21 Mar 2023
The reopening trade in China has undoubtedly galvanised Asian equities, but how can investors position for the next move in markets? Catherine Yeung, Investment Director for Fidelity Asian Values PLC, reviews the current environment and highlights why recent market movements underscore the importance of disciplined stock selection to capture long-term value.
The Chinese equity market has seen a buoyant and rapid rally following the government’s pivot late last year in its zero-Covid policy. Investors quickly anticipated a resumption in normal patterns of economic growth and felt confident enough to reinvest in previously unloved parts of the market - namely the beneficiaries of reopening.
However, investors waiting for clear signs on the economic impact of reopening would almost certainly have missed the bounce. Companies most affected by the lockdowns – such as retail, leisure and travel stocks – rallied quickly. Investors looking at many of those stocks today will find that they already fully discount the earnings boost from reopening, despite the recent pull back in the market.
The reality is that investors needed to be in these areas before the government took action. For us, our valuation aware approach led us to some of these reopening beneficiaries ahead of time. Trip.com, for example, had been a fast-growing, market leader prior to the pandemic. However, restrictions on travel had seen its valuation fall and we saw the potential to pick up long-term structural growth at a discounted valuation. The stock has subsequently bounced back to the extent that we have moved to take some profits in our holding.
We also hold Chow Sang Sang, a 100-year-old jewellery retailer with a presence predominantly in Hong Kong and mainland China. It has a holding in gold, alongside a legacy holding in the Hong Kong Stock Exchange. These two holdings made up a significant chunk of its asset value, but its share price remained depressed because it was under-earning on its jewellery shops relative to its history given the lockdowns and general restrictions. We were interested because of its low valuation relative to its assets, but it has also been a beneficiary of China reopening.
Elsewhere, careful stock selection has also helped guide our positioning in India, where aggregate valuations have looked stretched. Indeed, many Indian companies offered little margin of safety when the recent controversy over the Adani Group destabilised markets. This validated our focus on the more attractively valued areas of the market and companies with stable cash flows and growth – including utilities, pharmaceuticals and banks.
Buying high quality companies when they are out of favour or overlooked by others can help ensure that we are positioned for structural changes ahead of time. This has worked well during this period of recovery.
The question for us today is where to look next. We’ve taken profits in many of the companies that have rallied and need to rotate that capital into opportunities elsewhere. There are fewer obvious valuation opportunities. We remain highly selective and nuanced in our stock selection, with no broad themes to portfolio allocation.
Value stocks in Asia still looks cheap relative to growth. While 2022 saw some rotation from expensive growth companies to cheaper value companies, this appears only the initial stages of a wider mean reversion. In fact, what we are witnessing at the moment is somewhat similar to 2000 when smaller growth stocks were trading at an all-time high premium to smaller value stocks - even though these growth stocks hadn’t delivered better earnings over the two decades before. Notably, since 2000, small-cap value stocks in Asia have grown earnings faster than their growth counterparts.
At a country level, China remains a significant source of opportunity and our largest overweight position. Chinese consumption is still an important long-term trend and there is significant pent-up demand to be realised. After strict lockdowns, Chinese people want to meet, travel and spend money. It is also worth noting that household savings rates in China have gone up over the lockdown period, so there is a significant war chest that should be channelled 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 is the recovery in the domestic property market. If we start to see a recovery in the property segment, we could get yet another boost for the earnings environment.
Within the portfolio, our focus has always been on finding good businesses, run by good management team, at a margin of safety (good valuations). Invariably, there will be those companies that disappoint and others that will exceed expectations in this new environment. We ensure that our positions are led by the reality of a company’s position and whether that is reflected in its valuation.
Important information
This information is for investment professionals only and should not be relied upon by private investors. 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. Investments in 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. Fidelity Asian Values PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. 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.