Asia Pacific

Martha Wang, Portfolio Manager Fidelity China Fund –December 2011

“China’s economic growth is expected to moderate as external demand from Europe and the US slows and domestic economic activity falls.

“This means, that after tightening for the last two years, the policy environment will be more benign going forward. The recent fall in inflation pressure has given the government some room to ease its monetary policy. Headline gross domestic product (GDP) growth will depend on the balance between looser policies and weaker external demand.
“I am positive on the outlook for the next 12 months. There have only been a few periods in China’s stock market history when valuation levels have been as attractive as they are currently. Most of the macro risks have been largely priced in and the risk/reward outlook is very favourable.

“In terms of stock ideas, I favour the consumption space where I am finding many opportunities with attractive valuations.”

David Urquhart, Portfolio Manager Fidelity Asia Fund - December 2011

“Slower global growth and the resultant lower commodity prices will help to reduce some of the inflationary pressures in the Chinese economy. This will provide policy makers a reprieve on what was expected to be further tightening measures.

“I have moved China from underweight to an overweight. Currently, China is trading at a forward P/E ratio of 9.5x, which is at a significant discount to its 5-year average of 13.5x.

“I am also definitely seeing more attractive buying ideas in China. In an environment of slowing global growth, the focus has shifted away from growth opportunities – where risks of disappointment are increasing, and more on the value opportunities that exist in the market. Typically when you see the P/E of a stock that is the same as the sustainable dividend yield you are getting a great buying opportunity. This is especially so when these companies still have good prospects for growth. Recently there have been an increasing number of attractive opportunities that have emerged.”

Anthony Bolton, Chinese equities portfolio manager - December 2011

“The next 12 months should be a defining moment for Chinese investment when investors realise the economy is not about to collapse and the tightening period is over. We have been through an extraordinarily volatile year but I believe that when the dust settles and things calm down, investors will focus on relative growth rates they can get in different parts of the world.

“I feel very strongly that this will result in money flowing out of developed markets that have sovereign debt problems and very mediocre prospects over the next few years into the faster growing emerging markets like China.

“I am not saying that China is not immune to a slowdown in the developed markets. The country’s growth rate will slow down but it will still expand by about 7.5% to 8%, which will be very attractive compared to the rest of the world.
“Inflation has been a key issue in 2011 but it has already started to come down. A slowdown in inflation has allowed the Chinese authorities to stop tightening monetary policy. This should be positive for the markets. The speed and format of further loosening will depend partially on how the domestic situation develops from here and whether the developed world returns to recession.

“Some of the other issues that investors in China have been focusing on are bank bad debts and falling residential property prices. There are some real challenges regarding potential future bad debts, but the government has the financial resources to address these. The outlook for residential property in 2012 is poor. I am more concerned about the uncertainty due to the important political changes that are due over the next 18 months and whether they will lead to a change in policy direction.

“I continue to be positive on the consumption and services sectors and remain underweight in exporters, commodities, infrastructure companies, banks and property companies. Consumption and services are not immune to any slowdown in China, but I believe these are the areas with the best longer term outlook where structural trends favour them. Even with a slowdown in GDP growth, I expect these areas to outperform the general economy. If I am wrong about the world outlook, and a new recession were to commence leading to China embarking on another stimulus programme, these areas would likely be direct beneficiaries.”

David Urquhart, Portfolio Manager Fidelity Asia Fund - December 2011

“The Organization for Economic Co-operation (OECD) forecasts the Asian region to grow around 7% in 2012 and 5.6% for South East Asian economies. That’s below the 8.5% forecast for China, but above the 4% projection for Australia.

“Although Asia is not immune to a slowdown in the West, growth rates in Asia are also slowing, but it’s proving more resilient to a global economic downturn than in the past. One reason is that the region is significantly less reliant on the West than previously. For example, today it’s less reliant on the West as a market for its exports, with over half of Asia’s exports now being traded within the region.

“The region’s steadily rising labour force will provide a source of higher growth. The labour force is forecast to grow at 1.5% a year for the next 10 years, compared to Europe and the US which are growing at just 0.3%. As people enter the labour market they become economically productive, rather than being a drain on an economy. More people will be able to earn and therefore spend, buying goods and services that companies provide.

“The rising labour force is also adding to the growing middle class in Asia, which is expected to almost double to over a billion people in the next five years. China is expected to report the biggest absolute increase, while India and Indonesia will have stronger percentage growth.

“Another positive for the region is that while most Western economies have a negative current account balance, most Asian nations have a positive one (with the notable exception of India). This provides another reason for optimism about Asia, as the West slows, is that policymakers in the region still have more growth-supportive options at their disposal than their developed market peers. Asian economies still have the ability to use both monetary and fiscal policy to help stimulate domestic demand, while in the West high levels of government debt have made Fiscal policy tools unavailable. Most Asian central banks have been tightening their monetary policies in the past few quarters so they now have flexibility to relax interest rates and credit policy in case of a severe economic slowdown outside their borders.

“It is similar, with foreign exchange (FX) reserves. Asia accounts for 63% of global FX reserves, with China accounting for half of these at the end of 2010. “Asia still has the capacity to lend and borrow. This will help corporates in the region.

“Corporate debt levels are the lowest they have been since 1981 at 25.8% debt/equity. They have been building increasingly large reserves of cash and significantly de-leveraging their balance sheets following the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008. Strong balance sheets, cash flow and rates of return have put Asian companies in great shape. Though some companies will do better than others in this kind of environment.

“There are several other factors that will further contribute to Asia’s growth next year - and beyond - including increasing participation rates in tertiary education, rising labour skills, increasing urbanisation, developing credit markets and so on. All these should further underpin the growth opportunities of companies and their share prices in the region.

“Overall, Asia’s healthy financial system, robust domestic demand, low debt levels, high savings rates and the emergence of China as an anchor of growth for the region will continue to be supportive of multi-year growth in the region.

“This is one region why the Asia (ex-Japan) region has already tripled its representation in the MSCI World All Country Index from 3% in 2003 to 9.9% by mid 2011.

“By being in better economic shape we expect Asian equity markets - which are currently following the lead of US markets – have greater upside when global markets do improve.

“I have returned to a slight overweight to China, as the government in Beijing should start to loosen monetary and fiscal policy there as inflation concerns reduce and growth slows in response to the slowing global economy. This should help the growth of local companies. I also like Indonesia and Thailand, as we have identified some great businesses there with great growth potential.

“This is key, as while the region as a whole is one of the strongest in the world it is important to identify, from the bottom-up, those companies that are going to deliver earnings per share growth stronger than the market anticipates and currently at very attractive valuations. These stocks should perform well over the next few years even in the challenging macro environment.”
Teera Chanpongsang, Portfolio Manager of the Fidelity India Fund - September 2011

“The sharp fall in US and European equities has put downward pressure on Emerging Asian equities. The sell off was led by industrials, materials, oil and gas sectors that reflects growing investor concerns about an economic recovery in the West.
“Emerging Asian economies are not immune to a softer economic recovery in the West but I believe the region’s strong domestic fundamentals and structural growth drivers will continue to lead to superior growth. In fact, the prospects of a slower recovery in the West should make Emerging Asian growth rates look even more attractive to investors.

“In addition, the fall in commodity and oil prices should further ease inflationary pressures, and in particular improve India’s fiscal position due to reduction in import costs. That said Emerging Asian equities continue to have a high correlation to global markets and might remain volatile in the near term. However, in the long term we can expect the region’s strong fundamentals and superior growth profile to lead to better returns than developed markets.”

Martha Wang, Portfolio Manager Fidelity China Fund - September 2011

“The latest concern has been over signs of increasing leverage ratios of Chinese property companies which enhances the likelihood of further fund tightening for property developers. In addition, China coal, oil and gas names also suffered due to fears of a potential increase in tax on these companies. Despite these spots of negative signals, the outlook for China’s economy is positive given the recent indications of peaking of the food component in the Chinese CPI data. Moreover, the weakness in manufacturing indicates that China’s policy tightening is taking effect.

“Although China is not insulated from the global slowdown, looking at its growth since the 2007 global financial crisis, the country appears to be in a stronger position than the rest of the world. The fact that the Chinese government has been tightening aggressively while the rest of the developed markets are still in doldrums, indicates that the pace of growth in these markets is diverging. Despite the current sequential slowness in manufacturing, China’s output is 50% above the pre-2008 crisis level.

“The country has shown remarkable resilience during the last crisis provides comfort. Currently, China’s ‘A’ and ‘H’ share markets are very attractive compared to regional peers and relative to history, trading below their historical average P/E level. Given that China is nearing the end of its tightening cycle we expect the ‘H’ share market to experience a strong rebound when the government starts to loosen its policy.”

Teera Chanpongsang, Portfolio Manager of the Fidelity India Fund -  September 2011

 “The sharp fall in US and European equities has put downward pressure on Emerging Asian equities. The sell off was led by industrials, materials, oil and gas sectors that reflects growing investor concerns about an economic recovery in the West.
“Emerging Asian economies are not immune to a softer economic recovery in the West but I believe the region’s strong domestic fundamentals and structural growth drivers will continue to lead to superior growth. In fact, the prospects of a slower recovery in the West should make Emerging Asian growth rates look even more attractive to investors.

“In addition, the fall in commodity and oil prices should further ease inflationary pressures, and in particular improve India’s fiscal position due to reduction in import costs. That said Emerging Asian equities continue to have a high correlation to global markets and might remain volatile in the near term. However, in the long term we can expect the region’s strong fundamentals and superior growth profile to lead to better returns than developed markets.”

John Ford, Chief Investment Officer Asia Pacific - August 2011

"In the short-term, Asia’s equity markets will suffer a sell-off until policymakers respond more seriously to calm markets. Asian economies and governments are placing more emphasis on domestic spending and consumption being the key driver of GDP growth.

“The recent US credit downgrade and consequences may prove to be a boost to emerging Asian market equities, given the attractive valuations and relatively strong fundamentals. At Fidelity a number of our investment professionals for some time have been finding more attractive investment opportunities that relate to the domestic growth story versus exports.”

David Urquhart, Portfolio Manager Fidelity Asia Fund - August 2011

“S&P’s recent downgrade of the US Treasury debt from AAA to AA+ is a psychological blow to the American pride, but the economic consequences are minimal. When we see companies downgraded a notch from AAA, there is no material impact on the cost of funds or availability of funding. The market reaction – US bonds actually rallying – is consistent with this view. Rather, it highlights that the main concern of the market is about weaker than expected US growth in Q2.

We have just seen of US listed companies report Q2 results, and with 83% of them having reported, earnings are on average 5% better than expected. Clearly corporate America continues to be in good health and this is also being reflected in strong hiring by the private sector. Unfortunately the government (local and federal) are going through austerity measures to reduce debt and this is seeing some dismissals and so the overall unemployment remains more subdued. Despite the slower growth expectations, I don’t foresee a double-dip scenario in the US. Q2 growth in the US was impacted by the supply chain disruption caused by Japan’s tsunami, especially for the auto industry, and by higher oil prices. US growth is expected to slow to less than 2% for 2011 and 2012, rather than 2.5 - 3% that the market has previously projected. However, as we move into Q3 and Q4 the auto industry’s supply chain disruption should begin to unwind.

“Asian markets are attractively priced following the recent market correction. The region is now trading at a forward price to earnings ration (P/E) of 10.5x, which is at a deep discount to the five year average of around 13x. This is more than one standard deviation away from the five year average and is the second cheapest that you could buy Asian markets in a decade.

“Asian corporate balance sheets continue to be in very healthy shape, and economic growth continues in Asia. On a Price to Book basis the current valuations are 1.8x book value, versus five year average of 2.1x, and with the return on equity much higher than that of 10 years ago.

“So, from a valuation standpoint, this is the second best time to be buying Asian stocks in 10 years. There are risks in the US and Europe but these risks are more than priced in at the moment. I am still comfortable with the growth outlook in Asia, which should significantly outpace the rest of the world in the coming years.”

“Slower global growth and the resultant lower commodity prices, especially oil prices with Asia being a big energy importer, will help to reduce some of the inflationary pressures in Asian economies. This will provide policy makers a reprieve on what was expected to be further tightening measures. I have recently moved China from underweight to a small overweight. Currently, China is trading at a forward P/E of 9.5x, which is at a significant discount to its 5-year average of 13.5x. I am definitely seeing more attractive buying ideas in China.

“In an environment of slowing global growth, the focus has shifted away from growth opportunities – where risks of disappointment are increasing, and more on the value opportunities that exist in the market. Typically when you see the P/E of a stock that is the same as the sustainable dividend yield you are getting a great buying opportunity. This is especially so when these companies still have good prospects for growth. Recently there have been an increasing number of attractive opportunities that have emerged.”

Martha Wang - Portfolio Manager Fidelity China Fund - August 2011

“Although China is not insular from recent world events, the sustainable domestic demand fundamentals driving the long-term growth and given the current attractive valuations against regional peers and versus long-term historical averages should provide ample grounds for fund flows back into China.”

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