03 Feb 2023
Portfolio manager Anthony Srom provides an update on the Fidelity Asia Pacific Opportunities Fund. From China’s reopening to the US interest rate moves, he shares his views on what’s driving markets and outlines the high conviction stock picks he is backing to deliver in 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.
Key points
Last year was a difficult year for performance, with the portfolio underperforming its comparative index. We saw so much macro volatility relating to the war in Ukraine, monetary policy moves and China’s Zero Covid Policy (ZCP). Looking back, we delivered reasonably strong outperformance in Q2 and Q4, but this was offset by more difficult times in Q1 and Q3.
Despite this tough backdrop, we retain conviction in the stocks we own and portfolio turnover has been low. China is our largest overweight and we were adding to positions in 2022 given weak market sentiment and low valuations. We believe there are several mispriced opportunities in China when taking a longer-term view of these businesses.
At the stock level, key holdings include Focus Media, which is a display advertising company in offices, shopping malls and cinemas with a dominant market share and operates in a duopoly market structure. The company was added last year following a decision to rotate out of Tencent. These two stocks are highly correlated as advertising revenues are a key driver and, after weighing up their respective merits, we identified a better risk-reward profile in Focus Media.
Travel company Trip.com is a relatively new addition. China’s ZCP was obviously a major headwind for travel bookings but we took the view that this would ease and the stock is ideally positioned to benefit from reopening of the domestic Chinese economy and its borders. This has actually played out quicker than we anticipated and a number of reopening related companies have also bounced back strongly, including holdings such as AIA. A key business segment for AIA is mainland Chinese taking out Hong Kong dollar or US dollar policies when in Hong Kong, and there are expectations that this will come back with the easing of ZCP.
The Indian market as a whole has looked relatively expensive for some time and we are underweight. On a multi-decade view, the market is now around peak valuation levels and margins are not particularly attractive, so in some ways you are being asked to pay up for not particularly attractive fundamentals. Investors have started to recognise this as of late and we have recently seen a rotation away from India into more attractively valued areas such as China.
The portfolio has a couple of holdings in India, including private hospital network operator Fortis Healthcare. This was a relatively opportunistic addition last year as the stock fell significantly over the course of just a couple of days for non-fundamental reasons. We like Fortis Healthcare’s long-term prospects and its valuation looks very attractive compared to competitors such as Apollo Hospitals.
The two most exposed names in the portfolio would be building materials company James Hardie Industries and power tools manufacturer Techtronic. These stocks are listed in Australia and Hong Kong respectively but have significant exposure to US property. They have suffered as investors have become more concerned over the outlook for the sector given the Federal Reserve’s aggressive hiking path and the implications for US mortgage rates.
We have been adding to both companies through this period of market weakness and they remain meaningful active positions today. The journey hasn’t been smooth but both stocks look to have bottomed out towards the end of 2022 and we now look to have gone past the trough in terms of earnings downgrades.
James Hardie has not bounced back as much as Techtronic, but our core view remains that the US housing sector remains under-supplied. James Hardie should benefit from this dynamic given its dominant market position, plus it has a strong position in fibre cement for renovation work, where we expect a significant proportion of the current US housing stock is in need of work.
Techtronic should also benefit from the long-term need for more housing, while any infrastructure projects will see increased demand for power tools from contractors. It has also done a very good job in taking the market lead in cordless power tools, an area that is gaining market share among construction workers.
Technology is the largest absolute sector position, with our holdings focused in chipmakers and semiconductor manufacturers such as TSMC, ASML, SK Hynix and MediaTek. This has been a relative drag on performance of late due to general concerns over IT inventory and budget cuts and a slowdown in demand for semiconductors, especially for chips used in personal computers and smartphones.
We maintain a high degree of conviction that the long-term tailwinds for these holdings remains strong, underpinned by the global shift towards semiconductor-intensive areas such as high-powered computing, electric vehicles and artificial intelligence. In the near-term, we’ve continued to see some weakness in results but a lot of negativity is in the price and we see potential for an improving operating environment in the second half of this year.
The portfolio doesn’t have a great deal of exposure to longer duration growth stocks - particularly Chinese internet names - and ‘growth’ stocks would probably benefit most from any easing of rates and subsequent improvement in sentiment. The counter to this is that I don’t think the likes of Alibaba and Tencent are the same companies that they used to be given the regulatory changes we have seen in the areas they operate.
It is also possible that we could see a more severe recession or economic downturn than many market participants are expecting. This kind of outcome is not reflected in current valuations. Lastly, everyone wants to put Covid to the back of their mind and move on from the difficulties we have all experienced over the last three years. Things are looking better at the moment, but we obviously can’t rule out a mutation of some sort which sets us back and this is a risk factor that we continue to analyse. As a result, we focus on companies with solid balance sheets, have good products and trade at a valuation where the risk-reward looks attractive.
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. 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. The Fidelity Asia Pacific Opportunities Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It 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. 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.