Twenty years ago, Asia was the world’s factory floor. Today, it’s powering the future of EVs, semiconductors, and AI.
Join Fidelity’s Gary Monaghan and Lukasz de Pourbaix as they unpack how the region has evolved, what’s stayed the same, and where the biggest opportunities lie for the years ahead.
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EDITED TRANSCRIPT
Lukasz de Pourbaix (LDP): Asia is obviously a fascinating part of the world from an investment perspective and certainly a focus for a lot of and investors. We've been running our Asia strategy for over 20 years, which is a long time and over that time the market no doubt has evolved and changed. Can you take us through what are some of the key shifts and observations over the last 20 years that you've observed and how has that market evolved in that time?
Gary Monaghan (GM): It's chalk and cheese if you put them side by side, they're very, very different. That being said, there are still a few companies from 20 years ago that still exist today. The big Chinese banks, for example, were quite dominant 20 or so years ago. They're still big players in the index overall. But if you take a step back, just think of China, when it was the manufacturer of the world. Yes, it still is, but it's less of a copy and paste merchant. It leads in a number of leading-edge manufacturing processes, and cars, for example, in electric vehicles. Who would have thought you may be considering buying a Chinese car 20 years ago?
But also, thinking about the China index and the China makeup and the market, we've got stocks like Alibaba, Tencent, social media platforms, e-commerce, that shift and rise of the middle class has come hand in hand with technological evolution and the way people purchase and the way people have relationships with companies, it's very much different. You see this a lot in Asia as well; if you take the traditional Western consumer. The way things have had evolved is if you went to the high street, you went to the shops, you bought your products in Asia and particularly China, but other markets around the region as well. The infrastructure wasn't really there. You didn't have so much the high street, and so people just almost bypassed that and went straight to e-commerce. So the relationship between the companies that the selling stuff, whatever it may be, and the consumer, it's evolved. Almost very differently to the Western markets, which are now actually doing that themselves. So, you've just seen very significant change driven by technology and the things that go around that as well.
LDP: It's an interesting point because it certainly has shifted if you think about China as the manufacturing hub. The shift towards technology has been quite astounding and obviously we've seen developments in some of the AI technology and EVs as you mentioned. So very much a shift from just a factory to in some ways a lead in some technology particularly in EVs.
If you think about some of the other regions and other countries and observations, India is an interesting one obviously because it forms a large part of the market as well, but very different from China in terms of some of the structural drivers. What have you observed in India over that sort of 20 year period?
GM: I'll explore the viewpoint of the way our clients are thinking about India. If you're talking about India 10 years ago, it was not even in the top 10 markets of what people were thinking about. It was really a frontier market in the way people were thinking about India as well. But today it's something that people want to consider. They know about the population size, the potential growth there. Today, India's GDP per capita is roughly where China was 15 years ago, so it could be a real opportunity for a growth market.
That mentality shift from clients is significant but also alongside that as well is that you're seeing a rise in emergence of a whole bunch of companies again that you may be never heard of. Just if you're going to take a 20-year history, who would have thought 20 years ago that an Indian company, Tata Motor would own Jaguar and Land Rover? So it just gives you a sense that some of these markets which, 20 years ago weren’t even considered.
I should say from an investor's perspective, generally, now are in the conversation at least. A lot of that is down to the ongoing development, the growth of the market there. But also, the companies that have gone hand-in-hand with it as well. But I will say they're still across the whole region.
There are still a few things that's stayed the same. You've got to think about state ownership. The fact that the markets are still not fully developed, fully mature, so you've got a significant retail base that can whip the markets around quite significantly. Of course, a lot of these companies, not all, but there's still a lot of family ownership as well across the region, which, again, if you're taking more developed markets, the families have generally long gone. It's more of a, you can almost argue, faceless management team. But there are some things that have stayed the same regardless of how the markets have developed.
LDP: The whole aspect and focus on governance is still very much relevant when looking at some of these regions. If you think about Taiwan and Korea, and again, if you relate that to the whole tech theme and AI, obviously they're leaders in semiconductors. That's been an incredible journey for those countries in terms of their position in these market-leading technology. Any insights there on the evolution of that and how that panned out?
GM: They've evolved in terms of the even the technologies. Just again, it's evolved so significantly that it's not recognisable. Going back to my point earlier around what has been the same, Korea and Taiwan have largely for the last 20 years been the broadly been the manufacturer of technology products. So that in itself hasn't changed. It's just the technology itself is that is a thing that's evolved, and they've become much more leading edge in the way that they do things.
Hon Hai, as an example, was a stock that was still a significant part of the benchmark 20 years ago. It's still a stock that people will know, they make everything for Foxconn, for Apple. So, there are companies, TSMC was one, if not the biggest stock in the index 20 years ago. I was looking at the data earlier, it was about three and a half to four per cent of the index 20 years ago. It's bigger now, but it was still there.
LDP: There are other markets that over time people have been very interested in, whether it's Thailand, Vietnam etc. Historically, some of the challenges have been the depth of the market, particularly if you’re allocating those markets. How deep are those markets? Has that changed in any way? Are you seeing more depth, more liquidity in those markets, or is still problematic?
GM: It's still in the problematic side. Yes, they're bigger, but the other markets have got bigger as well around them. It's still a lack of depth, as you say, and liquidity there as well, that creates a bit of a challenge. From our perspective, the ASEAN markets have got some opportunities. It's always interesting. It can be quite volatile, which can create opportunities as well, but that depth and that liquidity that you're alluding to just probably still eludes the market overall.
LDP: If we fast forward to the current period, obviously there's a lot happening. We’ve got tariffs, we’ve got geopolitical threats. Asia's at the forefront of some of those things. What are some of the key challenges and opportunities today in that market? Some of the notable things include the onshoring and friend shoring movements. How is that impacting the Asian region more broadly? Are there opportunities as well with some of these structural shifts?
GM: The shift, if you like, away from China, as we were talking about earlier, 20 years ago, it was the manufacturer of pretty much everything. Now it's moving manufacturing to more leading edge, high-tech components and so on. But what's been happening, particularly in the last, let's call it five years or so, and sped up by tariffs, the first round of tariffs in 2018 from the US, is that Chinese companies and also international companies manufacturing in China have been looking for other avenues and other places to manufacture. That maybe pulls out some of the factories and some of the jobs from China. But from an Asia perspective, it's broadly ok because those companies are actually relocating to Vietnam or Indonesia or somewhere else in the region and they're not going away completely away from the area.
That in itself, from a broad Asia perspective, shifts the chess pieces around the board a bit, but it doesn't impact too structurally. It's because people are following where the wages are lower, if there's maybe resources etc. so it's had an impact, but it also doesn't impact the broader region.
If you go down to the nuts and bolts from a corporate perspective, actually some of that moving around of manufacturing and base is actually better because it's lower-cost - it helps the margins. If you were to keep your factory in China there's a good chance that as the wages are going up, the cost of producing is going up. It's going to crimp your margin. So, you have to look for other avenues. It's a natural evolution. I would argue as well that some of it been sped up by tariffs and geopolitics, but it's an evolution of the way the world evolves.
LDP: I’ve seen it multiple times in developed regions over the years, so it does sound like it's a natural evolution.
We've got a large pool of analysts across the region on the ground looking at companies. What are some of the themes and observations they're seeing at a company level?
GM: I think if you're looking, again without getting into company by company, to distil it down, there are opportunities linked just broadly to the rising consumer and the changing trends and tastes of that consumer. But it does differ. If I'm looking at, for example, China’s rising middle class, that big burst of rising middle class is arguably a story from a decade ago. As that consumer is maturing, they're making more, if you want to call them rational choices around where’s the value in the product I want to purchase, rather than maybe I want to buy the most expensive thing because I’ve never owned it before. So, you’re starting to see trends of, maybe if you want to call it, trading down? Or thinking more about experiences and services over just getting the next handbag. That exists, but maybe not as prevalent as it was.
In a market like India, which as I was saying earlier, the GDP per capita is where China was 15 years ago, that is a new middle class. People are now wanting to buy things, whether it's a car or other smartphones, etc. because they've never really had that before. So, it's just different stages of the consumer cycle. Importantly, the consumer and the rising middle class, which we've been seeing in the ongoing development, means that the consumers are really, really important sort of driver factor across the region.
I would add another one, a global theme, tech. It manifests itself in different ways but if you If you think in the US and AI and the servers and AWS for Amazon, etc., in Asia, you could argue that one of the bigger themes is that Asia is the enabler of AI. It makes the components. If TSMC, through its foundries, couldn't make the chips, AI, unlikely, would be where it is today. SK Hynix and Samsung Electronics, both in Korea, are the absolute global leaders in D-RAM memory, which is essential for a lot of these products to be working. The AI theme as we think about it, Asia is very much the enabler. It's the tech component part of that theme overall.
LDP: If you're of the view that AI is going to continue to evolve, Asia's front and centre of that thematic.
GM: It is. You could almost put Asia as the provider of the ‘picks and shovels’ for the end product, basically, and so that to us is quite an attractive place to be. Because you're not trying to pick the end company that might be the winner, you're providing the ‘picks and shovels’ or the technology equivalent of ‘picks and shovels’.
LDP: One of the companies that you mentioned that you recently have looked at is China Resources Beer, which is an interesting name. Take us through the investment thesis there because I do recall many years ago, brewers more generally, that was a big theme globally in terms of investment opportunities.
GM: From the big broad sense, there's pretty much a growing amount of volume of beer demand in China, tastes are changing. So, as I was saying, as people have moved along and evolved, tastes and trends change. In China, there's a lot of people who just want to have a beer, right? And don't me get wrong, people still want to have a Baidu and what have you, but you're certainly seeing people want to sit down with a few cans basically and you do see that. There's a trend there with some volume growth, which is interesting.
A company like China Resources Beer as you just alluded to, over time, they've increasingly been adding a bunch of well-known brands under their umbrella. If it's licensing or brewing and distributing within China, Heineken, for example, is within China, is under the China Resources umbrella. But they also have their own brand called Snow, which is not to everyone's taste maybe, but it's very, very popular and it's at a price point that makes it popular as well.
China Resources Beer have got a whole suite of products or brands across the shelves. You could go into a supermarket, and you might think, there's six or seven choices without knowing that actually one company owes them. For us, something like that is really interesting. They're big so it helps them with cost control. It's not going to be the type of stock that's 10 per cent of your fund. It's going to be at the low end. It's a good opportunity. It might not be a 20-year opportunity. But for us right now something like that is worth a go for a small position in the portfolio.
LDP: If you think about a narrative in developed markets over recent times, a lot of focus has been on the Mag 7 and the dominance of some of those tech companies in that benchmark. But probably one thing that hasn't been as prominent in the news is that the Asian market as well has had its own version, maybe not the Mag 7, but Mag 1 or 2. As an investor how do you manage that concentration in terms when you do have a couple of companies that are really driving a lot of the benchmark returns? Being an active manager, it's a hard one because you know some of these stocks may be expensive, but if you don't own them, it can be challenging, right?
GM: It's a challenge, because as you say, if you don't own them, and we've gone through periods where we don't own a number of these, it can go against you and it can be a bit painful. That being said, you go stock by stock, so for us, stock by stock, is it worth a while a position or not? Sometimes, as you said, maybe the value is just you know it's too expensive, or maybe you see the fundamentals for the coming year, two years maybe deteriorating from where they're at. In which case you stick by the process and you move on, which can be hard to do. But then you therefore have to find ideas that you think can outpace and you can do that for sure. For a number of years we didn't own Alibaba and Tencent - big, big stock heavyweights in the index - but you can still outperform because you can own something like, actually going back to the alcohol one Kweichow Moutai which do Baidu which outpace them, so you have a bigger position outweighs those and you can sort of offset. You do lose on one, but you can gain more on the other.
One of the other challenges though that being said, from this concentration point of view, is that when you get more and more ETF flows from a passive, which Asia still doesn't have too much of at the moment, money will just automatically go into the big stocks regardless of the valuation. So, you do have to be aware of that. But again, try and find those stocks where you think can outpace over time and that's where you can try and mitigate some of those concentration issues that you're talking about.
LDP: Our listeners might be thinking about looking at Asia as a market to invest in. What would be your top three opportunities in terms of Asian markets more broadly?
GM: We can go into some stocks in a moment, but I think as we're looking at the broader Asia market and the opportunity there, I think there's a few high-level tailwinds that could be quite positive more broadly and just hopefully will bring in a bit of flow of money.
One is that if we start to get the US dollar depreciation, maybe we get rate cuts. Whether it's true or not, a depreciating US dollar is good for Asian assets. As people are concerned about the US exceptionalism coming to an end etc., could depreciating US dollar rate cuts be the catalyst for people to trim US and buy something else? So that could be a trend that's of interest.
Linked to that as well is around flows and particularly from domestic investors. We've been seeing this year markets like Korea, India, China as well in particular, a lot of domestic flow into the market which, particularly in China, hasn't really been there for the last few years. So, the boots on the ground, either people living it are actually putting their hands in their pockets and buying their own markets for the first time. Korea is a great example as well where different numbers but there's estimates of like a hundred billion US dollars was leaving Korea in 2023 and 2024 to buy the US, and with various changes around regulatory changes or pushes to get companies to pay out more dividends and so a lot of that money or at least a big chunk of that money is repatriated back on. That's another trend I think could be quite interesting and something to observe.
Stock-wise, the challenge I'll say here is that it could change, you know of course as the facts change the comments will change, but I think if we're looking at China, some interesting opportunities emerging in the broad internet space. Tencent is one. It's a big stock, everyone knows it. It's one that we didn't own at the beginning of the year. The gaming business that they've got is good. They've got the massive, huge social media platforms WeChat, as the people in the West would call it. That company, for us, is good, but it didn't really have the next catalyst.
DeepSeek came along and suddenly it was oh, Chinese companies can access AI models, which was something that no one would have really factored in. Then you start to do the work and think, right, who can actually adopt AI to improve monetisation? It's not easy to do. AI is good at improving your efficiency and maybe creating a few reports quicker, etc. Very few people have found out how to use AI to really make you money in a big way. Tencent was an interesting one because they've been working on, and demonstrating that they can use AI to better connect their users with advertisements. They can better use your data basically with the help of AI to connect the user to the products that maybe you didn't know you wanted, or they can tailor the advert to your taste. So maybe they know the colours that you like and so on.
So, it's using that there, which for us was an interesting angle which could really drive future revenue through, better advertising strategy and improve the click-through rates. We found an opportunity to buy it because back in April, we didn't own Tencent. It went up a lot. It went from about 380 to 550, with zero weight. You do the work on AI, you think it's interesting, you're waiting for an entry point and then Trump came along with Liberation Day and tariffs. Tencent doesn't sell a bean to the US. But the stock price fell because it's Asia, it's China, people just sold. Stock tanked in the first week of April and as you were buying opportunity, suddenly it's we can buy Tencent at only a 10 per cent premium to what it was pre DeepSeek, pre-AI. So, you combine that and now you ride the wave up. So, for us, it could be interesting and the expectations for the future and outlook for advertising, and advertising revenues has improved a lot from the market perspective.
Head of Equity Investment Directing, APAC
Fidelity Asia strategies
Fidelity Australian Equities Fund
Head of Strategic Sales and Solutions
