The value in value investing in Asia’s small and mid-sized stocks

Nitin Bajaj, portfolio manager of Fidelity Asian Values plc, highlights how he believes a consistent value-led contrarian investing approach unveils opportunities for investors.

Our long-standing mantra is “invest in good businesses, run by good people, at an attractive price”. With about 20,000 companies listed on stock markets across Asia, our local Asia-based research analysts have a huge opportunity for finding good businesses with good management. But doing so at the right price can be challenging and often takes the trust to unloved markets, making it contrarian by nature.

It’s fair to say that Indonesia is one of Asia’s least favoured stock markets today. Many investors appear to have even forgotten where it is on the map, worrying over lacklustre overall economic growth and government policy. This has led to good domestic businesses trading on low valuations that do not reflect their fundamental strengths. Two years ago, China was similarly out of favour, with many people viewing the world’s second largest economy as uninvestable.

Yet, we are finding good Indonesian businesses to invest in at very attractive stock market valuations today, just as we did in China two years ago using the same investment process. As a result, a significant proportion of the Fidelity Asian Values portfolio is invested in Indonesian and Chinese stocks.¹

Keeping to a consistent, disciplined process

Since I took over the management of the trust in 2015, our dedicated team of Asia Pacific small cap analysts has followed a consistent research approach, dedicated to finding these high-quality businesses at attractive prices. It’s hard work – for every 10 companies we research we only find one worth buying. It’s a matter of keeping to the process, remaining disciplined and staying humble.

When we evaluate a company, we look back at the last 15-20 years to see if it has generated value for shareholders. What’s the likelihood it will do so over the next five years? We read the past three to five annual reports: if you read one report you get a picture, if you read five it’s a broader perspective. We interview management and people who have dealt with the company. Then we compare our estimate of the business’s value against its stock market valuation. If we can double our money in five years, that’s an interesting starting point.

The result? The trust owns high quality businesses at a notable discount to the wider market. The average return on equity (ROE), a measure of quality, of companies in the trust was over 7% at the end of October 2025. Meanwhile, the MSCI AC Asia ex Japan Small-Cap Index’s average ROE, representing the broad market, was under 3%. Turning to valuations, Fidelity Asian Values’ average price-earnings ratio was just over 10x, far less than the index’s 18x.

Past performance is not a reliable indicator of future returns.  
Source: Morningstar as at 30.11.2025, bid-bid, net income reinvested.  
©2025 Morningstar Inc. All rights reserved. The MSCI All Country Asia ex Japan Small Cap (N) Index is a comparative index of the investment trust.

Contrarian value has beaten growth

The trust’s focus on small to mid-sized market cap companies using a value contrarian approach may seem to contrast with the popular opinion towards the stock markets of Asia. After all, the region is known for its vibrant economies, driving faster growth than many other parts of the world. But our data-based analysis shows that over the last 30 years Asia’s small cap growth stocks have generated disappointing performance, with small cap value stocks posting far stronger average returns.

Why has this happened? Our hypothesis is that when an industry is doing well it attracts capital and talent, and when competition in the industry goes up prices go down. As a result, profits go down; stocks fall. When an industry falters, though, capital and talent leave. Subsequently, over time as competition falls and supply gets constrained, prices go up; profits increase; stocks rise. That is capitalism working.

There’s also a misconception that investing in Asian smaller companies is high risk. Historically, however, Fidelity Asian Values has outperformed during a bear market for a good reason. Returning to our mantra, the investment process focuses on good businesses, good people, good price. The better the quality of a business, the stronger its balance sheet, the lower its starting valuation, the lower the risk of investing. In other words, there’s a margin of safety.

Realising quality over five years

Looking forward, it’s hard to judge whether economies in Asia will continue to grow or another downturn waits around the corner. But I am not worried because the trust owns a portfolio of superior quality companies at a valuation discount of about 40% to the broad market average.

Naturally, our focus on valuations often leads the trust to invest against the consensus. But regardless of whether there’s a downturn or not, these companies are likely to be worth a lot more in five years than they are today.

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¹ 47.1% of the trust was invested in China and Indonesia on 31 October, 2025.