2020/21 Year in review: Asia
Markets have witnessed a strong rally over the past 12 months, driven by massive fiscal and monetary stimulus, expectations of a ‘return to normal’ and a focus on segments of presumed growth. It is not a huge surprise to see this strong rebound, especially considering where valuations were during the COVID downturn, but we must now be cautious of where markets and valuations currently stand. There has been numerous bouts of quantitative easing (QE) and the mother-of-all fiscal stimulus in the last 12 months, which have helped to inflate asset prices, but have had very limited impact to the real economy. We are now seeing high valuations for limited returns, and I am concerned that we could see a decrease in margins and returns and rising debt. As the rubber band is stretched further, markets become less stable.
Markets are currently debating whether we will see transitory bouts of inflation, and how long it will hang around. I am in the camp that inflation will come through. As a result, companies with pricing power and capex light business models will be preferred. Another area to watch is geopolitics, particularly with respect to Taiwan and the tensions between the US and China. A third challenge is US dollar strength; the dollar weakness anticipated by many at the beginning of the year has not played out, and I would be erring on the side of further dollar strength. Investors should also consider what is on the opposite side of the US dollar - the Chinese renminbi. A strong US dollar implies continued downward pressure on the renminbi, especially amid tight financial conditions. A weaker renminbi is something the market is not heavily focused on, but something I think should be considered by investors.
Given my cautious market view, I believe that the primary way to generate performance is careful stock picking and there are opportunities. The portfolio is exposed to the tech sector, especially in semiconductors where there is a clear structural supply/demand gap. I think we are still early in the cycle and our analysis offers comfort around the industry structure.
As in previous years, stock selection drove the Fidelity Asia Fund’s outperformance versus the index (47.08% versus 29.94% for 1 year as at 31 May 2021*). The common thread we see here is that these companies have strong products, continued to invest in the business during a tough period and ultimately managed to position themselves well versus competitors.
The year ahead promises more unknowns, and as mentioned above, I feel the market is generally looking fully valued. A laser focus on stock selection will be required to navigate the uncertainty.
* Total net returns represent past performance only. Past performance is not a reliable indicator of future performance. Benchmark: MSCI AC Asia ex-Japan Index NR
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