China’s inflection point and swimming against the tech tide

Chris Salih (CS): Hello I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Anthony Srom, manager of the Elite Rated Fidelity Asia Pacific Opportunities fund. Anthony, thank you very much for joining us today.

Anthony Srom (AS): You are welcome.

CS: Let’s just start with sort of the scope of the fund. I mean, you are known for being high conviction, I think it’s around 25-35 names typically. You’ve kind of got a strong allocation in sort of China, India, and Hong Kong, around two-thirds of the portfolio at the moment. Is that just a byproduct of the investment style and or why so heavily sort of focused on those specific areas at the moment?

AS: So in terms of the specific focus to Hong Kong, China, India, it’s very much a process driven positioning. So think of it, 25-35 names as you’ve mentioned. Very much bottom up stock selection is what’s driving let’s say this macro overlay that you’re seeing at the country level.

But if I look at it from a another perspective obviously technology is very topical at the moment in Asia. In terms of how I’m seeing things there I think a lot of positive sentiment, which is something that I used to sell into for the portfolio. Conversely negative sentiment is a good filtering mechanism for buy ideas. So it’s kind of working slightly against the process from that particular angle. Another part of the technology theme is valuation. I just think it’s quite excessive in certain parts of the technology sector. So by default, that’s gonna start swinging you away from things like Taiwan and Korea.

Another big country that you mentioned or didn’t mention was Australia very dominated by banks, which in my view are low growth, low return and quite expensive. I think people buying it for yield. Within Australia, I think materials are starting to look interesting, but again at a country level, but you find the fund being underweight.

So to wrap it up, I’d say you know, too much positivity in tech drives you away from Taiwan, Korea, and very much bottom up stock selection bringing things to the surface in Hong Kong, China, and India.

CS: Okay. I was gonna touch on tech a bit later, but maybe let’s just focus a bit more on it now. Just how excessive are those valuations and are there pockets, I mean China for example, people would argue is sort of 18 months behind, where we are in the western world in terms of tech. I mean, are they overly stretched? Are they sort of within a, you know, high end of expensive? Just maybe talk us a bit more about, talk to us a bit more about that please.

AS: I think there’s a couple of factors behind that. One is what do you think the high growth duration is in terms of being able to underpin these multiples? And the second thing is margins and returns. So if I just touch on growth, for example, SK Hynix, Samsung Electronics getting a lot of attention. In Asia at the moment, very high return, very high margin growing book value, about 15% per quarter on quarter. The thing therefore is when you’re being asked to pay 2.5, 3.5x book for these kind of businesses, how long can that compounding go on for? When I talk to analysts in the region here, no one’s really prepared to take much more than a three to six month view. Those valuations are pretty much the highest you’ve ever seen on record by a very big distance.

And you’ve got CapEx or sorry, capacity coming on stream 2027, 2028. So from where I sit, you’re basically being asked to pay really high multiples on very short time horizons. And I think once that CapEx starts to come through you know, margins will peak out and therefore so should the share prices. So I’m quite skeptical on that part of the technology spectrum, but bearing in mind Hynix and Samsung are both very big weights in the index. So that’s just some comments I’d say on valuation growth and how I’m seeing things there.

CS: Okay. And I’d be remiss not to sort of talk a little bit about China around a third of the portfolios invested in there at the moment. Obviously it sort of polarises opinion China, it’s had a a good run recently since the pivot in September 2024. What do you think investors are missing about it? Is it a case of tech’s been carrying it and there’s a lot of opportunities still underneath, maybe just where are there still lots of opportunities within that market?

AS: I think in terms of China, it’s at a interesting inflection point. If you look at it again from a macro perspective, the 10 year bond yield has stopped falling a while ago. So that’s just a signal that, you know, you should pay attention to. So for example, falling 10 year bond yield would be indicative of slowing nominal GDP growth. So the fact that it stopped falling makes me pay a bit more attention as to what might be going on underneath the hood. And that’s a very loaded question, but at a high level you think, oh, well maybe the narrative here is changing a little bit.

Also within China, I think there’s a recognition from the leadership that they need to really put the pedal to the metal on domestic consumption. I think they wanted to do that a year ago and got broadsided by the liberation day, hoo-ha first quarter of last calendar year with tariffs going through the roof. So they had another issue to deal with, which I suppose delayed ultimately what they’re trying to deliver in terms of domestic consumption.

So I think there’s a couple of things that I’m noticing more recently with China. One is breadth within the market is starting to improve which is benefiting some of the holdings in the portfolio. So these were companies where fundamentally you saw nothing wrong with your thesis, they’re ticking the boxes, not getting recognition from the market, but that started to happen back into fourth quarter last calendar year. So I think breadth is improving there.

The other thing is China consumer, you know, that’s been a long term thematic. Everyone loved it 10 years ago, everyone kind of hated it post-COVID. But when you think about it, Chinese consumers really haven’t opened their wallet for two years. Yes, they’ve gone on holidays and wanted to buy experience for experiences for want of better words, but realistically savings just keep compounding. And I think after two years it wouldn’t surprise me if you start to see the purse strings open up a little bit. The equity market has rebounded strongly, as you pointed out, last calendar year, and that’s kind of continued on.

And again, if you are looking at consumer within China, some of these companies are starting to catch a bid. So for example, Macau Casinos. Up quite strongly. So you are looking for little data points and signals as to what’s going on. So within China, yes, there’s a skew in the portfolio towards consumer discretionary and there’s some of the factors that are driving it.

CS: Is the consumer’s discretionary sort of overweight driven principally by China or are there other markets as well where you’re getting exposure?

AS: No, there’s other markets where the fund is getting exposure. China would be a pocket where that’s occurring through one exposure. C which is listed in the US but predominantly operates e-commerce, gaming and FinTech. Big market being Indonesia and Taiwan for them, as well as Brazil. So no, the fund is getting at elsewhere as well.

CS: Okay. And just lastly, sort of from an investor perspective, someone who’s watching this video, what would you say an investor should sort of expect from the portfolio that looks, you know, that looks so different from a benchmark over a full market cycle? I mean, for example, I know that you did some work and it showed that you were sort of style neutral over a long period, for example, just maybe give us some more insight on that please.

AS: Yeah, so I think your comment on through cycle’s an interesting one because it also implies down markets and drawdowns. So you know, if you look at one of the key characteristics of the portfolio it’s relative defensiveness versus the benchmark. That’s been the case for a very long period of time now. So what we look at internally is the positions that the fund has got, what are the volatility of each position and what’s the correlation of each position in the portfolio, which I think is quite important given it’s a concentrated 25-35 stock fund. And what we’ve noticed is in periods of market drawdown the correlation interplays there, you’ve got diversity and the fund tends to outperform. So that’s the first thing that I’d say with respect to your comment on full cycle.

The other one would be on technology that I’ve just touched on. I think that’s had a lot of love the last three years very well known, very well bid up. You know, I think to outperform over extensive periods of time, you’ve gotta do something that’s different to the market. And from that respect, the fund is differently positioned. If we look at it from a third angle compared to the benchmark, the fund is higher margin, higher growth, higher return given the holdings that we have, and as I mentioned defensive. So I think that’s not a bad mix to have.

CS: Anthony, thank you very much for spending some time with us today.

AS: Oh, you’re welcome.

CS: And if you’d like to learn more about the Fidelity Asia Pacific Opportunities fund, please visit fundcalibre.com