Bear markets often create new turning points and changes in market leadership. With this in mind, Fidelity Japan Trust PLC’s Nicholas Price outlines how our locally-based team are navigating the recent market turmoil and focuses on the areas that could rebound strongest following sustained stimulus.
- In the current environment, there is greater risk in trying to time the market than maintaining existing positions where conviction in mid-term growth is high.
- Things can change quickly when stimulus is effectively implemented and the market starts to look through the near-term negativity.
- Within Fidelity Japan Trust PLC, our job is to get active and find the new winners when others are standing still.
Bear markets often create new turning points and changes in market leadership. A period of sustained fiscal stimulus may throw up new leadership and new winners from discarded losers, so I am recommending that our analysts revisit the dogs as well as the old long-term winners in their coverage.
For example, what would happen is the US and/or China implement another auto scrappage subsidy? After the 2011 Japan earthquake, tolls were cut to zero on the motorways to encourage domestic tourism. So things can and will change quickly when there is some stimulus at the micro level as the market will then start to look through the current near-term negativity in those areas.
Against this backdrop, it is our job to get active and find the new winners when others are standing shell shocked. If we keep on speaking to company management teams and casting the net wider while the market is busy focusing on daily newsflow, we should be well placed to find the new winners.
Recent portfolio activity
Overall, I am happy to maintain the technology bias in my portfolios, but focusing on names with strong balance sheets, reasonable valuations and a secular growth story. I think that there is a good chance that they will lead us out of this crisis as demand for their products and services is likely delayed rather than foregone.
At the same time, I am also actively looking at domestic and China-related companies that are approaching 2008 valuations. It currently seems that Japan and China will get out of this crisis earlier - and with a fiscal boost.
Some of the screening candidates here include retailers, rail operators and leisure companies that have been really punished. I feel much more confident that the downturn is discounted when I see price to book ratios getting close to Lehman levels, particularly small-caps which have moved very quickly.
On the flip side, I have been selectively reducing exposure to some consistent growers, where the relative valuations remain elevated and there will be at least two quarters of tough earnings. When aggregate demand goes close to zero, even the market share gainers cannot gain share of zero.
I am also closely watching balance sheet leverage and covenants for the few companies in the portfolios which are relatively highly leveraged. Many of these stocks have been punished over recent times but those that can adapt and make it through the current uncertainty will be well positioned to reward investors willing to take a longer-term view.
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