Ongoing conflict in the Middle East, lingering tariff-related uncertainties and the prospect of slower growth in China leave Asian equities trading at a discount relative to developed market peers. But the prospects remain bright for a wide range of regional companies, particularly those recognising that good governance and effective management of ESG-related issues can improve operating performance.
Fidelity has been investing in Asian equities for more than 50 years. We have a large analyst team based on-the-ground across Asia producing in-depth fundamental bottom-up research. These insights feed directly into our stock selection in the Asia Equity ESG strategy, where we aim to identify companies with wide ‘moats’ and sustainable competitive advantages that are unlikely to be eroded away by competitors or disruptors. We also take corporate governance and management of ESG-related risks into account when selecting stocks, as these can have a material impact on investment performance over time.
Recognising the hallmarks of successful companies is important, but so are valuations. Periods of elevated market volatility - like we have seen recently following the outbreak of the most recent conflict in the Middle East - therefore present both risks and opportunities. We are mindful of the possible impact of geopolitical developments on the share prices of individual companies, but depressed sentiment in certain areas of the market can be exploited at the same time. As active investors, we are willing and able to add to favoured positions at attractive valuations or establish new holdings in undervalued stocks.
Many countries in Asia are net importers of oil and so the possibility of a prolonged period of higher energy prices is among the main risks facing Asian companies currently. A sustained increase in prices could push inflation higher and erode consumer spending power, particularly in countries like India and the Philippines where fuel costs account for a meaningful share of household expenditure. Higher energy and other input costs could also squeeze corporate margins, while foreign exchange movements could be a headwind for some. These risks are being managed through a disciplined focus on quality, liquidity and diversification, rather than through knee-jerk, reactive changes to portfolio positioning.
Two markets are becoming more interesting. India has recently seen significant outflows and relative underperformance, and while oil prices remain a key variable, improving economic drivers and moderating valuations could create opportunities. Thailand is another market to watch, where a new government could bring greater political stability and potential support for the economy.
Separately, we are looking for a broadening in market leadership as performance in the past year or two has been concentrated across a relatively small group of AI-related names and materials stocks. Gold and copper have generated strong returns, for example, but the outlook is unclear; interestingly, gold prices have been largely unaffected by the uptick in geopolitical tensions and copper inventories remain high.
The AI theme is also evolving, again presenting both risks and opportunities for investors. The ongoing build out of data centres and other infrastructure assets - supported by emerging developments like agentic AI - suggests capital expenditure in this area could remain an important driver of sentiment and, potentially, market performance. The Asia Equity ESG strategy has exposure to the AI story across a number of high quality companies with favourable fundamentals, strong pricing power, resilient balance sheets and good cash flow visibility, and where valuations are aligned with fair and realistic assumptions.