A disciplined-driven search for value in Asia

Nitin Bajaj, portfolio manager of Fidelity Asian Values PLC and the Fidelity Asian Smaller Companies Fund, assesses the backdrop for investors in Asia. He highlights the key areas in which he is finding value, particularly China and Indonesia, where market dislocations are creating opportunities for investors.

Our investment philosophy consistently focuses on owning good businesses run by competent and honest people, purchased with a margin of safety. This disciplined value-investing framework identifies durable opportunities through comprehensive research in undervalued markets. By adopting a contrarian approach, we intentionally target areas currently out of favour, steering clear of those driven purely by market momentum. This strategy allows us to effectively position ourselves to deliver robust client outcomes over the long term, regardless of market and style cycles.

Why value in Asia?

With over 20,000 listed companies in Asia, we tirelessly look to uncover hidden gems in these diverse and ever-expanding markets. Despite Asia being perceived as a growth market, historical data shows that small-cap value investing has been the best-performing asset class over the long term.

Past performance is not an indicator of future returns.

^{Source: Fidelity International, LSEG Datastream, 31 August 2025. Index: MSCI All Country Asia ex Japan Indices in USD terms.}

Positioning

In the current ‘everything bubble’ market environment, two notable exceptions stand out for value investors: Chinese consumer stocks and Indonesia. The portfolio has close to 40% of its assets invested in China and Hong Kong, primarily focusing on value stocks, and 20% in Indonesia, which we believe offers the best risk-reward in our universe. Additionally, the strategy holds 10% of its assets in India and 10% in South Korea, with the remainder split among other countries. At a sector level, there is a significant underweight in the technology sector, where market momentum has been concentrated.

Opportunities in China

China is currently experiencing significant intersectoral dispersion. There are two notable trends occurring: first, stocks with high dividend yields continue to rise as interest rates in China fall; and second, sectors such as biotechnology and artificial intelligence that are lacking earnings are performing exceptionally well. In contrast, the 'real China' - encompassing consumer goods, consumer discretionary and staples - is struggling due to broader economic challenges. This is largely attributed to a severe housing downcycle, which has undermined consumer confidence.

Chinese household deposits are increasing while loans are decreasing, reflecting a lack of confidence as property, which is their largest asset, depreciates. However, it seems we may be approaching the bottom of the housing cycle. A recovery in consumption could herald significant change, with Chinese households potentially unleashing a wave of spending given their healthy balance sheets. This shift could provide vital earnings support to companies.

Nevertheless, we steer clear of sectors with oversupply, as these are hypercompetitive markets. For instance, in China's electric vehicle industry, prices are cut far more frequently than in the rest of the world, leading to a relentless price war.

We continue to identify promising opportunities in China. Many of our Chinese holdings represent businesses that possess enduring competitive advantages but have remained out of favour among investors due to broader market sentiment concerns.

The case for Indonesia

Indonesia has a notably young population, with an average age of under 30 years, and an average income per capita of $5,000,¹ reflecting a low-cost environment. The country is conservatively financed, with household debt accounting for 16% of balance sheets, in stark contrast to India's 41%.² Similarly, Indonesia's government debt to GDP and its fiscal deficit are both significantly lower than India’s.

Due to its unique geography, characterised by thousands of islands, establishing businesses in Indonesia is challenging, and there is a limited entrepreneurial culture. As a result, incumbents dominate the market, with the largest four banks holding 80% of low-cost deposit market share, and the leading noodle company commanding a 70% share of the industry. Similarly, the top five tile businesses account for 60-70% of the tile market, and the largest toilet seat maker holds a 50% market share. This results in a very dominant, oligopolistic business environment.

Moreover, these incumbent businesses often offer attractive valuations, combining dominance, high returns on equity and growth, which are hard to find elsewhere in the world.

Finding opportunities amid uncertainty

We have always maintained that macroeconomic trends and market movements are difficult to forecast. We believe that the key to navigating market and economic cycles lies in maintaining a focus on intrinsic business value, rather than being influenced by short-term sentiment.

Ultimately, our approach remains consistent - seeking out good businesses run by competent management teams and available at compelling valuations.

Sources:

¹ World Bank Group, 2025.
² International Monetary Fund, 2025.