Why Anthony Srom is underweight what's hot, and overweight what's not

Why Anthony Srom is underweight what's hot, and overweight what's not

This article first appeared in Livewire on 23 July 2024

NVIDIA may be the poster child but the AI and digitisation trade won't be one company wins all, says Anthony Srom of Fidelity International.

_{This interview was taped on Friday 5 July 2024.}

The Asia-Pacific is a huge region - full of opportunities, brimming with ideas, and packing an economic engine like no other. The region contains more than half of the world's population, including the world's most populous nation.

In the decade to 2023, APAC accounted for more than 70% of global GDP. It's also home to some of the most exciting market stories on the planet - from the rise of India as an investment destination to the new AI plays found in Taiwan, South Korea, and Hong Kong.

And as Fidelity International's Anthony Srom explains, it's also a region filled with different storylines. No two economies are the same in the Asia-Pacific, meaning no two companies and their stocks are the same either. This partially explains why Srom, in his role as Portfolio Manager of the Fidelity Asia Fund (Fidelity Asia Active ETF), is a fervent bottom-up stock picker and fundamental analyst.

Srom also differs from many of his peers in being a natural contrarian. He likes to dig deeper into the companies that the market does not like, while staying away from those that are filled with a lot of hot air and market exuberance.

A perfect case in point? He's underweight India and Taiwan, where many investors have piled in due to economic optimism and the AI trade respectively, and overweight China and Hong Kong - two markets that some investors have even dared to label "uninvestable".

So how does Srom find opportunities in the places that others don't? You'll find out in this episode of The Pitch.

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Asia is a huge region. How do you like to start to break up the opportunity set?

Srom: One thing that I'll look for is negative sentiment as a filter. So, my process revolves around that as a source of idea generation. What you're looking for, across the region, is very much where's the neglect, what's being sold off, why the market doesn't like it, and use that as a starting point for idea generation for the portfolio. That's simply how the process works in the first instance.

Give us a broad overview of where you are overweight and where you are underweight.

Srom: The fund is underweight Taiwan and India, which are the two most popular countries as an investment thematic in Asia-Pacific ex-Japan at the moment. Where are you overweight? Hong Kong and China. It's not an area of the market that's getting a lot of interest - it's negativity. When I've met clients in the last one to two years, it's very much that Asia in aggregate looks tough and I just really don't want to deal with China right now. And so you've seen fund outflow from the region, but within the region, you've seen the extremes of gravitation towards Taiwan [where the fund is] underweight, and India [where the fund is] underweight, and where no one's positioned that much overweight.

You're digging across the region at all times, but it's just how many ideas can you unearth. So valuation for me is an important part of the process and you can't tick that box for Taiwan or India at the individual stock level. In China, you can [tick that box] a lot. However, then it becomes a bit more of a question of are these stocks are flagging up as cheap value traps. So you have to dig again a bit deeper.

Your largest individual overweight position is HDFC Bank. What makes it so special that it warrants being 11% of the Fund?

Srom: If you look at what's happened to HDFC Bank (NSE: HDFCBANK) the last few years, the valuation multiples have consistently derated for the best part of five years. So, we have a chat with our analyst, and have a chat with our trading desk, [to gauge] what's their assessment of what's gone on? Does it reconcile with mine?

What seems to have happened with HDFC Bank over the years is, that it's been used as a funding source for investments into public sector banks or other private sector banks. We've had a FinTech boom there in the non-listed space, which funds can participate in. So again, another layer of funding has come out. Their competitors have cleaned up their balance sheets. So there's been some reallocation to some of their peers. ICICI Bank (NSE: ICICIBANK), for example. I think it's come to a juncture for HDFC Bank in the last 12 months where valuation multiples have reached such a level that you expect to get full carry-through from the fundamentals they're delivering. So don't get me wrong. For the last three, four or five years, they have been delivering on fundamentals. EPS growth returns, net interest margins, et cetera. But you've had that headwind of valuation, multiple de-rate, which I don't think is in place at the moment,

By sector, 22% of the fund is in technology. But you own neither of the best-known names in Asia: Alibaba or Tencent. Why?

Srom: I think that sector and companies within that sector are value traps. If you look at what's happening in China, and this is my assessment, monthly active users for these companies are, by and large, maxed out. Minutes per day per user are maxed out.

These companies are fighting for market share. So handing out subsidies to try and attract users or keep their attention span longer on these apps. That's the backdrop. As a result, market shares are being fought for [and] margins are under pressure. You've got a soft macro backdrop. These stocks aren't ridiculously cheaply priced. We'll say, we'll wait. That's the high-level view of, let's call them, the Chinese platform companies. So Alibaba, Tencent, Meituan, Kuaishou, JD.com and whoever else is there.

Do you have any access to key tech themes like AI within the portfolio?

Srom: The fund does have exposure to AI or digitisation themes. You've got to bear in mind the fund is very much individual stock selection of course. But from a top-down view, we'll spit out some macro views. You're not looking for themes to invest in, you're looking for companies. But to answer your question, Samsung Electronics (KRX: 005930) and TSMC (TPE: 2330) are in the portfolio. So Samsung Electronics is a memory maker. TSMC is Taiwan Semiconductor Manufacturing Company, which is a foundry. So logic processing chips, and there's a minor play in Taiwan called Zhen Ding Technology (TPE: 4958). So the fund has three different companies that would be related to that thematic that you're talking about.

23 July 2024

Anthony Srom

Anthony Srom

Portfolio Manager, Fidelity Asia Fund strategies

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