Maya: This is a Momentum Media production.
Gary: Welcome to Relative Return get Closer to the People, products and strategies shaping Australia's financial services industry.
M: Hello. Hello and welcome to the Relative Return podcast. Maya here your host today. I am the managing editor of advice and distribution here at Momentum Media. So joining me today is Gary Monaghan from Fidelity. Welcome to the show, Gary. How are you doing today?
G: I'm okay, thank you, Maja, and nice to speak to.
M: Good. That's good, Gary. So do you want to tell us a little bit about yourself before we sort of get stuck into the topic we'll be discussing today? Just share a little bit about your time at Fidelity and what you do there.
G: Yes, so I've been at Fidelity for close to 16 years. I think it is originally started out in our London office in some of my hometown, and then I got the opportunity almost very close to eleven years to the day, where I moved over to Hong Kong for what in my mind was going to be a year, maybe a year and a half. And I'm still here nearly eleven years later. So essentially sort of loving life out here and getting involved in agent equities. I joined our European equities sort of team back at 16 or so years ago and I had the opportunity to move out here as an investment specialist then and now as more of an investment director role names that really sort of matters too much in that regard. But essentially what I do is I work with our investment team and I work with our portfolio managers, but also our distribution teams as well. And I will represent our equities capabilities in the Asia region to clients globally. So therefore part of that is obviously talking about markets, what we're doing in the funds and what's happening. But it's also on the other side of the coin sort of feeding back into the fidelity machine and figuring out how we can either tweak things to make things better for the client or maybe opportunities for future product development and such, which will then sort of go into the hands of the product team. So involved in various parts across the entire organisation, but a lot of it is speaking to clients and listening to clients as well.
M: So lots of areas to your job, it sounds like a complex role and it sounds like you're enjoying Hong Kong, having stuck around for such a long time after initially planning to be there for a short period of time. But I wanted to ask you, Gary, we're sort of hearing obviously in the mainstream media and across the media here in Australia that China's economy is slowing. There's sort of worries about the Chinese growth outlook that it's going to continue to weigh on Chinese share market. What are your thoughts on this? Obviously you're much closer to China over there than we are and you're sort of involved in that and you're watching China all the time. So what's the China situation like? Is China really uninvestable or is that sort of just the media hype?
G: Yes, it's a good question. It's the most pertinent question because again, as I said, I speak to clients globally and the Is China investable question comes up a lot. And of course there's lots of concerns. And I would say, first of all, that the mainstream media doesn't help because every news story you see and hear will be negative. It would always sort of really dig down into the negative as well and obviously plants those negative seeds. But the reality is that, yes, the economy is not going fantastically well. There are some real kind of bumps along the road at the moment. Property sector maybe under the expectations of consumer growth, post COVID reopening haven't sort of blossomed in the way that many had hoped. But at the same time we're investing in stocks. And yes, the economy, you want things to go well, of course you do. But at the same time there's always a price of a stock. And the news, the negative news flow that we're seeing from a macro perspective has certainly weighed on the valuations of stocks across the China market. And we've seen some significant derating. Some of that derating is valid in certain areas of the market, that's for sure. But at the same time, it's like throwing the baby out of the bathwater. Everything's been indiscriminately sold up. And so there are opportunities to make some good money. And we're getting companies that are coming out, for example, Focus Media in our portfolio. They're coming out with decent numbers, 20% growth, these sorts of numbers, which if you're reading just purely the news, you'd think that it's impossible to do not. And don't forget as well. I mean, China from just a geographical perspective and demographic perspective is massive. And so there are always opportunities. There's over 4000 listed companies and we only have to own a handful. And so if we can do our due diligence, if we can basically wear out the rubber on our souls and get out there and look for stocks, we can find investment opportunities. And we do continue to find investment opportunities, but you do have to be selective. But that's always been the case and we've always stood by that in terms of our investment philosophy, definitely.
M: And the tech sector is obviously really popular amongst sort of investors globally. The Chinese tech companies have been at the forefront of US sanctions, obviously. So that's another sort of issue that China's facing. So how can investors in Asia find opportunities in the tech sector?
G: Yeah, another one comes up a lot as well. Obviously part of the mainstream headline news you see is fairly consistent sort of sanctions on Chinese tech sector and other areas as well by the US. And one thing I would certainly point out to anyone is that china Tech doesn't equal Asia Tech and the Asian technology sector is of course full of companies from Korea or Taiwan. You've got the Indian outsourcing, it outsourcing businesses. So there's maybe a bit of a misconception that China Tech equals equals Asia Tech. It's not necessarily the case. And actually what the US sanctions on Chinese companies has done is actually improved the competitive environment for a lot of non Chinese Asian technology companies. Now, if we were talking pre COVID, it's all the light in the Sad everyone can understand. So pre COVID, if we were talking about Korean and Taiwanese tech companies, so these companies are making anything from integrated circuit boards, memory, microchips, all of the important components into various semiconductors. If we were talking pre COVID, one of the overhangs and the potential risks was sort of the emergence of cheap Chinese tech that could come in and basically offer the same product for cheaper. What the US sanctions has actually done is essentially taken away that competition and has actually improved the competitive environment for career at Taiwanese tech companies in particular. Because now if I'm let's call with making a laptop or a tablet or something like that, I'm probably a bit worried now to put Chinese tech components in there because there may be some future sanctions down the track. So therefore I'm certainly turning my attention to the Korean and Taiwanese companies and it's enabling the Korean Taiwanese tech companies to have more pricing power, which ultimately in time leads sort of through to better revenues and hopefully higher margins as well. So the US sanctions that we've sort of talked about inadvertently actually have actually improved the competitive environment for a number of Asian tech companies and we're certainly finding opportunities in that space.
M: So the US has really done a favour to all sort of the other Asian countries in terms of their tech companies.
G: Yeah, certainly. And I think it's probably not the intended outcome, but for everything, there's always unintentional outcomes for anything that happens. Right? So this is certainly one and it's one that we firm are tapping into. What I will caveat here with tech companies is you've got your competitive environment. We all understand the long term opportunity with things like AI and electrification for vehicles and such. And then you've got to marry up that with the short term cycles which we've gone through a fairly tough sort of short term down cycle, particularly in the latter end of 2022, we see the inventory build up that we witnessed last year being digested. So we're getting a cyclical turnaround in the short term as well. So it's all of these three things together competitive environment, cyclical turnaround in the short term. Plus that long term opportunity with all of the development of technology in time is really creating an opportunity for us.
M: Definitely. Gary speaking about China and what's happening globally and the Chinese economy and the fact that the way it's being portrayed here is that it's slowing and that it's in danger, basically. How do you sort of from that perspective, you're based in Hong Kong, but how do you think that's impacting Australia and the Australian economy? Obviously, we've got strong ties to China. We do depend on China for a lot of things. But how's that sort of impacting and also like the investor morale here in Australia.
G: Yeah, I mean, I think Australia is probably one economy that will feel the pinch, because one area that is going through a bit of turmoil at the moment is the China property sector. Of course, property developers need steel and iron and everything like that, with which they obviously turn to Australia for a big chunk of that. So I think there is, if you're sort of going down the supply chain, australia will suddenly be well, I wouldn't say will feel the pinch. They're probably feeling the pinch, I would say. But the reality at the moment is that we are not seeing sort of a huge amount of stimulus coming through from the government in terms of the big helicopter payments to get the property sector sort of back up and running. And it will probably be a relatively sort of slow burn back. The property sector in China is obviously very important to Chinese economy, so they want the property sector to be stable because it is such a stalwart sector within the China economy overall. But we do not foresee there being this big sort of bounce back going from zero to 100. And that, as I said, will feed through down the chain to Australia and other markets that supply to the property sector. So in that regard, should probably feel the pinch. Now, there are, I will say, know there have been some sides. I think it was the Bali market. Not Bali is in Indonesia, but Bali, the food product. The tariffs that were imposed have been sort of reduced or removed. And that potentially is a bit of a canary in a coal mine for potential tariff cuts in areas for like wine, for example, which we're keeping an eye on. So there is some potential pockets of opportunity around that. But on the whole, I mean, to be perfectly frank, those quality type players are probably feeling the pinch, as I've said.
M: Definitely Gary. And for Australian investors, obviously, we've established earlier on in this podcast, know China is in fact investable, despite sort of the media headlines. But for our sort of know, investors, where should they sort of be looking? If they're looking to invest into China, what are some of the sort of tips that you'd give them? What area should they be looking at? We've spoken about the tech sector in Asia more broadly, sort of profiting, but where should they sort of be looking at? If we're talking about specifically China?
G: Yeah, I think certainly be active in China, and by that I mean be very laid of the focus on the companies because there are more inherent risks that come with investing in emerging markets in general. But in China as well, you've got potential for regulatory risk that can emerge. We saw in the Internet sector a couple of years back, a lot of companies do have sort of state involvements. The SOEs are a dominant part of the China market as well. And again, you need to understand the direction of that SOE and does it align to you as a shareholder? So there are inherent risks. And so our general advice is be cautious of China ETS, because you get the good, but you also can get some bad trade in there as well, where being active really enables you to focus on companies that are seeing change, whether it's industry structured change, whether it's just coming off out of the real doldrums and balancing from the bottom. And so for us, that's the way to do it. Now, where are we finding opportunities at that individual stock level right now? It's a couple of areas, but one would be someone like Focus Media. Their full name is Focus Media Information Technology, but they're not Tetra, and they do billboard and screen advertising in elevators and escalators. And a company like this, which is in a massively dominant position within its own market space, about 80% of all screen advertisements and elevators and escalators are done by Focus Media in China. So there's an 80% chance if you walk into an elevator and you look up and there's a screen, it's one of theirs. That to us is really interesting because what we've seen with a lot of dynamics changing in China, with the Internet sector being regulated more and more, and the emergence of streaming, so therefore people don't watch TV so much. Consumer companies in particular are looking for other avenues to advertise. And as we've come out of COVID a lot of companies, particularly in the consumer space, want to get their brand out there. Again, they wanted to build up their brand. So you've got a couple of avenues, right? You can take your advertising budget and you can give it to the Internet companies, but Internet companies are very targeted, right? So you've usually got an individual demographic, or as you probably see when you're searching, if you're searching for a pair of socks, so you can advertise a pair of socks. So for advertisers that want to get their brand out there, it's too targeted. So then you go, well, okay, what can we do? Can we use TV? That's what you used to do, but people stream now. So TV advertising, it's not dead, but it's not as effective as it was. So if you want that broad based advertising where you can get someone from a small kid to a grandma, escalator and elevator screens is a really interesting way. It's a captive audience for 30 seconds to a minute and a half and as a result, the utilisation rate of these screens is exceptionally high. It's a company with net cash in the balance sheet and it's growing. It's growing as the consumer companies are looking to slowly build up their brand out of awareness over time, in the hope that we get a bit of a rebound in consumption back, hopefully later this year or early in 2024, from the bottom that we're at right now. So there are opportunities, but again, you got to be very specific. So it's not just buy any old advertiser or anything like that. It's look, turn the stones of the individual companies, understand the financial position, the market position that they have in terms of market share, and invest accordingly.
M: So do your due diligence, which I think is important if you're investing in any area of the market. But tell me a little bit about Fidelity's Asia fund. You guys won the Global Emerging Market Equity Fund of the Year Award at our Fund Manager of the Year Awards, just recently, hosted by our brand, Money Management. Can you tell us a little bit about that win as well? What that meant for you guys and just overall, how the fund sort of works?
G: First of all, we're delighted with it because it's a validation of the sort of work that we've been putting in over the many, many years we've been doing this. And so, first of all, it's a big thank you and we're very honoured to have that. Now, how we go about this in terms of portfolio, it's a very highly concentrated portfolio, very stock specific. So between 20 to 35 stocks today, we've got 21 stocks in the portfolio. And it's really about, again, focusing on the companies, but also not just the fundamentals, but listening to the market and getting a view on sentiment. Because actually, sentiment can create a lot of volatility and sometimes volatility can be your friend. And we talked about the macro headlines, the mainstream macro headlines, which generally, particularly with China, but sometimes across Asia, it can be quite negative. That creates sort of indiscriminate selling. And you sat there going, this is a good company, it's just been sold off, because people have read this mainstream news article, they've got concern and they've just indiscriminately got rid of the stock and you can dip your toes in and buy a good company. And your cheap valuations. For us, sentiment is a really important sort of indicator to purchase, but also to sell, because obviously, sometimes that news flow can be ultra positive as well, and everyone gets all hyped up and suddenly the valuations don't make sense. The other thing as well, I'll just point out, is, on the fundamental side, when we're assessing businesses, we do the usual understand the business, their competitions, where they're getting their products or where they're sourcing materials from, who they're selling to, we do all of that. But we also do pay a lot of attention to industry structure and how that is potentially changing. So you could get things that come through, like regulation that can either blow apart the industry structure and make it much more fragmented, or some regulation that comes through and it weeds out a lot of the bad companies and you're left with just a few. And it's not just regulation. There could be other things, could be some new technology that comes in or anything else. And that for us, is a really important factor to consider and to really think about when we're picking the companies as well. How is the industry structure changing and how is this company set to either benefit or potentially not benefit from this? And that leads us down to, again, what we think are some very good companies in strong positions.
M: Well, very interesting process, definitely. But Gary just moving on from, sort know, not so much Asia, but moving away from China. India's macro situation we're hearing is sort of shaping up to be quite attractive. Do you want to sort of explain to know why that is? And are you guys looking specifically at India and what sort of areas in India you sort of seeing positive attributes in?
G: Yeah, the Indian macro story is almost like the darling of Asia. The demographics are very good. So it's a very young nation, depending on the data you see, I think the average, the median age is 26 years old or 27 years old. So it's a young nation, very young. I think very recently the population, the actual population of India has just surpassed in China as well. So it's a big country, it's growing. And if you look at GDP per capita, it's roughly around two and a half thousand US. Dollars, which is actually where China was about 15 years ago. And it's many, many times lower than a lot of developed markets as well in terms of GP per capita. So it's this really interesting juncture where you've got this quite clear opportunity for economic growth and the government's providing support and policy to develop that economic potential as well. That's really interesting. And as this young nation grows, you're going to get the emerging middle class and all the trappings that come with that in terms of consumption. All sounds fantastic, the but is what I'm telling you is not new news to the market. And as I said, it's been a bit of a market darling because of this economic story. And we're now at a bit of a juncture where the Indian market is quite expensive. Now, price to earnings ratios are not necessarily always the best valuation metric to use, and it's not the only metric you should use. But even looking last week, India was, on a PE basis, a price to earnings basis. Indian market was double that of China. And you're thinking, well, okay, a lot of this good news is priced in. And so therefore, for us, the valuations are a little bit rich, actually. And I talked about our process thinking about sentiment, and the market sentiment towards India is very hyped up and excited. The valuations reflect that. So therefore we actually find the risk reward in India is actually probably more skewed to the downside. In order to justify valuations, you've got to continue growing margins and continue growing revenues at the rate that they've been growing in the last few years. That's hard to do. And so therefore you could end up with a bit more disappointment, which could drive some derating in the market for us. We underway India. We do own the bank called HDFC Ban, which very broadly you could argue is a good proxy for long term economic development in India because the private theo owned banks are at the forefront of helping the middle class become moving into the financial know and loan growth and all these know. It's a good proxy for that. But other areas for us are looking a little bit expensive. We've got our eye on the Indian outsourcing companies, the It outsourcing companies. You're always looking at the consumer companies that can benefit from this middle class growth in time, but the valuations are quite hard to sort of stomach at the moment. So therefore we're sitting on the sidelines, understand a fantastic story, but maybe waiting.
M: For a better entry point and hearing you speak about India. What are your thoughts on Australia? I know it's obviously not part of your sort of remit, but we recently received, I'm sure you saw the government unveiled the latest Intergenerational report which basically sort of found that our population is ageing quite sort of extremely, and that's going to sort of have issues on our productivity. And there's talk now that we really sort of need to focus on productivity and economic reforms that fuel it. And if this sort of doesn't happen, that long term growth could be weaker than what is projected by this report, which is quite bleak as well. What are your thoughts on Australia as a sort of market as?
G: I mean, the comments you just made mean it's not necessarily just an Australia issue, it's probably quite a developed market issue in general. And so obviously you have to think about things like immigration growth and all the headings as well. Now, I mean, Australia, if you think about it, it's got commodities, right, which Hitler, it's definitely got that going for it. And it's certainly not running out of space either to accommodate population growth as well. So it's certainly got some good things going for it. I think for us at the minute, the main concern is actually a bit more shorter term than what you're talking about in terms of long term population growth. It's things like people having to suddenly pay more for their mortgage and the impact that has on people's pockets. And obviously that will if people got to pay more for their mortgage, it's going to put a dent in the wallet, consumer products, and that has also a knockout implication to the overall economy. So for us, that's probably more of an issue at the moment as we're sat here with an investment view of one to two years. But as you say, that longer term sort of issue that you talked about is certainly something that needs to be addressed and it's a developed market issue overall. So we'll see this if we get to the next round of earnings announcements. We'll see how the guidance is for the companies as well and we'll sit and take a view before that and after that and see how things develop. And ultimately, though, it's down to the valuation you can have, and we've seen it in many markets across Asia. Maybe the situation from a top level macro perspective is bleak, but if a stock or an industry has been significantly sold down, then there's a valuation opportunity to capitalise on. So, again, be very specific, be focused and do your due diligence.
M: Definitely. Well, thank you so much, Gary, for joining me on the show today. Thank you for making time in your busy schedule all the way from Hong Kong to speak to us.
G: And thank you very much for your time as well.
M: And thank you to our audience for tuning in. So that was Gary Monaghan. He works at Fidelity and he is based in the Hong Kong office. We do hope you enjoyed today's podcast and I will catch you next time. The information featured in this podcast is general in nature and does not take into consideration your financial situation or individual needs and should not be relied upon. Before making any investment, insurance, tax, property or financial planning decision, you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.
