As a small-cap investor, Fidelity Asian Values’ Nitin Bajaj reviews a challenging period and outlines some of the unloved areas that he is backing to bounce back in 2020.
Asian markets appear to be in a contradictory state and I would characterise 2019 as being a good year for regional stock markets but a bad year for regional stocks. Like with what we have seen in the US, market leadership has become very narrow with a relatively small number of large-cap growth-orientated stocks driving a large proportion of overall gains from the broader market.
As a small-cap value investor, this has been a painful period but these trends between growth and value are part and parcel of investing in the stock market. They often capture the imagination of the media and investors before fading away. It is not possible to forecast the duration or magnitude of these swings but historically they always reverse.
Stocks over macro
We try to spend more time looking at companies rather than predicting changes in the macro environment. In this regard, we remain focused on finding good businesses, run by capable management and buying them at a good price.
The positive news is that market movements over the past 12 months have created an array of opportunities for us to add or initiate exposure to smaller companies where valuations have become disconnected from fundamentals. This is highlighted to good effect by the fact that Fidelity Asian Values PLC has moved from a substantial cash position at the end of last year to a small amount of leverage at the end of 2019.
At an overall level, the aggregate price-earnings ratio of companies in the portfolio stands around 8x which is substantially lower than the market and portfolio history. This would often be associated with distressed or troubled situations. However, on aggregate, our holdings demonstrate robust balance sheets and high as well as stable returns on equity.
The opportunity in financials
While portfolio positioning is driven by the availability of bottom-up opportunities, we currently see significant potential among some of the region’s micro and single specialist finance companies in India and countries in the Association of Southeast Asian Nations (ASEAN).
These companies are capillaries of the financial system that channel funds to the unbanked population, which is crucial for financial inclusion. Many of these businesses deliver high returns on equity in their niche segments, while their valuations are relatively undemanding given their strong prospects. The key is to back the right management teams that execute well in these markets without taking undue risks.
A number of these companies are currently out of fashion but I remain convinced that owning good businesses, run by able management and buying them at attractive prices has to be a sound way to invest. I’ve bought a number of excellent businesses at attractive prices over the last 12 months. This should serve the portfolio well over the coming three to five years. The ride might be bumpy but given the quality of the businesses we own, I feel confident about the destination.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments are subject to currency fluctuations. Fidelity Asian Values PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This Investment Trust invests in emerging markets which can be more volatile than other more developed markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.