Over the last 12 months, the Fidelity Asia Fund has returned 3.18% vs 2.12% for the index*, with some significant swings in performance as sentiment has been volatile.
The end of Covid‑19 lockdowns, especially in China, has been a major story. In the second half of 2022, the Fund was positioned for China reopening, and consumer-orientated stocks like Trip.com and Yum China have subsequently been strong contributors to returns. However, these positions were trimmed or exited throughout 2023 due to concerns that the market was too optimistic on consumer sentiment bouncing back strongly. More recently, the market is catching up to the view that China has a few issues to deal with, including high youth unemployment and lack of stimulus to get the economy going, while the psychological hangover of Covid‑19 lockdowns has held consumers back.
The China property sector, in particular, has borne the brunt of the market’s concerns. Property-related stocks have been de‑rated with a lack of stimulus measures coming through and our holdings in building material stocks have detracted. However, the industry structure is undergoing significant change as weaker players exit the market, and those who survive have gained market share, which will translate into better margins in the future.
Rising rates are also in the spotlight. Inflation and rates are higher globally, and we continue to think it will be this way for a while. This has had an impact on markets due to concerns of what higher rates will mean for corporate refinancing costs and the impact on consumer demand for property and higher end consumption.
Key contributors over the last 12 months have been from China reopening linked names, although this has largely played out as a theme. However, the A-share market continues to produce individual stock ideas and there are many good companies trading at low valuations. India is increasingly coming into focus as valuation multiples for segments of the market have de‑rated.
Holdings in the IT sector have been a good source of returns. The Fund has been adding to IT semiconductors as we see the market cycle bottoming out in areas like memory, as the industry digests inventory build-up. Stocks like Samsung Electronics and SK Hynix were de-rated late last year to below 1 x price‑to‑book due to these cyclical concerns, but the long-term demand for semiconductors is solid, driven by high-end computing, AI, and electric vehicles.
Overall, the market outlook appears challenging as there is no clear pathway for Chinese GDP growth, overall valuations aren’t attractive, and we expect interest rates and inflation to remain higher for longer. This creates a challenging backdrop for companies to operate in and requires deep
understanding of businesses and valuations to generate returns for shareholders. We believe a concentrated portfolio with a laser focus on stock selection will remain critical.
* MSCI AC Asia ex-Japan Index NR.
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