The last 12 months or so have been a particularly volatile period for Asia’s markets. Whilst this has been a tricky period to navigate, this environment has offered stock picking opportunities amid periods of indiscriminate selling.
Volatility in the region has of course primarily stemmed from US-China trade war rhetoric. However, in running the Fidelity Asia Pacific Opportunities Fund I have found it best to avoid the noise of daily news flow and instead focus on hunting for companies that can weather this storm.
As a result, we have continued to find ideas linked to the structural domestic opportunities in Asia. During the broad market falls late last year there were a number of companies in areas like consumption that were sold-off indiscriminately. This was particularly apparent in Chinese A-share companies, which were among the hardest hit in 2018 whether having any skin in the trade war game or not.
Bouts of volatility like this can throw out good businesses at attractive valuations for patient investors - it is notable that China has moved from a major underweight in the fund this time last year to a significant overweight today as several domestic-focused names such as Midea, Angel Yeast and Dongfeng Motor have been added to the portfolio.
The paradox is that while we find stock picking opportunities in China, the macro picture looks challenging. The currency is one factor we continue to monitor. The market is fixated on the Renminbi hitting seven to the US dollar, but if that is your view you need to factor in further depreciation within financial models and sensitivity analysis to understand how each investment will hold up - and the Renminbi depreciating deeply beyond seven is outside the realms of possibility.
China’s money growth continues its long-term downward trend. This could lead to further stimulus, quantitative easing or money printing which will put downward pressure on the currency. An alternative is outright devaluation to increase global competitiveness. Any significant devaluation will likely be a shock to the economy in the short-term and challenging for markets, yet in the longer-term it should prove positive for China due to improved competitiveness.
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Within this scenario, we are happy to own companies that have a significant competitive edge versus peers, a strong balance sheet and growth in the domestic market as these have a better prospect of riding out any volatility over a multi-year timeframe.
Away from China, we continue to hunt for any ideas across the region that we believe can make money for investors. India offers great long-term opportunities linked to its ongoing development. The market currently looks a little expensive, especially after the elections, but its size and diversity makes it an attractive hunting ground.
At the company level, HDFC Bank remains a significant holding in the portfolio. It is a very well-managed bank with a strong track record in delivering growth while maintaining the best asset quality within the sector. Its adoption of technology for business operations and customer offerings is unsurpassed and helps the bank gain more customers in an increasingly digital savvy market.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. 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. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.