Recent activity in Asian markets have been a useful reminder why macroeconomic shifts aren’t necessarily a good guide to stock market movements. While the reopening trade in China and India’s buoyant growth have undoubtedly galvanised the region’s stock markets, the timing has been unpredictable and the beneficiaries not always clear. It has shown why a careful understanding of the merits of an individual company is vital.
The Chinese share market staged a buoyant and rapid rally following the government’s pivot in its zero-Covid policy. Investors quickly anticipated a resumption in normal patterns of economic growth and felt confident enough to reinvest in previously unloved parts of the market - namely the ‘beneficiaries of the country reopening’.
However, investors waiting for clear signs on the economic impact of reopening would almost certainly have missed the bounce. Companies most affected by the lockdowns – such as retail, leisure and travel stocks – rallied quickly. Investors contemplating many of those stocks today will find that they already fully discount the earnings boost from reopening. This is before the benefits are reflected in economic data and despite the recent pull back in the market.
The reality is that investors needed to be in these areas before the government took action. For us, valuation considerations led us to some of these reopening beneficiaries ahead of time. Trip.com, for example, had been a fast-growing, market leader prior to the pandemic. However, restrictions on travel had seen its valuation collapse. Yet it remained ahead of its peers and a prime beneficiary of the resumption of travel, whenever that occurred. We saw the potential to pick up long-term structural growth at a discounted valuation. Since the market’s rally, we have taken some profit in the name.
We also held Chow Sang Sang, a 100-year-old jewellery retailer with a presence predominantly in Greater China (Hong Kong, Macau, Taiwan and Mainland China). Whilst Covid-related lockdowns over the past couple of years resulted in the under-earnings of its jewellery shops relative to history, we hold an exposure given its low valuation relative to assets and strong brand recognition. The company is also expected to be a key ‘reopening’ beneficiary.
Careful stock selection has also helped guide our allocation in India. The country has had strong economic growth, which left valuations looking extremely high. Investors had little margin of safety when the recent controversy over the Adani Group destabilised markets. This particularly hurt those companies with the highest valuations and validated our focus on more value areas of the market with stable cash flows and growth – including utilities, pharmaceuticals and banks.
Buying high quality companies when they are out of favour can help ensure that we are positioned for structural changes ahead of time. This has worked well during this period of recovery.
The question for us today is where to look next. We’ve taken profits in many of the companies that have rallied and need to rotate that capital into opportunities elsewhere. There are fewer obvious valuation opportunities, and we are increasingly selective and nuanced in our stock selection, with no broad themes to portfolio allocation.
‘Value’ still looks cheap relative to growth. While 2022 saw some rotation from expensive growth companies to cheaper value companies, this appears only the initial stages of a wider mean reversion. In fact, what we are witnessing at the moment is somewhat similar to 2000 when smaller cap growth stocks were trading at an all-time high premium to smaller cap value stocks - even though these growth stocks hadn’t delivered better earnings from the two decades before. Importantly, since 2000, value small cap Asian stocks have grown earnings faster than growth stocks.
The rally in value stocks is noteworthy that this has happened in spite of monetary policy conditions rather than because of it – China remains on a different monetary policy trajectory to the rest of the world. If we see any mean reversion in China, we should see another driver of earnings revisions for our holdings as well.
China remains a significant source of opportunity and our largest overweight position in the trust. Chinese consumption is still an important long-term trend and there is significant pent-up demand to be realised. After strict lockdowns, Chinese people want to meet, travel and spend money. It is also worth noting that household savings rates in China have gone from 31% to 35%, so there is a significant war chest that should be channelled into the economy over the next few months. Growing the consumer side of the economy also remains a key priority for the Chinese government, as is the recovery in the domestic property market. If we start to see a recovery in the property segment, we could get yet another boost for the earnings environment.
Our focus on the Asian Values trust is always about finding good businesses, run by good management team, at a margin of safety (good valuations). Invariably, there will be those companies that disappoint and others that will exceed expectations in this new environment. We ensure that our positions are led by the reality of a company’s position and whether that is reflected in its valuation.
The value of investments can go down as well as up so you may get back less than you invest. Changes in currency exchange rates may affect the value of investments in overseas markets. Fidelity Asian Values PLC can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This Investment Trust invests in emerging markets which can be more volatile than other more developed markets. This trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.