Portfolio manager Anthony Srom provides an update on the Fidelity Asia Fund. Against a volatile market backdrop and continued macro uncertainty, he discusses drivers of recent performance, how he is positioning the portfolio to capitalise on overlooked pockets of potential and reveals some of his high conviction stock picks.
Performance headwinds
Performance has faced headwinds over the last year. For the period of one-year to end-February 2025, the fund has underperformed by 570 basis points (bps). More broadly, some 800 bps of detraction came in the second quarter of the last calendar year, where we were impacted by a combination of headwinds. The Fund was adding to China consumer exposure through Yum China, the operator of Pizza Hut and KFC restaurants in China and Galaxy Entertainment and we also held Focus Media, a digital display advertiser, and Kweichow Moutai, a high-end baijiu maker - which were all weighed down by depressed consumer sentiment. Additionally, positions in companies that are sensitive to US interest rate cuts such as power equipment company Techtronic Industries also detracted over worries that US rates would remain steady.
While these holdings were included in our portfolio for their own merits, it is important to highlight the macro headwinds that the Fund was grappling with at the time.
In the early part of 2024, the fund also moved from a materially overweight allocation to information technology (IT) hardware to an underweight stance, reducing the artificial intelligence (AI)-related exposure due to overall caution on the broader AI theme. Our positions in ASML Holding, a key supplier to computer chip makers, and chipmaker SK Hynix were sold and the allocation to Taiwan Semiconductor Manufacturing Company (TSMC) was decreased. This move also detracted as there was still a lot of upward momentum in some of these names. However, we do take some consolation in the fact over the last seven months or so, the fund has outperformed by around 200 bps.
Views on AI
The portfolio’s exposure to IT has significantly decreased over the last 12 months and is currently less than 5% of the fund, most of which is through our holding in TSMC. While we have no doubts about the long-term benefits of AI, we remain cautious about the market’s current assessment of these benefits, as expectations remain elevated. We believe the market needs to go through a trough of disillusionment to find out which business models are likely to work, who the potential winners will be and so on. So, there does need to be some recalibration around expectations and valuations for these companies.
In terms of AI related capex for the Magnificent 7 or even the Magnificent 5 in the US, this expenditure has grown by 50% year on year in the last two to three years. By extrapolating this over three years, we get a figure of around US$1 trillion, which has not translated into substantial revenue or returns. Looking ahead, we anticipate a tightening of capital expenditure discipline in AI investments, which could be a potential catalyst for reassessment.
China recovery
We maintain an underweight position in China but are overweight Hong Kong. Within this, we are heavily tilted towards consumer stocks, and we also hold China Overseas Land & Investment. The government appears to be taking a reasonably incremental approach and we are marginally positive on the policy changes coming through.
To assess the impact of stocks in our portfolio, we need to peel back multiple layers to understand the underlying dynamics. In the case of China Overseas Land, its development pipeline is predominantly exposed to Tier I cities, skewing towards upper-end luxury properties. Looking ahead, developer land banking has been limited in recent months, suggesting the pipeline will be relatively constrained over the next 12-18 months, which benefits companies like China Overseas Land. From a high-level perspective, the rate of change in property prices is improving, particularly in Tier I cities where inventory is not problematic.
Meanwhile Yum China has performed very well over the past six to seven months. The Chinese consumer sector appears to be gaining some momentum, partly attributable to recent stimulus measures. In particular, Yum China is benefitting from diminishing competition, healthy margins and a market that has recalibrated its valuation assessment.
From our perspective, a robust consumer rebound is not crucial for stocks such as Yum China or China Overseas Land to outperform the broader market.
Impact of tariffs
Last year, there was significant market concern in the Asia Pacific region over the impact of a Trump election win. Our view was that regardless of who was in the White House, China would face challenges from the US administration. Following Trump’s election, our approach has been to focus less on the rhetoric, which often seems to be designed to generate headlines, and more on actual policy implementation. Currently, other countries appear to be targeted ahead of China, although we do anticipate this focus will eventually intensify towards China.
In terms of impact on our portfolio, Techtronic Industries represents our primary concern. However, they have significantly diversified their production base away from China over the past five years. China now accounts for only approximately one-third of their production capability. The remainder is distributed across Vietnam, Mexico and the US, providing considerable flexibility in their manufacturing footprint.
We are not overly concerned about potentially higher tariffs on China, and its impact on our portfolio. While there may be second-order impacts to consider, our exposure to export-oriented companies is limited.
Improving India valuations
Valuations in India are incrementally more attractive, though not compelling as yet. Several companies have experienced significant declines over the past three to six months, bringing them onto our radar. In some cases, we have acted upon these opportunities.
In terms of portfolio adjustments, our financial sector exposure has increased marginally, primarily through non-banking financial institutions such as Cholamandalam Finance, which provides vehicle loans to individuals and small businesses. The industry faced concerns over non-performing loans last year. Following its quarterly result, the stock declined by around 30%, which we felt was an overreaction. We took the opportunity to buy this stock, a move that has been validated so far.
In the consumer space, there have been concerns regarding a GDP slowdown in India and pressure on consumption. For instance, food delivery company Zomato has experienced significant pullback recently, which led us to initiate a small position. Although this company does not represent a significant position in the portfolio, we are currently assessing our allocation to this stock. Overall, we haven't been buying India aggressively, rather we have been adding exposure incrementally at the margin.
Private lender HDFC Bank is our largest active holding at around 9% of the portfolio. Here, our long-term investment rationale for the bank remains strong, given its robust asset-quality and well-capitalised balance sheet.
Long-term opportunities
Looking beyond China and India, the ASEAN region presents a promising opportunity for equity investors. Often overlooked amid the focus on China, India and AI, ASEAN economies are rebounding as tourism returns and some political stability re-emerges. This region could serve as a strategic diversification for investors seeking growth outside the major markets.
We have increased our allocation to Singapore’s global consumer internet company Sea, which runs one of the leading e-commerce platforms in ASEAN, and a gaming company that publishes and develops PC and mobile games. Reducing competitive pressure in ASEAN has allowed its e-commerce platform to continue raising commission rates and building up its competitive moats.
Overall, while opportunities exist across the region, a disciplined approach, focusing on value, and risk assessment, will be essential in navigating the complexities of the Asian markets in the year ahead.
We continue to believe that careful stock selection, underpinned by rigorous company research, can effectively mitigate areas of risk and successfully capitalise on the beneficiaries of the region’s long-term growth.
