After a slow start to the year, performance of Asian equities has picked up, with some bright spots continuing to strengthen through the year. Against this backdrop, Fidelity Asia Fund portfolio manager Teera Chanpongsang outlines why his continued emphasis on high-quality companies with strong franchises is well positioned to benefit from the region’s structural growth prospects.
Despite a slow start to 2024, Asian (ex Japan) equities performed well over the second quarter. Some of the bright spots seen in Q1 have continued to strengthen. Taiwanese and Indian equities were among the leading performers, primarily driven by technology demand for the former and a positive macro outlook for the latter. Sentiment has also continued to strengthen towards Singapore following strong GDP growth and improving private sector demand.
After expectations for China were scaled back in 2023, investor interest was rekindled by better-than-expected GDP readings and strong tourism data during the May holiday period. However, with geopolitical dynamics between China and the US remaining uncertain ahead of the upcoming American election, we remain focused on opportunities that are relatively insulated from unpredictable regulations imposed by the US.
Structural shifts offer long-term potential
Asia continues to be an attractive market for long-term investors. We believe that there is a significant longer-term growth opportunity in India and this has been reflected in recent investor interest. Structural and demographic developments are favourable for longer-term growth and we believe that opportunities still remain for disciplined stock selection to succeed, despite the higher valuations seen in India. While India has seen remarkable growth in recent years, China remains the largest economy in the region. The economic reality is tough but there are strong franchises valued attractively.
This longer-term structural shift is also represented across much of Asia. With demographic and consumption shifts taking place across the region, a growing middle class could provide the platform for a greater penetration of products and services. This shift underpins opportunities across a variety of sectors, including, technology, consumer and financials. We believe that by looking at these broader trends and overlaying fundamental, on-the-ground analysis, we believe we can identify areas of longer-term growth that are overlooked, or underappreciated.
These shifts mean that, within the Fidelity Asia Fund, we see select opportunities across strong franchises, technology bellwethers at the heart of global supply chains, financials driven by sustained demographic shifts, robust consumer brands, and future leaders expanding their footprint by creating new products and services.
Good quality opportunities in Indian financials
At a sector level, financials remain a key overweight position in the portfolio, with a special focus on good quality private sector banks operating in India. Axis Bank operates across the entire spectrum of financial services in India. The bank benefits from structural growth in banking service penetration, as well as the opportunity to expand and take market share from less-efficient competitors. We also hold ICICI Bank for similar reasons, alongside its compelling improvements in return on equity. Non-banking lender Shriram Finance has been a significant contributor, exceeding estimates over the last four quarters, reflecting an improvement in operational efficiency and asset quality and we feel there is still room to grow.
However, we are seeing signs of investor exuberance in the broader India market. We feel that this underlines the importance of focusing on fundamentals in order to identify those companies that have true long-term potential and are not simply being carried along with the tide.
AI continues to support technology outlook
With Asia home to global technology bellwethers that provide leading-edge products driving the next generation of innovation, we believe this diverse sector will be able to sustain a long-term demand trajectory and provides encouraging prospects for the future.
With the Magnificent Seven in the US enjoying sustained outperformance off the back of AI exuberance, those companies in Asia with key connections have benefitted. Our holdings in MediaTek and SK Hynix both performed well due to their important strategic partnerships with NVIDIA. We maintain our strong conviction in other mega-cap stocks in the sector such as TSMC and believe that higher demand is successfully translating into stronger revenues and higher margins. While Samsung Electronics lagged peers due to issues with testing on new chips, we feel that the stock is undervalued relative to its long-term potential and our conviction will be borne out by the tailwind from AI.
We retain a high level of conviction in how the portfolio is positioned and remain confident in the region’s long-term prospects. We believe that by focusing on the region’s structural growth trends – alongside a disciplined, fundamentals driven approach to stock picking – we can deliver strong investment outcomes for our investors.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. The Fidelity Asia Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.
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