kong Exchanges and Clearing has also been added to the portfolio as it is well placed to benefit as an increasing number of Chinese companies look to list in Hong Kong rather than the US.
I remain alert to further periods of uncertainty which could provide the opportunity to invest in long-term winners at attractive valuations. But is important to be prudent given the continued uncertainty that we face.
This environment is where active management can really add value over passive vehicles. My investment process has been tested over time and the mosaic approach to investing that I deploy helps me look at investment ideas from a multitude of angles.
Change is the only constant and nowhere is this more apparent than investing in Asia. The examples I have shared highlight the breadth of opportunity that Asia offers and how local insight and differentiated analysis has enabled us to invest in a number of market leaders at an early stage.
As markets are becoming more short-term orientated, this can be an opportunity for investors with a longer-term horizon. A clear investment philosophy that has been tested across a variety of market environments should be well positioned to generate alpha for clients in the long-term.
Further information
This information is for investment professionals only and should not be relied upon by private investors.
The value of investments can go down as well as up so investors may get back less than they invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Asia Fund has the potential of having high volatility either from its composition or the techniques used to manage it. The fund can use financial derivatives which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in small and emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0620/31304/SSO/NA
