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So far, 2021 promises a broad economic recovery around the world, according to analysts. If there are no major unpleasant surprises from the virus, widespread normality could soon return to economic life. Asia Pacific is on the forefront of recovery providing broad investment opportunities. We spoke to Anthony Srom, Portfolio Manager of the Fidelity Funds – Asia Pacific Opportunities Fund, Fidelity International, about the most promising sectors and titles.*
AsiaFundManagers.com: In recent months we have seen progress on vaccine distribution drive recovering growth expectations and even positive
inflation expectations in Asia Pacific. What is your current view?
Anthony Srom: At the end of 2020, I was quite bearish and concerned about deflation. My concerns at the time were around the fact that expectations for economic recovery were very optimistic and it was likely that these would not be met. I expected a ‘tick’ shape recovery.
However, the recovery has since been supported by large, ongoing fiscal stimulus programmes and reluctance to withdraw stimulus. Nevertheless, I see little real sign of inflation at present with China, Singapore, Thailand currently printing deflationary numbers. However, we still have low oil prices of 6-9 months ago which created a low base effect to filter through, which may have some inflationary impact.
Given the recent rebound of banks and materials stocks, this to me suggests that the market expects economic growth, but modest inflationary pressure. If you are a believer of more moderate economic growth, then I believe you should look elsewhere for share price returns.
AsiaFundManagers.com: How are these views affecting your portfolio decisions?
Anthony Srom: I think that inflation might be slightly higher than people expect in the longer term, but am happy with the companies in the portfolio irrespective of this eventuality. In general, I’m looking for companies with capital-light business models, with pricing power that at least allows prices to rise with inflation.
AsiaFundManagers.com: What investment case do you currently see in China?
Anthony Srom: China surprised me with its policy towards monetary tightening and caps in the banking sector. This has hit some sectors like property. To me, this policy is curious given the deflationary impulse we have seen, the debt in the economy and the strength of the renminbi – it risks damaging growth in the short term. However, the correction in the
A-share market presents opportunities to invest in strong businesses with pricing power and we have added some new names and will looking to increase existing positions if the market falls further.
AsiaFundManagers.com: In terms of individual positions, could you give us some current examples?
Anthony Srom: We hold Chinese liquor company Kweichow Moutai at around 6.5% in the strategy at present.* This position is currently at its lowest weighting for some time, as we were reducing it as the share price rallied strongly into Chinese New Year. However, in terms of its fundamental outlook, there could be a strong double-digit price hike for ex-factory price per bottle in the next year or so, around 20% perhaps. This would drive earnings expectations up and, consequently, valuation will look attractive. We recognise that sentiment has been excessive in recent months, but if there has been a pullback we would consider buying more if this continues.
Beijing Oriental Yuhong Waterproof Technology is a good company in a rationalising industry, trading at an attractive valuation. The industry it operates in has a chequered past in China, but it has been cleaned up in recent years and small players are expected to exit as the industry consolidates. Tier one property developers are prepared to pay premium for better quality products, which is advantageous for the business given the results of survey work we have done. At a 1.7% active position size it is a stock we have our eye on for potential increases.*
South Korean social media platform Kakao is a new position that represents around 2.6% of the portfolio.* The minimum active weight we are looking for it 1.5%, so it is at the lower end of our position spectrum. We believe its assets are very under-monetised and having spoken to the company we expect growth to be double digits in excess of market expectations, especially as we look to 2023. They have opportunities in monetising their social media platform as the industry consolidates and they are using their ecosystem and traffic to develop an interesting payment business.
Looking to the foundry business, there was a big industry structure change following Intel’s exit, which led us to implement a large increase of our position in Taiwan Semiconductor Manufacturing Company (TSMC). There is now upward pricing pressure that hasn’t been evident for some time. In terms of valuation, we expect a minimum 10% total shareholder return in the coming years. In terms of absolute position size, it is large at 10%, but in relative terms this is more like a 4% overweight as the company is a large index component.*
AsiaFundManagers.com: Thank you very much for the interview.
Anthony Srom
Portfolio Manager
Fidelity International
Anthony Srom is a Portfolio Manager at Fidelity International based in Singapore. He has 23 years of investment experience and is currently responsible for managing Fidelity Funds – Asia Pacific Opportunities Fund, Fidelity Asia Pacific Opportunities Fund, Fidelity (AUS) Asia Fund, Fidelity Korea – Asia Equity Investment Trust and some institutional segregated mandates.
* Fund Holdings as of March 2021, unless otherwise stated.
Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included ort he purposes of illustration only.Please note that the holdings of the fund may differ from the holdings of the comparative index. The holdings of the fund may have changed since the date of publication. Investors should note that the views expressed may no longer be current and may have already been acted upon.
