Fidelity: How to position for Asia's recovery

Asia has faced a challenging period over the past year, but with China’s reopening improving sentiment and tech-heavy markets such as Taiwan and South Korea rallying sharply, how can investors benefit from this improving backdrop? Fidelity Asia Fund portfolio manager Teera Chanpongsang examines the evolving market environment and outlines where he sees greatest investment potential.

Key points

  • China’s re-opening is a significant boost for the broader Asia region. This underpins an encouraging earnings outlook for China.
  • We had consistently maintained that sentiment towards China had become too depressed, with investors overlooking the inherent strength of underlying business models.
  • Overall economic activity across the region is healthy. We maintain strong conviction that Asia remains an attractive market for long-term investors given its structural growth prospects. 

Asian equities have recorded a strong start to 2023 as China’s reopening has gathered pace. In addition to a sharp rebound in consumption, we are also seeing favourable policy shifts for internet and gaming companies, as well as the real estate sector. 

As the biggest economy in the region, China’s reopening is a significant and fast-paced change in the region. The overall direction of change is positive and bodes well for an improvement in longer-term earnings in China.  China is on a very different path to Western markets at this point in the business cycle across a range of fronts. Inflation is more contained, and the country has a labour surplus as well as a strong savings profile.

While the reopening has spurred considerable enthusiasm, we are mindful of near-term rotation within regional stock markets. It also remains crucial to factor in potentially higher costs from rising interest rates and the impact of higher inflation on demand. From a global perspective, regional earnings expectations for 2023 remain encouraging compared to global markets. 

Positioning for a recovery

We had consistently maintained that investor sentiment towards Asia - and particularly China - had become too depressed to be sustained over the long-term, with investors so focused on doomsday scenarios that they were overlooking the inherent strength of underlying business models. 

Within the Fidelity Asia Fund, our focus has consistently been on investing in high-quality companies that are supported by strong management teams, have built strong franchises, and are well positioned to both drive and benefit from structural growth prospects in the region. This has provided the portfolio with a natural balance sheet strength, which is a significant advantage as the era of free money draws to a close. 

In terms of recent portfolio moves, we have added to technology giants TSMC and Samsung Electronics which we believe offer exceptional franchise value. TSMC remains the largest absolute holding in the fund that continues to be a front-runner with cutting edge technology. Its market leadership position is undisputed and supported by its emphasis on its technological expertise. Meanwhile, Samsung Electronics is a global leader in memory chips, handsets, display panels and consumer electronics products and is well positioned for strong demand. 

We have also initiated a new position in duty-free operator China Tourism Group Duty Free. We believe the company is well positioned to benefit from the recovery of Chinese consumption demand driven by the tactical tailwind from China’s re-opening, as well as the long-term structural growth of China’s duty-free market.  

Opportunities across the broader region

Meanwhile, broader economic activity within the region is healthy, with domestic consumption and loan growth indicators demonstrating a clear improvement in key markets such as India and Indonesia, which are key overweight positions. The return of international travellers to Asia is also positive, with several markets gaining after Hong Kong and China resumed quarantine-free travel, especially regional trading partners including South Korea and Taiwan. Longer-term, we believe that the shift of supply chains to ASEAN is a structural trend that will continue to reshape the investment landscape.

Overall, Asia remains an attractive market for long-term investors. The region continues to experience structural growth given its favourable demographics, scope for penetration of products and services, and a growing middle class. This underpins opportunities across strong franchises, technology bellwethers at the heart of global supply chains, robust consumer brands and future leaders creating new products and services and expanding their footprint. 


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 Fund has the potential of having high volatility either due to its composition or portfolio management techniques. 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.
 


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