Covid-19 is having a huge impact across all major economies, and Asian markets are in the eye of the storm. As with many of characteristics of the nations in the region, there are some big differences in terms of where nations are in the outbreak cycle. In China life appears to be slowly getting back to normal, while in other nations the worst is perhaps some weeks ahead. In India, for example, the whole nation is in lockdown with only essential services in operation. Stock markets too have reacted differently, and this is creating some opportunities that active managers are hoping to take advantage of.
Like all fund managers, Nitin Bajaj, manager of the Fidelity Asian Value Investment Trust, doesn’t know how the pandemic will play out. What he does believe with conviction, however, is that market valuations are exceptionally low.
His working assumption is that lockdowns, which affect more or less all of Asia, last three to six months. This means huge disruption for local economies in terms of consumption, and for Asia’s many export industries forced to dial back production. Yet Mr Bajaj expects in two to three years’ time the economic situation will not be materially different to how it would have been without the virus. By looking to the long term and assessing the valuation of companies in that context, he is confident he can generate strong returns for investors.
Mr Bajaj takes inspiration from Warren Buffet’s style of ‘value investing’. This advocates targeting good businesses run by trustworthy management teams and buying them at the best possible price. This investment approach tends to lead him to smaller companies that are not widely followed by professional investors and areas that are being widely ignored. At the same time, he looks to take profits from areas that perform strongly over his 3 to 5-year investment horizon and reinvest in new ideas through overlooked, cheaper stocks.
Asia is home to 18,000 listed companies offering a huge pool of opportunities for Mr Bajaj to find what he is looking for. Many smaller firms receive little or no research from the investment industry, and we believe this plays to the strength of the manager and his team as they search among Asia’s lesser-known businesses. Given the focus on smaller firms the investment trust structure also suits the approach. The ‘closed ended’ nature of a Trust means the manager can focus entirely on owning the best stocks for shareholders, rather than having to manage cash in and out of the portfolio resulting from changing investor sentiment towards the asset class.
Given the breadth of the investment universe it is difficult to make generalisations about the impact the virus is having. Mr Bajaj points out that different industries are under different levels of stress and some companies are more used to adverse situations than others. He feels his attention to balance sheet strength and the quality of management teams should stand him in good stead through a testing period where the emphasis for businesses will be on conserving cash.
By way of indicating how cheap shares have become, he points out that 40% of portfolio has dividend yield higher than its price to earnings (p/e) ratio. The p/e ratio measures the current share price relative to a company’s per-share earnings. For instance, a p/e ratio of 10 would indicate a company is valued at 10 times its annual earnings. With the average dividend yield across the portfolio at around 5% and the p/e ratio at around 6x there’s no question that valuations appear extremely low, albeit the dividend yield looks at the past year’s pay outs against the current price – so it doesn’t account for dividend cuts or cancellations. Mr Bajaj expects very few companies won’t cut dividends during the period, but he is confident that the vast majority can withstand a severe recession and resume full pay outs when the economic outlook improves.
While some companies across Asia will inevitably get into difficulty amid dire trading conditions, Mr Bajaj feels relatively comfortable as companies in the portfolio generally have very little debt. He notes there are many examples of companies valued at less than the cash on their books, which in his view hugely undervalues their longer-term potential, even allowing for the fact that earnings have dried up in the short term while costs have not. Amid the turmoil there are some success stories too. One portfolio holding makes healthcare gloves and sales have rocketed, while Mr Bajaj feels many others will start to benefit from a huge increase in government spending. This is specially the case in India, he feels, where the low oil price allows the government considerable additional firepower. India is a large importer of oil and the collapse in the crude price is a huge benefit for the nation.
In terms of recent stock market action, Mr Bajaj believes many investors are trading countries rather than stocks, and this overlooks the fundamentals of individual businesses. For instance, the Trust’s largest holding, Power Grid Corporation of India is a defensive utility business where, in Mr Bajaj’s view, there is very little impact from Coronavirus on earnings. However, the share price has been hugely volatile, reflecting that investors have not been properly discerning between economically sensitive and more resilient companies.
The ‘value’ approach adopted has hampered performance over the past few years, and this has been exacerbated in the recent market sell off. Indeed, the manager points out that currently there is the biggest dispersion between ‘value’ and ‘growth’ stocks for 20 years. Despite this, we believe in the pragmatic process adopted. Mr Bajaj’s mantra “good businesses, good people and good price” and his determination to target resilient businesses that can withstand the economic pause and emerge with strength should help the Trust deliver strong, longer term performance in this higher risk area. It remains part of our Direct Investment Service Preferred List our curated list of investments for new investment in their respective sectors.
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Fidelity Asian Values Trust – opportunity amid volatility?
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