By Anthony Srom, Portfolio Manager, Fidelity Asia Fund
In 2018 Asian equity markets have challenging. Our expectation is an upward bias to volatility combined with moderating global growth and US dollar strength. Equity markets are likely to struggle in this environment given where valuation multiples currently stand. We have long maintained a cautious view and still do not believe potential risks ahead have been fully priced in, particularly in the technology sector. Given this, we continue to be very selective and have been focusing on companies with above market earnings expectations and strong balance sheets.
The Fidelity Asia Fund currently holds overweight positions in the materials such as gold, property, utility and energy sectors, all of which are unlikely to be consensus positions. Within property, we own Sun Hung Kai Properties, a Hong Kong/China property company, as we believe it benefits from a supply constrained Grade-A office market in Hong Kong with a likely improvement in retail rents. The stock trades at a wider than historical average discount to NAV due to concerns about rising interest rates, but its strong balance sheet means it can adopt capital management initiatives, for example share buy backs, which are likely to be value accretive to shareholders.
We continue to believe that crude oil prices will be higher for longer due to limited supply growth. This should underpin earnings for companies exposed to such a dynamic. The Fidelity Asia Fund holds China Oilfield Services due to an undemanding valuation and a likely improvement in cash flow from rising rig utilization and sales of technical services as industry capital expenditure grows to meet a tightening supply gap. The portfolio holds close to its maximum allowed cash position and we will look to deploy this into ideas at more attractive valuations. We have begun to accumulate some positions in Chinese companies as markets have pulled back but they are yet to build into more meaningful exposures.
