PM flash comments: demographics
The Fidelity Global Demographics Fund has not been immune to the selloff in global stock markets. However, it has been significantly more resilient. The focus of the Portfolio Managers continues to be on owning good quality companies which can benefit from long term structural growth drivers across three themes: i) Ageing populations, ii) The rise of the Middle Class in emerging markets, and iii) Population growth.
The long-term nature of these drivers has meant that despite having significant exposure to consumer and medical technology industries - both of which have been hit by Covid-19 - the fund has materially outperformed its benchmark, MSCI AC World. This is primarily driven by the quality bias of the strategy when it comes to assessing business models and balance sheets. During this period of volatility, the Portfolio Managers are looking for opportunities which meet their quality criteria, and which are aligned to the long-term drivers outlined above.
Specific comments on some of the key sectors can be seen below.
Consumers are at the forefront of current events. While at the beginning of the outbreak it looked like it could be contained within China, it is now clear we are dealing with global pandemic which is having a very severe impact on consumption - especially in Western Europe, where aging populations are very vulnerable to the virus.
The consumer stocks we own in the fund mostly benefit from middle class demand in Asia, and it is encouraging to see that the outbreak has been kept under control in Asia, and especially in China. After several very difficult weeks of lockdown, life is slowly coming back to normal and consumption is recovering to pre-crises levels. Companies like L’Oréal, LVMH and Nike are well positioned to benefit from the normalisation of consumption in Asia.
Most of our exposure within consumer is actually to consumer technology. Companies like Alibaba, Amazon, Alphabet and even Apple are well positioned to benefit from the acceleration of the shift of commerce and entertainment online. In the current selloff we are looking for opportunities in the travel and leisure sectors, which have been the hardest hit, but which we expect will return to growth due to structural drivers.
The fund has a significant overweight in healthcare given the clear overlap with the key themes which we are aiming to play. The sector has been particularly defensive recently versus the broader market.
However, this has mainly been driven by pharmaceutical and biotech stocks, which the fund does not hold. Most of our holdings are in medical device companies (MedTech) which we like for their attractive growth rates, good end markets and good returns. However, the current Covid-19 crisis and associated shut down of large parts of the economy has led to increasing risks of delays to elective procedures by healthcare systems around the world.
In our view this presents a long-term opportunity for the fund, given the underlying fundamentals of these businesses are not impacted despite significant short-term disruption in 2020. Consequently, we feel that this exposure will benefit us when any ensuing recovery takes place.
Industrials / Automation
Within industrials Covid-19 has material implications for both demand and supply. The extreme uncertainty around the severity and duration of the hit to company earnings has driven some major moves in share prices. In the short term the fund’s focus on high quality companies with strong balance sheets and structural growth is helpful. In the medium term we are looking for opportunities the current environment may present.
For example, the virus is likely to drive greater demand for factory automation, which is one of the key themes in the fund. Firstly, higher automation intensity reduces the risk of disruption from humans becoming ill, if a similar situation arises in the future. Secondly, the virus seems likely to accelerate the shift in supply chains that we were already seeing as companies move out of China and look to relocalise, driving multi-year demand for automation. Following the selloff we now can buy these companies at significantly lower valuations. We are playing this theme in the fund through Keyence, SMC and FANUC.
Sector exposure in the fund (%), at 29 February 2020
Source: Fidelity International, 29 February 2020. Comparative Index: MSCI AC World (N).
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