Page 16 - DIY Investor Magazine | Issue 32

THE UNIQUE OPPORTUNITY
IN ASIA’S SMALLER COMPANIES
Nitin Bajaj
Portfolio Manager, Fidelity Asian Values PLC
Portfolio manager Nitin Bajaj reviews the fundamental backdrop facing investors in Asia’s key economies.
He discusses how extreme market dislocations are creating buying opportunities among small-cap value companies, particularly in China, and highlights how this translates into the current positioning of Fidelity Asian Values PLC.
One of the major features of the investment landscape across Asia since the start of 2020 has been the material out performance of small-caps relative to large-caps.
This looks like a partial mean reversion from what happened between 2016 and 2019 when large-cap stocks significantly outperformed small-cap stocks.
However, scratch a little deeper and a large discrepancy can be seen within Asia’s smaller companies, where there has been an out sized out performance of small-cap growth versus small-cap value.
Small-cap growth stocks are now trading at a premium of over 100% to small-cap value stocks - a level we last saw in 1999- 2000.
Given our small-cap value-oriented focus, this market backdrop has been a big headwind for us. While this can be a headache, it’s not necessarily a bad thing as it means we get to buy some very good businesses without much competition.
In all this, our process has remained unchanged. We continue to believe that fundamental analysis and owning good businesses where the valuation leaves sufficient margin of safety is the most time-tested way to make money in the stock market over the long-term.
‘WE ARE EXCITED ABOUT THE PORTFOLIO OF BUSINESSES WE OWN CURRENTLY, WHICH ARE DOMINANT IN THEIR INDUSTRIES’
As such, we have recently been deploying more capital in China and taking capital out of India, where we think the market is now looking expensive.
But even in markets where valuations are stretched, we
are also seeing businesses trading very cheaply, creating opportunities for investors like us. We are excited about the portfolio of businesses we own currently, which are dominant in their industries, earn good returns on capital and are available at attractive valuations.
For example, we own a business called Yongda Auto Service, which is the largest dealer for Porsche and BMW in China. Over the last few years, this company has seen rapid growth as the country has become wealthier, with a growing number of consumers aspiring for luxury brands.
Quality of earnings has improved as the market matures and its balance sheet is now best-in-class. We believe this stock will continue to do well as China’s wealthy continue to grow.
OUTLOOK
The extreme valuations have been caused by a wall of money - created by governments across the globe in response to the pandemic - all chasing the same stocks in the market.
INCREASING OUR ALLOCATION TO CHINA
A wave of regulatory tightening drove significant volatility in Chinese assets over 2021, but we believe the market is now looking cheap in comparison to other markets.
DIY Investor Magazine · Feb 2022 16