Is Asia a political safe haven?

March 10, 2017

As a long-term investor in Asian equities, I have seen first-hand how policies can influence both capital markets and economies. Therefore, as a portfolio manager, I consistently emphasise maintaining a long-term view and seeking long-term growth.

Asia has favourable demographics, pro-reform governments and an expanding middle class that supports evolving consumption patterns. It is crucial to have a disciplined approach to harness this growth amid an evolving policy environment.

Asia, like other emerging markets, has historically attracted a significant political and corporate governance discount to developed markets, but is this still justified in 2017?

Clearly, the external environment across the developed world has become more uncertain, but what shouldn't be lost among the headlines on Donald Trump and Brexit is the fact that Asia itself has made important steps to promote a more stable economic and political backdrop.

It's encouraging that reform progress is most evident in China and India - the region's largest and most important economies.

In China, the authorities continue to aim for a balance between growth and reform as part of a longstanding objective to transition the economy towards a more sustainable model driven by private consumption and services and less reliant on investment and exports.

Much has been written about the consumption side of this shift - and the Fidelity Asia fund maintains significant exposure to a range of companies that are benefiting from the multi-year growth in demand for goods and services.


However, I've also been encouraged by the recent progress that is being made on tackling longstanding issues in China's old heavy industry sectors.

Many of these areas are dominated by state-owned enterprises (SOEs) and the government's renewed emphasis on this area is starting to create some interesting investment opportunities.

The steel sector is a case in point. For years it has been beset by issues of over-supply, but China has shut down over 50 million tonnes of steel capacity in the last year alone.

This is mirrored by progress at the individual company level, where SOE reforms are helping to better align the interests of management teams with those of minority shareholders.

If we look at Baosteel, for example, it now has to be among the most efficient steel producers globally in order for its management to exercise their stock options.

In practical terms, a greater focus on tackling inefficiencies, controlling costs and boosting profitability is good news for investors and should translate into improved share price performance over time.


India is also in the midst of implementing an ambitious multi-year reform programme under prime minister Narendra Modi.

The government's commitment to implementing much-needed change was reinforced by last month's budget, which contained measures to increase investment in rail and roads along with initiatives to boost rural growth, develop affordable housing and develop the digital economy.

This came hot on the heels of the demonetisation of high value bank notes in November 2016 as the government aimed to formalise India's large unregulated economy and increase the tax base.

The fruit of these measures won't be felt immediately, but they are helping set a strong foundation for the Indian economy to thrive for years to come. In particular, the prospects for consumption growth are immense thanks to India's very favourable demographic profile and rich entrepreneurial spirit.

I experienced this first hand on a recent trip to the country where I saw street coconut traders accepting digital payments via customers mobile phones - this would have been unthinkable even a couple of years ago, and it really highlights the significant strides the Indian economy has made under the Modi government.

While the outlook for the Indian economy is positive, selectivity and prudence remains key at the individual stock level as there are wide dispersions in valuations, earnings prospects and balance sheet quality.

My investment philosophy is to focus on individual companies rather than take a call on market movement. Therefore, well-managed businesses that are underpinned by structural growth prospects that are not yet factored in their valuations levels are ideal candidates for this portfolio.

As in China, I continue to position the portfolio towards Indian holdings that enjoy direct access to the fastest-growing parts of the domestic economy.

Teera Chanpongsang is portfolio manager at Fidelity Asia.

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