Anthony Srom, Fidelity International
To tackle expected portfolio risks over the coming months – such as inflation, US-China tension and a stronger US dollar – equities investors should look to specific names in key growth areas.
According to Anthony Srom, portfolio manager of the Fidelity Asia Pacific Opportunities Fund, these include the China A-shares market and the technology sector.
China is appealing despite heightening geopolitical tensions. “[Our] portfolio maintains significant exposure to selected Chinese A-share names,” said Srom, who also sees opportunities in the technology sector. “There is clear structural demand for semiconductors and relatively low supply, and we think we’re still early in the cycle,” he said.
Getting portfolios prepared
Fidelity’s outlook for the second half of 2021 depends on just how transitory bouts of higher inflation will be – and also their duration.
“We believe that inflation will come through and have thought about this dynamic in relation to the portfolio. As a result, pricing power and capex-light business models are preferred,” he explained.
Another area to watch is geopolitics, he added, particularly in relation to Taiwan and other tensions between the US and China.
Indeed, the move by US president Joe Biden to add more companies to the Executive Order is a continuation of the long-term strategic battle between China and the US. “Geopolitical risks do represent another fundamental factor to consider during stock analysis,” said Srom.
The potential for US dollar strength is a third challenge, given that the dollar weakness anticipated by many at the beginning of the year has not materialised.
As a result, Srom urged investors to consider what is on the opposite side of the US dollar: the renminbi.
“A strong US dollar implies continued downward pressure on the renminbi, especially amid tight financial conditions,” he explained. “If you see weakness in the renminbi and strength in the dollar, that starts to raise questions around continued commodity price strength, which alleviates some inflationary pressures.”
Adapting to China policy
Within China, however, there is also increasingly more government regulation coming to the fore in various industries – although it is difficult to get a clear picture on what is going on in the background.
“When I look at a company, I consider whether it or its industry is prone to more government intervention or regulation. If it is, risk increases,” Srom explained.
For example, he added, domestic property sales have been slowing due to a clamp down on developers’ liquidity situations. “Therefore, provincial governments are likely to look to tax something else to raise revenue. There has been speculation that this may be the liquor sector.”
At the same time, investors should look out for companies that stand to benefit from China’s 14th Five-year plan, given stated aims that include becoming carbon neutral by 2060.
