This is an edited transcript of a recent interview between Firstlinks’ James Gruber and Anthony Srom, Portfolio Manager for Fidelity’s Asia Fund Strategy, on Fidelity’s Sound Bites podcast.
James Gruber (JG): How are you thinking about AI and the impact it could have on Asia and the stocks in your portfolio?
Anthony Srom (AS): From an Asian perspective, negative; from a perspective for the portfolio, a positive.
Let me elaborate. The Fund is very much underweight technology. It's the largest sector underweight, double digits, active position.
If I wind back the clock about 18 months ago, 24 months ago, it was the largest sector overweight. I sense there's a lot of froth, excess positive sentiment still attached to technology, specifically AI. When I talk to analysts in the region, look at research, I think there's a lack of recognition around risks attached to AI and how that could play out for a lot of companies.
There's only one stock left in the portfolio that is technology related, being TSMC, and that's an underweight.
If you think of enablers like SK Hynix, TSMC, Nvidia, the picks and shovels providers, everyone's gone for those. You're seeing a bit of migration of capital into the enablers. But when you look at how these companies could take advantage of it, for example, Tencent - long runway for ad monetization. Not only that: higher monetization of ads. They can apply it to gaming. So, I think if you extrapolate out three to five years, my view would be you're going to get a much better earnings profile to something like Tencent versus Alibaba, who's gone all into cloud, which is quite competitive. I have question marks around something like that, for example. So, I'm quite cautious on AI and tech, but you have some exposure in the portfolio that I think is likely to deliver.
JG: To be clear, the advantages with AI and advertising is that you can get data on individuals and groups and therefore can be more specific with that advertising - is that correct?
AS: Broadly speaking, yes, you can. You've already got a lot of granularity. I think the application for advertising would be to what you mentioned, how to make it more specific, more relevant, and therefore also how you can exhibit to customers a higher return on that advertising roller, which would mean someone like Tencent could charge more, to keep it simple.
JG: Let's talk about some of the other big opportunities that you see in Asia. Your fund has significant positions in Chinese consumer stocks. Does that make you a bull on Chinese consumption going forwards?
AS: No. It basically positively disposes me and the Fund to what I think will be structural winners in a somewhat challenged part of the economy.
When I go through Shanghai, Hong Kong, meet our analysts, besides going through their coverage list, what they like, etc, I always like to ask them: What are you doing? What are your friends doing? What are your relatives doing? How are they feeling? Are they confident? Are they worried?
I think the confidence around the Chinese consumer was shattered during COVID and after COVID - lack of belief in the leadership [and] how they handled the situation. You've seen the economy head south. Since then, people are worried about incomes, job security etc.
That said, I think that has morphed into being resilient. Chinese people have savings. They're willing to spend, but their spending is much more targeted.
Now I'm going to go for an experience, and by the way, I'll spend more on that experience than maybe what I would have done in the past, but I'm going to save for a longer period of time to get there. I will go and buy a pair of trainers, but I'm not going to buy something for 500 renminbi. I might go buy 400 renminbi pair of trainers.
So that's where I'm saying the Chinese consumer is resilient when I look at the companies that are in the portfolio.
The other aspect that I see is a disconnect between the way the markets price those companies and what I believe they can deliver.
Something like the Macau casino operators, for example, have been in the dumps until about two months ago. Has the dynamic changed there? Is this short-term noise? [I’m] still trying to get to the bottom of it, but nonetheless, the market is telling you, I think something has changed in that space.
Another one that the fund owns is Anta sports apparel - Chinese consumption I've just mentioned, let's call it resilient. But is there a thematic there? Yeah. I mean, post COVID, people want a healthier lifestyle. They want more outdoor. This feeds exactly into that part of that sub sector. There are opportunities to be had, is the way I summarise it.
JG: You're also overweight Indian financials - what's the attraction there?
AS: Because no one likes it (laughing). If you look at it, the last 12 months, it's not been a sector that's been liked by the market, and that was the entree for the Fund to increase its exposure.
So, what the market was worried about - consumer stress feeding through to non- performing loan credit cycle coming through, specifically on unsecured consumer lending. You had tightening liquidity in the Indian economy, leading to competition for deposits, which means cost of funding is going to go up, which means net interest margins are likely to be compressed.
The market there hit a brick wall about September. October, some of these dynamics started to play out.
In particular, if you look at Cholamandalam Financial, we believe it's a long-term winner. Went from about 1500 rupees per share down to 1100 rupees in a very short period of time. The fund took advantage to increase exposure to that and it's paid out quite nicely thus far.
Again, Axis Bank came into the portfolio beginning of this calendar year, partly funded through HDFC Bank, which was a big relative outperformer. You're looking for additional exposure to Financials given the thematics that I've just mentioned, negative sentiment, NPL cycle potentially coming through, but not as bad as it could be for certain companies. Axis Bank fits that bill. Where it also ticks the box is relative to its valuation group, you are basically bubbling along rock bottom, 30 to 40% discount to the likes of HDFC Bank, ICIC Bank, which we think is unwarranted. They're not really high conviction positions, but I think an area of the market that looks interesting.
JG: The area that you do seem to have some conviction is in ASEAN. Why is that? And how are you investing there?
AS: The exposures in ASEAN [are] really concentrated in Thailand. I still think it's an underrepresented part of the market because they're [investors are] just still absorbed in geopolitics, the China-US tariffs. They're still absorbed in AI. And where's the catalyst for Asia? It's really hard to see.
So, the exposure that the Fund has got would be Sea in Singapore, where it's headquartered, CP All, which is a 711-franchise operator in Thailand, and Bangkok Dusit Medical, which is a private hospital operator in Thailand.
Just screening through the region before I came down here last week, at the aggregate level the region looks fair value. But I was surprised to see that Malaysia, some of the valuation multiples for the Malaysian market are cheaper than the trough in 2008. Is that an area of potential ideas? I think it is. We'll go do some work there.
Thailand is a similar situation in that it's de rated significantly. I think, year to date, the market's down 30%. It's almost like the whole kitchen sink has been thrown at the Thai market. You've had tourists kidnapped, specifically Chinese tourists. You've had risks around Middle East medical tourism coming to Thailand, you've had political instability, which we'll see how it plays out. You've had an earthquake. So, I just think less bad will be good for something like Thailand. We've just got to wait for sentiment to turn.
JG: Anthony, could you leave us with two thoughts now: one opportunity and one risk?
AS: In terms of opportunity, I would point to China. You've probably all heard the comments around, oh, it's uninvestable. The only problem with that is the market's reacting differently now than what it did say 12-18 months ago. If I go back 12-18 months ago, what was happening was bad news was sold into in China, obviously, good news was aggressively sold into. I sensed a sea change in that back end of last year, and that seems to be the case. If you look at the market this year, it's up double digits year to date. So, when I look at the sentiment, that's changing the market.
Still, I sense a lot of long owned investors are underweight China. The Fund is overweight Greater China, looking at Hong Kong and China put together, about mid-single digits.
In terms of risk, I wouldn't ignore what happened last year in Japan. The question around tightening of monetary policy and the shock wave that sent through global markets. If rates keep trending positively in Japan, does that start sucking liquidity from other markets? US, for example. Do you see a reallocation to Japan? In a relative world, do you see EM and Asia ex Japan start to outperform DM, which hasn't been the case for a number of years? What I'm driving at is monetary policy or financial repression policies, not only in Japan but elsewhere, could have massive implications to where liquidity flows. That's a huge risk. But within risk, there's also opportunity.
You can access the full interview here.
Anthony Srom is a Portfolio Manager for Fidelity Asia Fund strategy at Fidelity International, a sponsor of Firstlinks. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on the website www.fidelity.com.au.
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