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James Gruber 0:02
Hello and welcome to another episode of Fidelity Sound Bites, something a little different this month. In case you haven't noticed, I'm not Lucasz de Pourbaix. My name is James Gruber, and I'm the editor of investment newsletter Firstlinks, published by Morningstar, and I'll be your guest host for this episode. I'm being joined by someone considered a veteran in the Asian equity space, Anthony Srom, portfolio manager for Fidelity's Asia fund strategies. Firstlinks and Fidelity have a relationship that goes way back and Anthony happened to be in town, and I was interested in catching up with him, and this gives me the opportunity to do so. And Anthony, I don't think our paths have crossed before, even though we both started working in Asian equities at a similar time, I was an equities analyst with broker CLSA across different Asian countries, from 2005 to 2010 and you started with Fidelity in Singapore in 2006. I'm sure we know of people in common, but it's nice to finally meet you in person.
Anthony Srom
Likewise.
James Gruber
Let's talk about a few big picture items. First, tariffs. How are you thinking about them in an Asian context?
Anthony Srom 1:33
Pretty interesting question. Well, you've had a Liberation Day sell off, as everyone would have seen in March, April. How am I thinking about it from here? higher level of uncertainty. So do we kind of settle at lower levels? Everyone walks away with a face saving win - Xi Jinping, Donald Trump, or is there still some argy bargy left to go? I'm unsure. But tariffs aside, if we come up with something that's not satisfactory to both parties, the risk, I see is that maybe the US, specifically, Donald Trump, comes at China with something else that's non-tariff related. So to answer your question, I don't think we're entirely out of the woods between the China-US relationship. Tariffs seem to be progressing in the right direction, but I'm open minded.
James Gruber 2:24
You mentioned non-tariffs. What are you thinking there?
Anthony Srom 2:28
Oh, could be expansion of the non-reliable list, or Entity List. Could be sanctioning parts of the Chinese economy, for example. So I think there's a lot of there's a lot of other avenues that the US could exhibit aggression towards China, should they wish.
James Gruber 2:46
Have you adjusted your portfolio in response to these tariffs at all?
Anthony Srom 2:53
The answer is yes, there was addition to the portfolio as a result of the tariffs. So you saw the steep sell off, as I mentioned, in March, April. I thought that was an opportunity for the Fund to add to an existing position being Tectronic in Hong Kong. So you're adding on weakness just to maintain the active bet that, that fund is running. I also saw a opportunity to introduce Tencent into the portfolio. So if you look at Tencent going into Liberation Day, let's call it mid-five hundreds per share. It gets absolutely smashed down to about 424, 440, which takes it back to almost the pre DeepSeek days of January, with the benefit of knowledge of Deep Seek and AI application for their business. I thought that was a pretty good risk- reward opportunity. The Fund stepped up meaningfully. It's about 8% of the NAV of the portfolio now, and you've seen it re rate since then. So early days in the thesis, early days in the investment. But the Fund used, let's call it, the noise around tariffs to actually add.
James Gruber 4:04
I was going to ask you about AI, so that's a nice segue. How are you thinking about that and the impact it could have on Asia and the stocks in your portfolio,
Anthony Srom 4:15
from an Asian perspective, negative, from a perspective for the portfolio, a positive. Let me elaborate. So the Fund is very much underweight, technology. It's the largest sector underweight, double digits, active position. So if I wind back the clock about 18 months ago, 24 months ago, it was the largest sector overweight, I sense there's a lot of froth, excess positive sentiment still attached to technology, specifically AI. When I talk to analysts in the region, look at research, I think there's a lack of recognition around risks attached to AI, and how that could play out to a lot of companies, financials and others, investment thesis. So there's only one stock left in the portfolio that istechnology related, being TSMC, and that's an underweight. In terms of why I say you would be a beneficiary at the portfolio level, should I prove correct, let's just take that underweight, as what I've just mentioned. But I think you are having positions in companies that are likely to benefit from implementation, rather than being enablers. So if you think of enablers like SK Hynix, TSMC, Nvidia, the picks and shovels, providers, everyone's gone for those. I think you're seeing a bit of migration of capital into the enablers. But when you look at how these companies could take advantage of it, for example, Tencent - long runway for ad monetization. Not only that, higher monetization of ads. They can apply it to gaming. So I think if you extrapolate out three to five years, my view would be, you're going to get a much better earnings profile to something like Tencent versus Alibaba, who's gone all into cloud, which is quite competitive. I have question marks around something like that, for example. So I'm quite cautious on AI and tech, but you have some exposure in the portfolio that I think are likely to you know, when rubber meets the road deliver.
James Gruber 6:18
To be clear, the advantages with AI and advertising is that you can get data on individuals and groups and therefore be more specific with that advertising is that correct?
Anthony Srom 6:33
Broadly speaking, yes, you can. You've already got a lot of granularity. I think the application for advertising would be to what you mentioned, how to make it more specific, more relevant, and therefore also how you can exhibit to customers a higher return on that advertising roller, which would mean someone like Tencent could charge more, to keep it simple.
James Gruber 6:56
Let's talk about some of the other big opportunities that you see in Asia. Your Fund has significant positions in Chinese consumer stocks. Does that make you a bull on Chinese consumption going forwards?
Anthony Srom 7:18
No, it basically positively disposes me and the Fund to what you think will be structural winners in a, let's say, somewhat challenged part of the economy. So let me elaborate. You know, when I go through Shanghai, Hong Kong, meet our analysts, besides going through their coverage list, what they like, etc, I always like to ask them, What are you doing, what are your friends doing? What are your relatives doing? How are they feeling? Are they confident? Are they worried? I think the confidence around the Chinese consumer was definitely shattered during COVID and after COVID, you know, lack of belief in the leadership, how they handled the situation. You've seen the economy head south. Since then, people are worried about incomes, job security, et cetera. That said, I think that confidence has morphed into being resilient. So Chinese people have savings. They're willing to spend, but their spending is much more targeted. Now I'm going to go for an experience, and by the way, I'll spend more on that experience than maybe what I would have done in the past, but I'm going to save for a longer period of time to get there. I will go and buy a pair of trainers, but I'm not going to buy something for 500 renminbi. I might go buy 400 renminbi pair of trainers. So that's where I'm saying the Chinese consumer is resilient when I look at the companies that are in the portfolio, the other aspect that I see is a disconnect between the way the markets price those companies and what I believe, and our analyst believe they can deliver. So reading to that, I think semen has got two negatives on certain companies within the China consumer space. Something like the Macau casino operators, for example, have been in the dumps until about two months ago, starting to rally quite considerably. Has the dynamic changed there? is this short term noise still trying to get to the bottom of it, but nonetheless, the market is telling you, I think something has changed in that space. Another one that the fund owns is Anta sports apparel, okay, Chinese consumption I've just mentioned, let's call it resilient. But is there a thematic there? Yeah. I mean, post COVID people want a healthier lifestyle. They want more outdoor. This feeds exactly into that part of that sub sector. So, you know, there's opportunities to be had, is the way I summarize it.
James Gruber 9:43
You're also overweight Indian financials. What's the attraction there?
Anthony Srom 9:48
Because no one likes it.<laughing> If you look at it, the last 12 months, it's definitely not been a sector that's been liked by the market, and that was the entree for the for the Fund to increase its exposure. So what the market was worried about, consumer stress feeding through to non performing loan credit cycle coming through, specifically on unsecured consumer lending. You had tightening liquidity in the Indian economy, leading to competition for deposits, which means cost of funding is going to go up, which means net interest margins are likely to be compressed. So the market there hit a brick wall about September. So the Indian market peaked around September last year. October, some of these dynamics started to play out, in particular if you look at Cholamandalam Financial, we believe it's a long term winner. Went from about 1500 rupees per share down to 1100 rupees in a very short period of time. The fund took advantage to increase exposure to that, and it's paid out quite nicelythus far. Again, Axis Bank came into the portfolio beginning of this calendar year, partly funded through HDFC Bank, which was a big relative outperformer. You're looking for additional exposure to Financials given the thematics that I've just mentioned, negative sentiment, NPL cycle potentially coming through, but not as bad as it could be for certain companies. Axis Bank fits that bill.Where it also ticks the box is relative to its valuation group, you are basically bubbling along rock bottom, 30 to 40% discount to the likes of HDFC Bank, ICIC Bank, which we think is unwarranted/. Sso they're not really high conviction positions, but I think an area of the market that looks interesting.
James Gruber 11:46
the area that you do seem to have some conviction is in ASEAN, the markets there,. Why is that? And how are you investing there?
Anthony Srom 11:58
So the exposures in ASEAN, you know, really concentrated in Thailand. I still think it's a underrepresented part of the market from people's attention, because they're just still absorbed in geopolitics, the China-US tariffs. They're still absorbed in AI. And where's the catalyst for Asia? It's really hard to see. So the exposure that the Ffund has got would be Sea in Singapore, where it's headquartered, listed in the US. CP All, which is a 711, franchise operator in Thailand, and Bangkok Dusit Medical, which is a private hospital operator in Thailand. So just screening through the region before I came down here last week, at the aggregate level the region looks fair value. But I was surprised to see that Malaysia, some of the valuation multiples for the Malaysian market are cheaper than the trough in 2008. That kind of is an outlying aberration. Is that a area of potential ideas? I think it is. We'll go do some work there. Thailand is a similar situation in that it's de rated significantly. I think, year to date, the market's down 30%. It's almost like the whole kitchen sink has been thrown at the Thai market. You've had tourists kidnapped, specifically Chinese tourists. You've had risks around Middle East medical tourism coming to Thailand, you've had political instability, which we'll see how it plays out. You've had an earthquake. So I just think less bad will be good for something like Thailand. To be upfront the investments have been attracted to performance, but you've just got to manage what percentage of the portfolio you're prepared to allocate to a thesis and how long you're prepared to wait for that to turn around. So we're into just passing the 12 month mark for both holdings, as a PM, you recognize sometimes you're early, which is the same as being wrong, which I've just pointed out. But there are ideas. I think again, big disconnect between fundamentals and valuation. We've just gotta wait for sentiment to turn.
James Gruber 16:05
Can you tell me a little bit more about Sea Ltd, which is headquartered in Singapore but listed in the US?
Anthony Srom 16:12
Sure, it's a combination of a few different businesses, so e-commerce, online gaming and a bit of fintech. So maybe think of it as a Alibaba, Tmall, Tencent gaming, or Riot Games. And, you know, a not pay now. Well, buy now, pay now lender, for example. So short duration lending above market interest rates. So looking at the business they operate in Brazil, Indonesia, Thailand, Vietnam, predominantly. If I think about the valuation breakdown, 80% e-commerce, 20% for the remaining businesses. So I think what's interesting about it is you're getting withdrawal of competitive intensity in the Indonesian market, which is the biggest market for them. The Chinese are too occupied fighting battles domestically. So Lazada, which is backed by Alibaba, retrenching a little bit, Tik Tok distracted elsewhere, and they've really been able to execute over the last few years what I think is a structural competitive advantage, which is they do their own logistics for E-commerce. No one else does that. So I think that's a strategic blunder Alibaba made a few years ago, where they outsourced logistics. So very solid competitive position, both in Brazil, Indonesia, specifically. What we're seeing is the market was not believing a turnaround in the E-commerce earnings coming through. We sensed that was an opportunity in the fourth quarter last year, where the Fund started building the position. And what we've seen is an inflection of E-commerce earnings, again, faster than the market anticipated, fortunately for us, faster than what we anticipated. You also had positive earnings surprise from the FinTech business Which this is kind of not speculative lending, this is lending to companies and consumers who are on the E-commerce platform so they know your behaviour, sizing up your risk profile, and we look at the credit metrics of their lending book. It's nothing abnormal there, from what we can see. So that has been a pretty good winner for the portfolio.
James Gruber 18:23
Anthony, could you leave us with two thoughts for the listeners now, one opportunity, perhaps, and one risk?
Anthony Srom 18:31
Yeah. So in terms of opportunity, I would point to China, specifically in in the EM, slash, Asia, Japan, world. You've probably all heard the comments around, oh, it's uninvestable, and what we discussed earlier tariffs and the like. The only problem with that is the market's reacting differently now than what it did say 12-18 months ago. If I go back 12-18 months ago. What was happening was bad news was sold into in China, obviously, good news was aggressively sold into. I sense to sea change in that back end of last year, and that seems to be the case. If you look at the market this year, it's up double digits year to date. So when I look at the sentiment that's changing the market. Where's liquidity shifting to I do feel like there's been a change in the perception towards China. If you look at hard numbers, the market, and stocks within those markets have really stopped derating. So you saw a steep de rating, 22/23 but now kind of it's flat lining. So you're getting confirmation that you know, to a certain degree, maybe the worst is behind China. Still, I sense a lot of long owned investors are underweight China. And will take it from here, but within the region, I think it's actually an opportunity. The Fund is overweight Greater China, looking at Hong Kong and China put together about mid signal digits. In terms of risk, you know, I think I wouldn't ignore what happened last year in Japan. I question around tightening of monetary policy in the shock wave that sent through global markets. The point I'm driving at is, I think Stan Druckenmiller said it where you know the way liquidity goes, and that'll indicate to what markets are going to do, or what stocks are going to do. What I'm driving at is if rates keep trending positively in Japan, sorry, does that start sucking liquidity from other markets? US, for example right, the US exceptionalism, example. Do you see a reallocation to Japan, for example? in a relative world, you see EM and Asia ex Japan start to outperform DM, which hasn't been the case for a number of years. So what I'm driving at is monetary policy or financial repression policies, not only in Japan but elsewhere, could have massive implications to where liquidity flows. That's a huge risk. But within risk, there's also opportunity, which I've just pointed out.
James Gruber 21:27
And to explain that financial repression, you mean that Japanese inflation and rates are high. Well, inflation is higher than rates, and therefore you get financial repression by governments trying to repress rates while inflation is going up.
Anthony Srom 21:46
Let me just answer the way I think about it. Yes, you're right. Inflation has been ticking up. Rates are ticking up. Who's going to fund Japan without rates going up too excessively? Which is your point of financial repression. So Japan has huge foreign assets. That's fortunate for them, that they're in a surplus situation, unlike the US, which is in a deficit situation. And so that money will come home to, like you pointed out, try better manage the interest rate outlook for that economy. But again, that's going to have liquidity implications for many markets.
James Gruber 22:21
markets. Well, that's a wrap. Thanks for coming in today, and it's been great to chat.
Anthony Srom
No, you're welcome.
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