Nitin Bajaj, portfolio manager of Fidelity Asian Values PLC (LON:FAS), outlines why he expects value to continue its strong run as we head into 2023, and why he believes that China presents a unique investment opportunity at current valuations.
- China is an integral part of the global economy and despite recent market upheavals, it is very hard for it to become irrelevant. And hence, mean reversion (the assumption that an asset’s price will tend to converge to the average price over time) is my base case for China and in such a scenario, I believe a lot of companies are trading well below intrinsic value in China.
- With the current decline in stock prices in Korea and Taiwan, I believe some of the well managed companies are now trading at reasonable valuations and we are investigating a number of these.
- I believe we will be in a period of sustained outperformance of value stocks given they are still trading at very significant discount to so called growth stocks and in an environment where interest rates are not zero anymore, investors will focus more on cash flows and solid businesses.
Predicting where markets are headed is always a bit speculative. My focus is Asian equities, and my style is very heavily weighted towards value stocks. Currently I continue to find a lot of companies which have strong long-term businesses, are run by competent and honest people and available with a significant margin of safety.
This is most true in China. I understand the reservations people have on China and the general negative sentiment. I have witnessed this level of negativity a couple of times previously in my career – namely in the US in 2008/09 and India in 2012/13. And history does rhyme. In my view, China can only be considered uninvestable if we believe that it is either the next Russia or the next Turkey.
My feeling is that China is such an important part of the global economy and a system which is built on both central party leadership but also entrepreneurial ability of the people – that it is very hard for it to become irrelevant. And hence, mean reversion is my base case. In that scenario, I believe a lot of companies are trading well below intrinsic value in China.
What could surprise markets in 2023?
Surprises are generally unforecastable. For me the key is to own businesses which can withstand unexpected negative surprises. That comes from owning good businesses with competent management which are conservatively financed and not overpaying for them.
Positioning for what lies ahead in 2023
I have been finding many companies in China that have good businesses and are available with a very good margin of safety.
Incrementally, I am also spending more time in Korea and Taiwan as valuations have corrected significantly – specially in Korea. We have struggled in the past to find many investable businesses in Korea due to corporate governance reasons. However, with the current decline is stock prices, some of the well managed companies are now trading at reasonable valuations and we are investigating a number of these.
Taiwan has historically been a very shareholder friendly jurisdiction, albeit very cyclical given high exposure to very competitive areas of technology hardware. With the current downcycle in technology, we expect to be able to back some of the long-term winners at attractive prices. Again, we are spending increasingly more time on this space.
Conversely, I find valuations for smaller companies in India very challenging. There are some very well-run businesses in India, but most are priced to perfection. Most of our current exposure in India is with banks and a few special situations.
My process of owning good businesses, run by competent and honest people and buying them at a good margin of safety will not change. So, in that sense, very little changes from one year to the other.
I believe we will be in a period of sustained outperformance of value stocks given they are still trading at very significant discount to so called growth stocks and in an environment where interest rates are not zero anymore (hence less fuel to speculate), investors will focus more on cash flows and solid businesses.
Sustainability has been an integral part of investing for me since I have managed money. I find it bizarre that we think investing and sustainability are separate. It is very hard to make money by investing with dishonest management or with companies who mistreat employees or fool customers or harm societies they work in.
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Fidelity Asian Values Plc (LON:FAS) provides shareholders with a differentiated equity exposure to Asian Markets. Asia is the world’s fastest-growing economic region and the trust looks to capitalise on this by finding good businesses, run by good people and buying them at a good price.