Rather than try to forecast macro trends and market movements, investors can find opportunities in underappreciated markets across Asia where some companies have been mispriced.
Such names can be found at the moment in overlooked sectors in China and Indonesia – where valuations broadly remain at historically attractive levels.
Key to identifying those businesses with the potential for strong market performance is taking a contrarian view, explained Nitin Bajaj, portfolio manager of Fidelity Asian Values PLC and the Fidelity Asian Smaller Companies and China Focus Funds. Put simply, this involves looking for value where others see risks and avoiding areas driven purely by market momentum.
“The best time to invest in such businesses is when they are out of favour and trading at valuations that protect your downside as an investor,” said Bajaj.
The crux of this process is to ignore short-term sentiment swings and stay focused on intrinsic business value, irrespective of market and style cycles. “Our approach remains consistent,” he added, “seeking out good businesses running run by competent management teams and available at compelling valuations.”
Counting on consumption in China
Just because recent narratives have emphasised China’s weak macro dynamics, Bajaj believes the quality of the domestic workforce and technological expertise will remain a competitive advantage.
“It is also important to recognise that China’s economic importance extends beyond its domestic market, with Chinese companies gaining significant global market share in several industries,” he said, pointing to China’s dominance in Africa’s truck market. From being an insignificant player, Chinese companies now have a 70-80% market share.
Meanwhile, Chinese firms offer a big cost advantage over US and German counterparts in the production of polysilicon, a crucial material for solar panel production, added Bajaj. This has led to China commanding more than 95% of today’s global polysilicon market.
Investors can also find value in Chinese domestic consumption-led names. “The market is overlooking strong franchises, whose deep moats are a competitive advantage,” Bajaj said.
Capitalising on Indonesia’s demographics
Indonesia is another market which Fidelity sees as offering a combination of well-managed, high-quality companies that dominate the segment they operate in, plus trade at reasonable valuations.
Further, added Bajaj, the country’s young, fiscally conservative population provides a stable environment for high quality companies to thrive.
The sanitaryware sector is a case in point. Fidelity’s own research estimates the local market for these produces could expand by 7-8% in volume terms, supported by improvements in affordability. However, said Bajaj, the current market penetration of sanitaryware in the country is only 50%, which is relatively low and provides a tailwind for demand, especially given the chance of limited overseas competition due to these being fragile and high-volume, yet low-value, items which are hard to transport over long distances.
Limited scope in India and Taiwan
Beyond China and Indonesia, Bajaj is more cautious about markets such as India and Taiwan, where momentum in 2024 has led to expensive valuations and, therefore, little room for future upside.
Yet there are still some opportunities worth pursuing. “In both of these markets, the portfolio is invested in companies higher up the market cap scale,” said Bajaj, “where valuations are more reasonable than in small caps, and such exposure supplements the overall liquidity profile of the portfolio.”
More specifically, Indian financials have been an unloved area of the market, whereas Taiwan’s semiconductor industry is likely to remain a core component of whichever technology dominates.
