Fidelity Asian Values PLC’s Nitin Bajaj discusses his approach to navigating the ebbs and flows of today’s uncertain macro environment. He outlines how he goes about building a margin of safety into his portfolios and discusses key stock-specific opportunities he has identified in India over recent months.
- Prospective returns from equity markets globally are likely to be lower over the next decade - so where can the opportunities be found?
- Asia’s size and diversity will continue to provide lots of opportunities for bottom-up stock pickers to find overlooked or misunderstood investment potential.
- For example, over the last few months I have been incrementally finding more opportunities in India, particularly among mortgage finance and utilities companies.
The last few months have certainly been an eventful period for investors in Asian equity markets. We’ve seen a marked shift in sentiment between the final quarter of 2018 and the opening months of this year, brought about by a perceived thawing in trade tensions between the US and China, as well as supposedly market-friendly policy moves in both countries. I view such short-term moves as normal ebb and flow of the market.
As a bottom-up investor I don’t have a differentiated view on calling future macro events and history has shown us many times that the impact of political and economic policy is complex and multi-layered. What I would say, however, is that after an extended period of global growth over the last decade it would not be surprising to see a downturn in the business cycle at some stage in the next three years. If this were to happen, this is likely to create headwinds for equity market returns globally.
In this kind of environment, I believe it will be more important than ever to remain focused on owning well-managed and good quality businesses - that aren’t overly reliant on a positive macro environment - and buying them at the right price. For me, valuation remains absolutely critical as I believe investing is as much about protecting the downside as it is about participating in the upside.
The key to this is to avoid stocks which do not leave enough ‘margin of safety’ for an adverse macro environment or bad luck. I continue to shy away from investing in unproven business models, highly geared companies, cyclical businesses on peak margins or stocks trading on high valuation multiples. I have followed a philosophy of buying ‘good’ businesses, run by honest and competent management teams at a ‘good’ price. This does not need to change.
Looking past the macro uncertainty
While prospective returns from the broader market are likely to be lower than they have been over the last decade, the fact that Asia is home to over 18,000 listed stocks does provide a diverse opportunity set to find overlooked or misunderstood investment potential irrespective of the prevailing economic and political conditions.
For example, over the last few months I have been incrementally finding more bottom-up opportunities in India, which is the largest individual country weighting in Fidelity Asian Values PLC as at the end of April. Within the country, the trust holds several significant positions in the Indian mortgage space, spread across holdings such as LIC Housing Finance and Housing Development Finance Corporation.
Housing finance companies in India have significant competitive advantages versus banks due to comparatively lower operating costs. A tight liquidity environment in India late last year hurt the share prices of housing finance companies so I have been able to buy long-term compounding businesses at attractive valuations. As the liquidity conditions improve this trend should reverse.
The growth dynamics of the Indian mortgage market is very attractive given that India’s nominal GDP grows at about 10% per annum and the mortgage sector is underpenetrated. Note that India has less than 10% mortgage to GDP ratio, as compared to about 60% in the UK. Hence, these companies can continue to grow for the next decade and beyond as well as gain market share from banks due to their lower operating costs. The key will be backing the right management teams who execute in this growing market without taking undue risks.
Power is key
Elsewhere in India, the trust has exposure to the utilities sector through Power Grid Corporation of India and PTC India. Power Grid Corporation owns and operates India’s regional and national high-voltage transmission network. It is a monopoly asset that offers visible mid-teens regulated returns on equity, low operational risk due to its criticality in the value chain and reasonable dividend yield. PTC India is India’s largest OTC power trading company and benefits from steady volume growth, strong return on investments, underappreciated non-core assets (in the process of being sold) and a cheap valuation.
While I have been finding stock specific investment opportunities in India, I am also conscious that the Indian market may experience volatility in the near-term due to the ongoing national elections, the results of which will be declared on 23 May. Hence, I have hedged this near-term macro risk by buying put options on the Nifty index. But looking past the elections, I believe the stocks I own in India offer asymmetric risk-return profile and should reward investors who are willing to take a longer-term view.
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The value of investments and the income from them can go down as well as up, so you may get back less than you invest. 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. Fidelity Asian Values Trust PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can be more volatile than other more developed markets. 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. 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.