23 Feb 2023
The ideas and conclusions here do not necessarily reflect the views of Fidelity’s portfolio managers and are for general interest only. The value of investments can go down as well as up, so your clients may not get back what they invest.
The overriding challenge of 2022 presented itself right at the start of the year when Russia invaded Ukraine, setting off a host of political and market events. Industries in which Ukraine and Russia play a vital role, such as fertilisers, oil and gas, were primarily affected and investors quickly switched their holdings to countries such as Saudi Arabia which were not significant holdings in the portfolio at the time. The portfolio was overweight Russia with about 8% exposure in absolute terms at the beginning of 2022 resulting in this loss of relative performance which significantly affected the portfolio.
As a result of the invasion, we saw large rises in energy costs through the year, which was the primary driver of inflation affecting sectors across the board and resulted in a consumer squeeze. This manifested in the portfolio through concerns over consumer discretionary spending, especially in areas related to semiconductors. With both the public and company finances being squeezed, less was directed towards electronic devices, resulting in reduced earnings and performance for holdings such as TSMC and Samsung. This fall was the largest decline in semiconductor stocks since the global financial crisis. These companies are now trading at 10–20-year lows, and currently offer attractive opportunities.
From a sector viewpoint, we have seen positive numbers out of financials and lends support to it being our largest overweight position. Indian financials have produced very robust results with growth in the range of 15-30%, while those interest-rate-sensitive financials have benefitted from the global rise in rates. One negative within the portfolio has been Brazilian bank Bradesco which seems to be losing market share, but the wider picture remains healthy.
Chinese companies have struggled to perform due to widespread Covid lockdowns. But with the removal of these restrictions at the end of last year, we are seeing early signs of a recovery across most sectors. We will see an improving trajectory across the board in China including in higher spend segments such as automotive dealers and automotive manufacturing. This picture is similar in other areas with better earnings momentum coming out of internet-related businesses as people begin to return to ‘normal’ and resume with online purchases and travel, positively benefitting holdings such as Alibaba and Trip.com.
Metals, mining and energy are all areas with positive moves in recent months. We have seen a strong increase in price for copper up to around USD 9,000, benefitting holdings in that sector (representing about 5% of the portfolio), while the oil price has remained relatively high, despite falling from the levels seen immediately after the invasion in February 2022.
While these higher prices have resulted in higher earnings, we believe this may be now peaking and a shift in position will be needed.
Emerging markets as a whole are trading at very low valuations and are trading towards the bottom end of valuations of the past 20 years. With valuations low, areas such as mid-caps are relatively cheap and as a result, we have been going down the market cap spectrum to broaden exposures within the portfolio.
We have increased our allocation to China given the recent shift in dynamic and expectations following the Party Congress, with a particular focus on Alibaba, Tencent (primarily via Naspers) and other discretionary stocks. The zero-Covid policy saw increases in savings and that gives us confidence that the recent upswing can continue, especially in areas such as travel and discretionary spending.
In Brazil, 2022 saw Lula come to government following their elections. We have trimmed our exposure in the aftermath of the election due to some less supportive senior leadership appointments and commentary around spending caps. In addition to a reduced exposure to Brazil, we have taken some money out of copper as we feel that the price may have peaked for the time being.
With the global economy still battling inflation and rates being high across the board, we are looking to increase exposure to areas set to benefit from this, with a new position in an Eastern-European-facing bank. With inflationary pressures likely to continue in the near future and many regions facing a recession, we continue to seek good quality companies at attractive valuations.
Important information
This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up so clients 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Fidelity’s emerging markets funds have, or are likely to have, high volatility owing to their portfolio composition or portfolio management techniques. They can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.