India is currently the best place for finding opportunities in the Asian market, more so than China, according to the team behind the £307.6m Fidelity Asian Values trust, which has a 7 per cent overweight position in the country.
Over the past few years India has been less-favoured market among the Asian mix.
The MSCI India index has underperformed the MSCI Emerging Markets index over the past year and is lagging the MSCI China over one, three, five and 10 years.
MSCI India versus MSCI Emerging Markets over the past year
Source: FE Analytics
Added to that, the International Monetary Fund (IMF) cut its economic growth forecast for India last October.
But despite this Fidelity International’s Medha Samant maintains the Indian market is one of the best places to find opportunities, so long as you look for “the organised players in an unorganised market”.
An example of that is Power Grid Corp of India, which is the portfolio’s biggest holding at 3.70 per cent. Fidelity Asian Values currently has 23.9 per cent of its portfolio in Indian stocks, compared with 21.6 per cent in China.
Samant explained that with the Indian government currently focused on infrastructure it is paving the way for power companies to develop; a long-term theme since power will always be in demand.
Samant said that as the Indian government is trying to provide stimulus there and with the government opening up the power sector, Power Grid Corp is an example of someone who stands in a very good position to gain contracts in the future.
The Indian government has been putting efforts into boosting its economy as the Indian prime minister Narendra Modi, who came into office in 2004, significantly eased the way businesses can operate.
“There are different ways to play Asia,” Samant said, adding that you don’t just have to invest in the region’s bigger names like Alibaba, Tencent, or Samsung for growth.
Indian based holdings in the fund include non-banking financial company Shriram Transport Finance and IT company Redington India.
“We prefer these single, mono lines of businesses,” Samant said. “The businesses we own are basically good businesses run by good people available at good prices.”
Indeed, this allocation to India and finding the companies able to take advantage of the stable trends within the country has helped provide top-quartile returns in Fidelity Asian Values over a five-year period; a considerable outperformance for a trust running an out-of-favour value style.
On its Chinese underweight, Samant explained that just because its allocation is below the market average does not mean that Fidelity Asian Values manager Nitin Bajaj cannot find opportunities there.
Like India, Samant said it’s about finding those companies working within a consistent trend in what is another volatile market.
The macroeconomic issues with China have been ongoing with the latest noise around its trade war with the US suggesting that a potential peace treaty may be on the horizon in 2020.
One part of the noise and confusion created by the trade war has consequentially been the realignment of trade routes.
Bangladesh has become the preferred alternative for European firms and Vietnam the new manufacturing path for the US.
But Samant explained that rather than trying to negotiate these new trade routes and the alliances still being established, one of the key areas of focus was “China for China” – essentially the domestic companies focusing on delivering Chinese growth.
Within China, Bajaj is looking to find those companies who are tapping into trends stable enough that they are unaffected by the trade war. Companies such as Xingda International Holdings, which produces the steel rods used in the manufacturing of car tyres.
Performance of Xingda International Holdings since December 2006
Source: Google Finance
The rise of the middle class in China has meant that more people are able to buy cars for the first time – something which has greatly helped to boost the car manufacturing industry.
That, along with the need for China to adopt more alternate power sources to help tackle its air pollution issues, means it is also becoming a hub for electronic cars with supercar giant Tesla hosting one of its headquarters there.
“The trade war, or whatever you might call it, is not going to impact this,” Samant said.
Along with this new social class is the desire for a better quality of life, mirrored by wage increases. But it’s not just a better quality of home life that is rising but quality of health, bringing about a rise in running in China.
“It’s a no brainer,” Samant said. “We bought a Chinese sportswear brand and the primary focus is on running. So again, it's not a complicated business, it’s a mono line. It’s the market leader in offering running apparel and shoes in the top tier, tier-two, tier-three, tier-four cities.”
This again is something unlikely to be impacted by the trade war. “People are going to be running,” Samant said, “It’s a trend that’s only going to be improving in China. It's not exporting. It's China for China.
“So you can't say, you know, just because our country allocation is underweight, we're not finding many companies to invest.”
Fidelity Asian Values runs a bottom-up value style approach, a method that has been decidedly out of favour over the past decade when growth has significantly outperformed.
But this has not appeared to hinder the fund’s performance as it has produced a top quartile return over the past five years, making 77.93 per cent over that time frame and outperforming both the MSCI AC Asia ex Japan index (58.01 per cent) and its average IT Asia Pacific Smaller Companies peer (22.36 per cent).
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
The five FE fundinfo Crown-rated trust has a yield of 2.17 per cent and ongoing charges of 0.99 per cent. The fund is currently trading at a premium to net asset value (NAV) of 0.8 per cent and is 12 per cent geared.