This is for investment professionals only and should not be relied upon by private investors.
CONTENTS
The economy of Asia is maturing, changing shape, and bringing home some key functions initially off-shored to the West. It’s also vying for world leadership in a range of emergent technologies – from batteries to biotech – that look like the foundations of our future world. The pandemic seems to be leveraging this process. The parts of Asia that demonstrated well-organised responses to Covid-19 are on a quicker path to recovery than Western economies, marked by a push towards both the online economy and greater sustainability. That recovery builds on established megatrends, notably the rise of the Asian middle class, decades of relatively high growth rates compared to developed economies and continuing favourable demographics in parts of the region. There are clouds on the horizon, particularly in terms of China’s trade relations with the rest of the world. However, continuing tensions with the US are also speeding up aspects of Asia’s maturation, for example, in terms of encouraging Asian firms to raise capital on domestic rather than US stock markets. As the Asian economy matures and finds it voice, investors can benefit from listening to locally based expertise. In this insight series, Fidelity’s Asia-based experts help you explore three vital themes: growing Asian capital markets; Asia innovation trends; and the emerging Asian focus on sustainability and long-term returns.
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Invention
Might innovation and sustainability boost long-term growth?
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1020/32301/SSO/0320
Capitalising on Asia?
INTRODUCTION
CAPITAL MARKETS
The end of the journey West
ARTICLE
Innovation that’s hard to ignore
China’s innovation push – three defining themes
ASIA INNOVATION
Uncovering China’s innovative private companies
The China sustainability paradox – is change on the way?
Is China on a path towards a greener recovery?
SUSTAINABLE INVESTING IN ASIA
THE FUNDS
The Fidelity Asia Ex Japan Funds
OVERVIEW
Sustaining returns in Asia’s new world
Asia’s Age of
Evidence is mounting of a structural shift in terms of Asian businesses raising capital on Asian rather than Western markets. Alibaba Group, which gave Hong Kong the world’s second biggest listing of 2019 despite its New York IPO in 2014, was a super-sized straw in the wind.
Why now? Paras Anand, the main contributor to this section, discusses how the gravitational pull of China’s faster economic growth over the last two decades is being leveraged by more recent positive and negative forces:
Positive market reforms in Hong Kong and Shanghai are lowering hurdles, especially for tech stocks, with Shanghai’s new Star Board for tech start ups already attracting big names
Anand's conclusion – that the great journey West is coming to an end – is important to international investors for two reasons:
China’s two leading stock exchanges - key stats
For example, they need to take into account risks arising from the enthusiasm of China’s retail investors for the recent wave of IPOs, and the continuing evolution of local stock market rules.
They also need to consider the effects of regional corporate governance issues, such as whether managements represent shareholder interests in the face of ownership concentrations.
•
Negative sentiment and proposed legislation in the US is creating a less than hospitable environment for many Chinese listings
The growth of homegrown markets will have an impact on the shape and rate of growth of the Asia economy, e.g. by raising capital for the next generation of tech giants
But international investors will need to shift their mindset to access the full range of public and private Asia investment opportunities effectively
Taking such regional factors into account will be important as investors reweight portfolios – and index providers reweight global indexes – to better reflect Asia’s share of global GDP.
(real GDP, annual % change, IMF June 2020)
World economic outlook projections
That reweighting may accelerate as investors turn away from low-growth post-pandemic developed economies towards the relatively faster recovery, and long-term growth potential, of Asia.
NEW LISTINGS (IPO and NON-IPO)
number of LISTed companies, h1 2020
It already has over 150 companies listed
Number of companies listed (as of October 2020)
2,317
Shanghai Stock Exchange (SSE)
Shenzhen Stock Exchange (SZSE)
Year launched
1990
SSE STAR Board launched in 2019 to cater for science and technology
Source: World Federation of Exchanges, H1 2020 Market Highlights, p.6
Read Paras Anand’s more detailed account of the trend and its key implications.
DISCOVER HIS VIEWS
Justin Harper, China’s Star Market Aims to Take on the Nasdaq, BBC News, 23 July, 2020
Daniel Ren, Chinese Retail Investors’ Bet on IPOs Pays Outsize Dividends, But Analysts Say Bubble Could Burst Without Warning, South China Morning Post, 5 September, 2020
Source: IMF, World Economic Outlook Update, June 2020
1,753
63%
APAC took 63% of global IPO listings in H12020
$400bn
Value of SSE STAR Board
243
Number of China IPOs YTD (Sept 2020)
10,777
Americas
APAC
28,443
EMEA
13,946
Compared with Dec 2019
-0.6%
1.5%
-2%
Market cap
$4.9tn
$3.5tn
Top 10 stock exchanges by market cap
1. New York 2. NASDAQ 3. Tokyo 4. Shanghai 5. Hong Kong 6. Euronext 7. Shenzen 8. London 9. Toronto 10. Bombay
$19.3tn $13.8tn $5.7tn $4.9tn $4.4tn $3.9tn $3.5tn $3.2tn $2.1tn $1.7tn
View sources
SSE: english.sse.com.cn (accessed 23/10/2020)
SZSE: www.szse.cn/English/ (accessed 23/10/2020)
United States
Germany
France
United Kingdom
China
India
2019
2020
2021
2.3
4.2
0.6
6.1
4.5
5.4
7.3
6.3
8.2
6.0
-8.0
-7.8
-12.5
-10.2
1.0
-4.5
10 -8 -6 -4 -2 -0 -2 -4 -6 -8 -10 -12 -14 -
Select A year
1.5
1.4
(1) View source
$400bn - Value of SSE STAR Board
SOURCES
243 - Number of China IPOs YTD (Sept 2020)
X
SOURCE
World Federation of Exchanges, H1 2020 Market Highlights, p.6
Stock exchanges market cap
Number of companies listed
WFE Market Statistics, May 2020
View source
World Federation of Exchanges, H1 2020 Market Highlights, p.5
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Subhead: 25/39 Body copy: 23/37 Source: 20/28 Icon: 18px BOX/Graphs 32/38 Large quote 34/46
For a generation of Chinese tech entrepreneurs, ringing the opening bell on the Nasdaq or New York Stock Exchange was the ultimate sign of success. From the late 1990s and the dawn of China’s online economy, the country’s most innovative start-ups beat a path to US initial public offerings (IPOs), attracted by richer valuations and a smoother listing process than they could usually find at home.
Nowadays, however, some of China’s leading tech and internet firms are opting to stay closer to home, either by relocating their primary listings away from the US or adding a secondary listing in Hong Kong or Shanghai exchanges.
More to follow
We think more companies are likely to follow in the footsteps of e-commerce giant Alibaba Group, which brought the world’s second-biggest listing of 2019 to Hong Kong when it raised US$13bn in a secondary offering. Alibaba had bypassed Hong Kong in favour of New York for its blockbuster 2014 IPO, the world’s second biggest on record at US$25bn, but more recent regulatory changes in Hong Kong made the internet company reconsider. At the same time, US-listed Chinese firms such as China Biologic Products and Bitauto announced plans to go private in a widening trend of delisting.
Water pressure
His third key driver is pressure on infrastructure. In the developed world, infrastructure is aging. “Pipes are getting old, you need to repair them,” he says, or water leaks out.
It’s a striking vision of a water-borne economy. In Lecourt’s world, a T-shirt represents roughly 2,700 litres of water; eating a kilogram more meat demands up to 15,500 litres of water; a cup of coffee is 140 litres of water. This magnification of water demand is becoming even more important as Asian and other emerging economies generate a middle class with new consumer tastes.
Growing global consumption drives waste as well as water management. “95% of everything we buy is likely to become waste within two years: it’s the other side of consumption,” according to Lecourt.
Studies have shown that as GDP increases, the amount of waste per head also increases. And many of the most populous countries in the world, such as China and India, are increasing GDP at a fast rate.
He’s keen on increased recycling as a partial solution but points out that “you still need a company to transport waste, clean it, and do something with it.”
“And approximately 50-60% of global waste is not even properly collected,” Lecourt says, with emerging economies needing to develop waste management approaches as their economy grows. A new generation of water and waste services is about to be born.
The fourth driver is increasing regulation. For example, the European Union is aiming to recycle more municipal waste and packaging, while China is introducing laws to help clean up polluted arable land. “Water and waste regulation is a positive thing,” he says, “because it also helps ensure that investment creates real value and that the consumer can afford it.”
Tougher standards are giving birth to entirely new markets. Lecourt cites a new market in systems for treating the ballast water that stabilises ships as they traverse the globe. The accidental introduction of foreign species when ballast water is discharged has become a major threat to aquatic diversity, so new filtration technologies are being deployed.
Waste side story
His final driver is resource scarcity. “There is a limit to the amount of fresh water in the world,” he says, with various studies showing that a major water gap is developing between existing accessible supplies of fresh water and the amounts drawn off by humans for domestic, industrial and agricultural use.
Meanwhile, the places we can dump waste without processing or recycling it are running out or being regulated away. “We expect the waste market to double or triple in the next decade,” says Lecourt, “as the world stops burying waste in a hole and instead turns it into useful materials and energy.” In addition, he sees particular momentum in the emerging markets, “but you can have great value pockets in very boring European regulated-water stories.”
The key is to be able to compare the risk/return benefits of different water and waste investments around the globe and through time. His 20 years of experience in the sector, combined with Fidelity’s benchmarking approach to global investing, come in handy.
Sustainable stories
Lecourt’s five fundamental growth drivers won’t go away and they underpin an unusual investment story. “Water and waste are a different kind of growth,” he says, “not tech growth but likely to grow nicely, at rates above GDP.”
Both sectors exhibit cyclicality but usually not quite like other industry sectors. “If you have a big market crisis, water and waste investments might well fall, but historically the underlying earnings visibility tends to be very stable.”
That goes back to the fundamental nature of the industry. “In a crisis, people still have showers, go to the toilet and want their bin emptied whether that bin is 30% or 70% full,” says Lecourt.
But with most water and waste companies locally based, can the industry rise to the global scale of the sustainability challenge? “I’m pretty optimistic,” Lecourt says. “Humans are global and our economies are integrated. Making sure our global water, waste water and physical waste is managed in the right way comes back to awareness and behaviour – and those are catching up fast.”
Paras Anand, Chief Investment Officer, Asia Pacific on the increasing number of Chinese firms shifting focus from US to domestic listings – and the implications for investors.
While farming uses most fresh water globally, industrial demand for water has tripled over the last century, and domestic use of water has risen by 600% since 1960.*
*Source: Betsy Otto and Leah Schleifer, Domestic Water Use Grew 600% Over the Past 50 Years, February 10, 2020
The epic migration of Chinese listings looks set to accelerate in the next few years as market reforms in Hong Kong and Shanghai are lowering listing and financing hurdles for tech firms. The gravitational pull has also shifted: China’s economy today is 10 times bigger than it was in the 1990s, while the rise of Asian capital markets provides global investors with access to great investment opportunities outside the US.
More recently, the Trump administration has been pressurising some US government pension funds to pull out of indices that include Chinese shares, while proposed new legislation in Congress could lead to the delisting of foreign companies - predominantly Chinese ones - that don’t comply with US auditing regulations.
THE RAPID growth of china's economy
Star board and Hong Kong account for over one-third of global IPO activity in 2020
Hong Kong also now offers the additional benefit of mutual market access between mainland China and the outside world - through the Stock Connect programme. This has been very successful in boosting capital flows between the exchanges and is expected to gather further momentum as domestic Chinese A-shares are gradually added to major international indices.
It’s all relative
For Chinese firms in the US, rising scrutiny has made overseas listings less attractive on a relative basis in recent years, while trade frictions between the two countries amplify their macro risks. Fraud allegations against Chinese companies such as Luckin Coffee have prompted US regulators to publicly warn of the risks related to investing in Chinese stocks.
While the bill still needs to be passed into law and some sort of agreement between the two countries could still be reached, the likely outcome is that many Chinese companies on US exchanges will seek listings in China. As at August 2020, there were well over 200 Chinese ADRs listed in the US, totalling around US$1tn in market cap. The transfer of some of this paper to Chinese exchanges promises to further deepen liquidity in China’s equity markets.
Hometown push
Hong Kong has recently taken bold steps to allow unprofitable companies and those with dual-class share structures to go public. This has cleared roadblocks for many technology firms that previously could only head for the US. As listing conditions continue to improve, it is likely that private tech firms planning to go public will increasingly prefer to stay in Greater China.
It’s not just internet stocks being lured to Hong Kong. Healthcare IPOs have boomed in the city following the introduction of new rules in 2018, relaxing restrictions on pre-profit and even pre-revenue biotech companies seeking listings. Companies like Innovent Biologics and Cansino Biologics have also successfully raised capital. With new deals flourishing, the Hong Kong stock exchange was the world’s number one bourse by IPO value in both 2018 and 2019.
At the same time, the authorities in mainland China have been highly active in liberalising their markets, particularly in the past five years. Besides the Stock Connect programme, other initiatives include removing quota limits for qualified foreign institutional investors and relaxing equity financing rules for A-share companies.
Regulators also recently launched a new venue known as the Star Board for tech start-ups, with relaxed profit requirements and trading curbs. The new board opened last year in July and while still at an early stage with just over 150 companies listed, it is already attracting high-profile names. For example, Chipmaker SMIC debuted on the exchange in July 2020, while the even larger fintech giant ANT Group recently announced it has begun proceedings for a listing.
Source: SCMP, Datastream, 10 July 2020
Following the fanfare around Star Board’s launch, regulators are preparing to adopt an IPO registration system for Shenzhen’s ChiNext board, an older venue for Chinese tech stocks. If successful, the listing reform could bring a new wave of tech IPOs to Shenzhen.
Challenges remain
A key challenge facing the relisting of many Chinese firms is their so-called VIE or variable-interest entity ownership structure, which was designed decades ago to bypass China’s ban on direct foreign ownership in sectors like technology and education. The structure allows overseas listed vehicles to maintain some control over profit flows and business operations in China through contractual arrangements.
Unwinding VIEs can be slow and costly, but there are signs that listing rules may be easing. China is starting to allow some VIE listings on the Star Board. Red chips - companies incorporated overseas and controlled by Chinese government entities - can now sell shares on the venue even if they have a VIE structure.
Summary
When a door closes, a window opens. We think the great journey West is coming to an end for most Chinese tech firms, whose homeward shift has most likely passed the point of no return. Backed by a vibrant economy, Chinese capital markets have grown tremendously over the last three decades, offering strong liquidity and a solid investor base for companies seeking to list. The returning tech industry leaders, in turn, will add to the diversity and depth of greater China’s markets, as well as their internationalisation. This gives investors a greater mix of options and channels by which they can tap China’s long-term growth story.
US$1tn
Market cap value of Chinese ADRs listed in the US (As at August 2020)
US$13bn
Size of Alibaba Group's secondary offering in 2019 (second largest of that year)
Paras is the Chief Investment Officer, Asia Pacific, at Fidelity International. He is responsible for working across all asset classes to determine regional priorities, catalyse innovation and represent the function to external bodies such as regulators and policy makers. Paras also leads global initiatives such as systematic investment strategies and use of data, analytics and artificial intelligence in the investment process. He also has responsibility globally for ESG, Corporate Finance and Equity Capital Markets. Paras joined the company in 2012 as CIO Equities, Europe with responsibility for all portfolio management services across Fidelity’s European offices. Prior to Fidelity, he managed long-only and alternative investments for a wide range of international clients.
Paras Anand
PARAS' BIO
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Fidelity’s Jenn-Hui Tan, Global Head of Stewardship & Sustainable Investing, alongside Jackie Chien from Fidelity’s capital markets team and senior trader Puja Bharwani discuss the latest developments in Asia’s capital markets. Which factors are having the greatest influence on progress across the region and what are the implications for international investors?
Inside Asia: The evolution of Asia’s capital markets
Find out here
“The rise of Asian capital markets provides global investors with great investment opportunities outside the US”
“Tech firms planning to go public will increasingly prefer to stay in Greater China”
1990s
China’s economy today is 10 times bigger than it was in the 1990s
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01/03
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Paras is the Chief Investment Officer, Asia Pacific, at Fidelity International. He is responsible for working across all asset classes to determine regional priorities, catalyse innovation and represent the function to external bodies such as regulators and policy makers. Paras also leads global initiatives such as systematic investment strategies and use of data, analytics and artificial intelligence in the investment process.
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He also has responsibility globally for ESG, Corporate Finance and Equity Capital Markets. Paras joined the company in 2012 as CIO Equities, Europe with responsibility for all portfolio management services across Fidelity’s European offices. Prior to Fidelity, he managed long-only and alternative investments for a wide range of international clients.
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Rising consumption is driving up water use
Discover the litres of water it takes to produce common consumer goods
Source: Estimates based on Waterfootprint.org; accessed Spring 2020; approximations only
T-shirt
CLOTHING
2,700
Pair of shoes
8,000
Cup of coffee
BEVERAGES
140
250ml of beer
75
Computer
PURCHASES
31,500
Car
144,300
One egg
FOOD
200
1kg of meat
15,500
Only 2.5% of the earth’s water is freshwater, most of it frozen or underground. Lakes, rivers and other accessible surface water form only the tiniest (1%) part of this global freshwater resource
5. Resource & scarcity
Source: National Geographic, Freshwater Crisis
Regulation and standards are tightening all over the world with the EU aiming to recycle 70% of municipal waste, new laws in China to tackle soil pollution, and the global shipping industry investing in ballast water filtration
4. Regulation
Source: Fidelity International, Case study: Waste Side Story – The Other Side of Consumption
UK water pipes leak enough water to fill over 1,200 Olympic swimming pools per day
3. Infrastructure gap
Source: Discover Water
The global middle class is likely to rise from 3 billion in 2015 to well over 5 billion in 2030 – driving up water use and waste generation
2. Consumption growth
Source: Homi Kharas, The Unprecedented Expansion of the Global Middle Class: An Update, 2017, Brookings, p.13-16
68% of global population may live in cities by 2050, requiring new water and waste infrastructure
1. Urbanisation and population growth
Source: UN, World Urbanization Prospects: The 2018 Revision, p.xix
Water & Waste – Five Drivers
Discover why the world needs water and waste investment
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Innovation that’s
“China has been rapidly increasing its innovation capability”
For the last three decades, the West has underestimated Asia’s potential for growth through innovation. It was tempting to think that China, Asia’s powerhouse, would continue to focus on doing things faster and cheaper rather than forging entirely new ideas.
That perception, dented by the success of China’s tech giants, should probably have been thrown out long ago. The degree of innovation lay unremarked partly because a significant amount of Chinese product and process innovation lay hidden under Western brands, for example in the global car industry. It was tempting to dismiss Asian innovation as incremental rather than fundamental, or the by-product of state intervention to protect domestic industries.
We are now entering a phase of Asian innovation that will be harder to ignore, as the Fidelity team make clear in the main article in this section. Covid-19 has rocketed the world towards an online future for services as well as retailing – a future in which innovation is driven by data.
Here the Asian and especially Chinese economies have huge structural advantages. These include very large domestic markets where online consumption is leapfrogging that of more developed economies.
That will give Asia a better development platform and massive data to support innovation in internet retailing, internet services and fundamental tools such as artificial intelligence. But as the Fidelity team make clear, Chinese innovation won’t stay corralled in the technology and e-commerce theme.
The team identify a second leg of environmental innovation. Chinese firms already dominate many industries that underpin the emerging global green economy, including batteries and alternative energy generation. But China’s export success is now combining with a significant push domestically to roll out a greener economy. That will feed the demand for different kinds of environmental innovation and new business solutions.
But the Fidelity team’s third theme is perhaps the most profound: lifestyle innovation. They offer healthcare as their key example but lifestyle-focused business innovations may revolutionise many other sectors such as education and entertainment.
The driver here is the Asian consumer. Asia’s lifestyle innovators are being inspired by an increasingly affluent, assertive, tech savvy generation of consumers who are now keen to adopt local brands and homegrown ideas. Asia is no longer looking west, but the scale and depth of Asian innovation may be about to reverberate around the world.
future tech
Support for manufacturing innovation in state programs such as ‘Made in China 2025’ is being augmented by the ‘China Standards 2035 Plan’. Still being formulated(1), this will help China write global industry rules for next-gen tech like:
Read Fidelity's VIEW to find out
So how might China’s new infrastructure of innovation shape investment opportunities?
China’s heritage of invention helped create our world – hover over the items for details
Is China Re-inventing Innovation?
Paper money (before 11th century)
Compasses (3rd century AD)
China's World Economic Forum ranking for global competitiveness (28th out of 141 nations)…
Now China is building a new infrastructure of innovation
28
/ 141
... is powered by both ICT adoption
18
24
...and innovation capability
WEF
China’s innovation is supported by 3 pillars
Scientific publications and research institutions
China publishes more AI papers than the US
And may beat the US in ‘most-cited 1% of AI papers’ by 2025 (see graph)
Patent applications
R&D expenditure
US
01 / 02
$610bn
$564bn
Many developed economies are on a level trend...
hard to ignore
Source: WEF, The Global Competitiveness Report 2019, Pages 15 & 154
Source: Field Cady and Oren Etzioni, China May Overtake US in AI Research, March 2019
Source: WIPO Facts and Figures, March 2020
Source: Paul Heney, R&D World, Global Investments Unabated in Spending Growth, March 2020
Source: OECD (2020), Gross domestic spending on R&D (Accessed on 24 September 2020)
Explore our infographic below and then choose one of the Fidelity team’s articles to read.
Or read Dale Nicholls' insight into uncovering China’s innovative unlisted companies
China has nearly 20,000 AI scientists and engineers Adoption of AI by firms in many sectors is strong in China compared to EU and US
artificial intelligence
China IoT connections to double to 8 billion by 2025 Key driver: Enterprise IOT, e.g. smart manufacturing and smart building
China’s world-leading 5G subscription numbers are soaring, despite Covid-19 In 2020, 70% of global 5G connections will be from China
5G
Internet of things
GSMA, The Mobile Economy: China 2020, p.13
“For the last three decades, the West has underestimated Asia’s potential for growth through innovation”
share of top 1% of AI papers
China hugely leads the world in patent applications
China is vying with the US for top gross R&D spend, according to forecasts for 2020
02 / 02
But the story of R&D as a proportion of GDP over the last few decades is more telling
Gross domestic spending on R&D
Total, % of GDP, 2000 – 2018
...from a low start, China now beats the EU/UK and is closing the gap with the US...
...while South Korea has soared to become the leading large nation
In 2019, China also took the lead in terms of international Patent Cooperation Treaty (PCT) filings
Japan
Korea
top 5 biggest users of the pct system
58,990
2018 vs 2019
10.6%
57,840
2.8%
52,660
5.9%
19,353
2.0%
19,085
12.8%
which ip offices receive the most patent applications?
Of 3,326,300 applications around the world, 1,542,002 of them came from China
(1) Arjun Kharpal, Power is ‘Up for Grabs’: Behind China’s Plan to Shape the Future of Next-Generation Tech, April 26, 2020, CNBC
Chinese abacus (500 BC)
Silk (c.3000 BC)
Movable type printing (1000 AD)
Gunpowder (c.1000 AD)
Porcelain* (c.13th century AD)
Innoculation (small pox) (c. 16th century AD)
*Footnote: High quality, hard paste porcelain
Various sources, including China’s Age of Invention, interview with Robin Yates, Professor of History and East Asian Studies
Shara Tibken, Covid-19 Isn’t Slowing Down the 5G Rollout – At Least Not in China, CNet, quoting Ericsson report, June 2020
5G subscription numbers are soaring
GSMA, The Mobile Economy: China 2020, p.12
Global 5G connections
Sarah O’Meara, Will China Lead the World in AI by 2030, 21 August 2019
20,000 AI scientists
Daniel Castro et al., Who is Winning the AI Race: China, the EU or the United States?, Center for Data Innovation, August 2019
Adoption of AI is strong
China and Korea are joint first place for digital communications patents
TAP AN IMAGE TO VIEW EXAMPLE
And may beat the US in ‘most-cited 1% of AI papers’ by 2025
(28th out of 141 nations)…
China's World Economic Forum ranking for global competitiveness
03 / 03
02 / 03
01 / 03
China’s heritage of invention helped create our world – tap the items for details
Innovation that's hard to ignore
We are living in a golden age of innovation and the pace of change is intensifying. For example, it took 70 years for the washing machine to reach full penetration, 20 years for colour television but only five years for social media. We expect the next innovation waves to drive exponential growth in companies that develop, enable and adopt these disruptive forces.
From a geographical perspective, China is at the forefront of the next wave of innovation, partly due to its significant structural advantages. As the so-called godfather of Artificial Intelligence Kai-Fu Lee once said, “Data is the new oil, and China is the new Saudi Arabia”.
Conclusion
China is a fertile ground for innovation and its huge market provides companies with the potential to quickly scale up successful innovation. Although the types of innovations will evolve over time, we believe the innovation theme and China’s leadership is perpetual in nature.
Data creation, access and analysis are paramount to the development of the next generation of innovations. China has created more data than any other country and continues to outgrow global data growth. Additionally, the country is uniquely positioned at the crossroads of innovations - both as a source and a destination for the most innovative companies.
Historically viewed as an imitator, China is leading the next wave of global innovation and investment opportunity.
Domestically, government policy and regulations have long been supportive of innovation, an effect that is now materialising. As such, we believe China’s structural advantages make it a fertile ground to develop innovative products and services.
This in turn will have significant implications for the shape of future returns from Chinese equity markets. Indeed, from an investment perspective, we have identified technology, environmental and lifestyle innovation as the three key themes that will be significant drivers of change and growth for at least the next few decades.
Waves of Innovation drive growth in productivity, population and economy
THREE THEMES DRIVING INNOVATION IN THE NEXT DECADE
Select a theme to view
Innovation
1785
1845
1900
1950
2030
2nd wave
3rd wave
1st wave
4th wave
5th wave
6th wave
Industrial revolution
Heavy enginering
Automobiles Mass production
Information technology Telecoms
Sustainability Digital revolution
Iron Water power Mechanisation Textiles Commerce
Steam power Railroad Steel Cotton
Electricity Chemicals
Petrochemicals Electronics Aviation Space
Digital networks Biotechnology Software
Artificial intelligence
Innovation is not confined to the technology sector but is increasingly encompassing areas such as lifestyle and environmental. Through our fundamental bottom-up research and local insight, we can invest in the leading areas and companies that offer “innovations by China and innovations for China”.
Source: oxfordre.com
view the insight
It wasn’t long ago that China was regarded as an imitator rather than an innovator. But now the world is waking up to its prowess. Fidelity’s Head of Equities, Ned Salter, technology analyst Tina Tian and healthcare analyst Yuanlin Lang discuss China’s drive to tech self-sufficiency and the opportunities that this is creating across different sectors.
Inside Asia: Can China succeed in climbing the value chain?
Internal combustion engine
Renewable energy Green technology Big data analysis Biomimicry
Industrial internet of things
Cloud computing
China’s diverse listed universe remains the primary vehicle for investors looking to access China’s long-term growth story, there is an increasingly significant opportunity set among its vibrant and diverse unlisted companies.
With companies generally coming to market later, there’s a huge amount of activity in the pre-initial public offering (IPO) stage in China.
Dale Nicholls of Fidelity China Special Situations PLC tells why he is using the trust’s closed-ended structure to invest in China’s vibrant unlisted sector
The unlisted sector is less well-known, and therefore more mis-priced, offering greater potential upside for investments. Over the years, the unlisted space in China has deepened, and while still not as developed as in Western markets, it does offer plenty of interesting opportunities for the patient, long-term investor.
The trust has been investing in China’s unlisted companies since it was launched in 2010 and has the ability to invest up to 10% in this space. For example, we were early investors in online e-commerce company Alibaba, which we had held as an unlisted holding for nearly three years before its record-breaking US$25 billion IPO in 2014.
When we analyse any company, we look at three main areas: its ability to generate consistent and high returns over time, the potential for future growth and the strength of its management team. To help us find the best ideas, we have research teams on the ground in Shanghai and Hong Kong. This extensive research capability helps us to identify ideas which haven’t been discovered or are not so well understood by the market.
Investing in the future of China
Our analysts focus on companies that are most likely to benefit from China’s growth and changing economy. For example, China is home to the largest online community in the world, and its internet population is expected to grow to 1.14 billion by 2025 from around 883 million in 2019.(1)
A key holding in the portfolio is ByteDance, an internet technology company with core domestic Chinese products being its content platform Toutiao and its video-sharing social networking service Douyin. It also currently owns the more globally popular social media app TikTok, although their domestic business remains the key driver of earnings growth. From a market capitalisation perspective, the company has the potential to become one of our biggest holdings. When it does come to the market, we expect ByteDance to be valued north of US$100 billion.
The company has been able to successfully monetise its business with significant online advertising revenues in China. The management has also done a remarkable job of growing the business and the brand globally.
Other holdings include Didi, the ride hailing app, which after its takeover of Uber in China, has over 90% market share. While the company is benefitting from its market dominance, it is also profitable. Of course, there has been a significant drop in traffic due to the coronavirus pandemic, but business is coming back quite strongly as economic activity normalises. Indeed, across China, we continue to observe a slow and steady pick-up in overall activity which suggests that the world’s second largest economy is benefiting from being “first in and first out” of the pandemic.
We also have a holding in DJI, the leading consumer drone manufacturer which accounts for over 70% of the world’s drone market. With commercial use expected to rise significantly, the company is expected to see strong growth in areas such as agriculture, construction and even movie production.
Pony.ai, the autonomous vehicle start-up based in Silicon Valley and China is another investment. Earlier this year, Pony.ai and Toyota announced a pilot program to test self-driving cars on public roads in two Chinese cities - Beijing and Shanghai. While Toyota has invested US$400 million into the company, the company also has a strategic relationship with Hyundai.
Pony.ai has a stellar management team and is a technology leader. To put its business into perspective, there are five leading players globally in this nascent industry, with limited opportunity for newcomers given high capital requirements and advanced technological progress already achieved by the incumbents. Having taken test rides in its cars several times, I can say they compare quite favourably versus human drivers.
Opportunities beyond tech
Besides the technology space, we see opportunities in the consumer space and healthcare where there is a huge amount of entrepreneurial activity, as well as significant research and development that has the potential to reap rewards in the future.
More generally, we remain firm believers in China’s long-term structural growth story and are focused on identifying companies - across both public and private markets - that are best placed to benefit from a growing middle class and the shift towards a more consumption driven economy.
With our in-depth bottom up fundamental analysis, we are uniquely placed to identify - very early on - the many opportunities available among mis-priced companies that offer direct exposure to China’s long-term growth story - in effect: tomorrow’s winners.
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. Fidelity China Special Situations 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. Investments in small and emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas 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. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1020/32301/SSO/0320
1.14bn
China's estimated internet population by 2025 (from around 883 million in 2019)
Tiktok - Photo by Obi Onyeador on Unsplash Cab - Photo by Andrea Piacquadio from Pexels Done -Photo by Jared Brashier on Unsplash
DALE'S BIO
Dale Nicholls
Dale joined Fidelity in 1996 as a Research Associate in our Tokyo office. In 2003, he was promoted to portfolio manager of the Fidelity Pacific Fund and retains management of that fund today, alongside Fidelity China Special Situations PLC. Prior to joining Fidelity, Dale worked at Bankers Trust Asia Securities in Tokyo and as a Market/Business Analyst at Sony Corporation, also in Tokyo. He graduated from the Queensland University of Technology in Australia.
benefit from their views
In this virtual event recording, Fidelity China Special Situations PLC portfolio manager Dale Nicholls debates the role of China and the rest of Asia in the new global economic order. Dale is joined by Dr Keyu Jin from the LSE to shine a spotlight on US-China tensions, while Fan Bao, Chairman and CEO of investment bank China Renaissance Group, provides a unique insight into China’s new economy.
Inside Asia: The future of Asia
“With companies generally coming to market later, there’s a huge amount of activity in the pre-IPO stage in China”
“We remain firm believers in China’s long-term structural growth story”
www.statista.com
DALES' BIO
(1) www.statista.com
The China sustainability paradox
The paradox:
Click to explore
china is leading the world in green transport and renewables technology
this September, President Xi Jinping called for:
In late September, China’s President Xi Jinping called for a global green recovery, announcing that China aimed to achieve peak CO2 emissions before 2030 and – this was the real news – carbon neutrality by 2060, the first time China has set such a target.(1)
The statements caused surprise, with commentators wondering if they were an attempt to contrast China with the US’s position on climate change under President Trump.
China’s position on green issues is indeed somewhat paradoxical. As we explore in our infographic, China is both the world’s biggest polluter and critical to global sustainability as a developer and manufacturer of green technologies. It is a major financier of coal-fired power plants(2) but has also spent years investing in greener forms of transport, such as its vast network of high speed trains and newer ideas such as ‘trackless trams.’(3)
In the initial aftermath of the Covid-19 crisis, China’s financial and medical stability came first, to the extent that environmental groups worried that climate initiatives were being sidelined. In the first paper in this section, Fidelity’s Paras Anand notes that China’s government advisers are now recommending an increase in the proportion of green projects – and that the State Council of China has pledged to support a ‘green silk road’.
That renewed green focus should lead to investment opportunities in relation to new technologies and the rolling out of a more environmentally friendly Asian economy. But it also points to a shift in corporate attitudes, explored in this section’s second Fidelity paper in terms of how Asian companies are leveraging the Covid-19 crisis to improve long-term value propositions.
(1) Matt McGrath, Climate Change: China aims for ‘carbon neutrality by 2060
(3) Sebastian Ibold, Are Chinese Trackless Trams the Best New Thing to Hit the Road in Your City, March 2020
(2) For example, see Lauri Myllyvirta et al., Will China Build Hundreds of New Coal Plants in the 2020s?, March 2020
Explore investor implications with Paras Anand
Dhananjay Phadnis on Asia's new sustainability focus
Global green recovery now
China peak emissions – before 2030
China carbon neutrality – before 2060
Paras Anand, CIO Asia Pacific, Fidelity International
Explore our infographic below and then read the Fidelity team’s views.
“A convergence of factors – government action, global investor advocacy and corporate commitment – is sowing seeds of hope for a green bloom in China”
China emits more of the world’s CO2 than any other country...
...And continues to build and finance coal capacity...
...But China is critical to global renewables growth
N. America Middle East Other Asia China Lat. America Africa Europe Russia India
Source: S&P Global Platts Analytics, Market Intelligence World Electric Power Plant database, April 2020
TOTAL coal capacity in construction by major region
0
10
20
30
40
(GW)
Source: Union of Concerned Scientists, updated August 2020
Renewable electricity capacity additions, 2007-2021
Source: iea.org, last updated June 2020
Matt McGrath, Climate Change: China aims for ‘carbon neutrality by 2060’
221 Gigawatts (GW)
2.1 million 1.06 million 560,000 326,000
World: China: Europe: US:
With more high-speed rail track – 25-30,000 kilometres – than any other country(4)
5
China’s transport is increasingly green and innovative
Compared capacities: US: 96.4GW Germany: 59.3GW
China leads the world(1) in installed wind energy with:
Global electric car sales (2019)
It has the largest market for electric cars with nearly half (47%) of the world’s electric cars are on its roads(5)
Currently, 4 out of 5 of all solar modules installed globally are Chinese made(2)
China is central to the manufacture of green technologies
China has 77% of global lithium cell manufacturing capacity(3)
(3) China Dominates the Lithium-ion Battery Supply Chain, but Europe is on the Rise, BloombergNEF, September 16, 2020
(2) Charlie Campbell, How China Floated to the Top in Solar, Time
(1) Jack Unwin, The Top 10 Countries in the World by Wind Energy Capacity, 14 March 2019
(5) IEA, Electric Vehicles, June 2020
(4) World Bank, China’s High-Speed Rail Development, 2019, p.1
Tap to explore and swipe right for more
+
From a careful reading of government policy, corporate commitments and investor pressure on ESG issues, there are signs that China’s recovery from its Covid-19 ordeal may be significantly greener than its rebound from the global financial crisis a decade ago. We are optimistic that China will seize the opportunity to move towards more environmentally-friendly growth than in the past, whilst seeking to repair social and economic dislocations.
However, pressure is growing from corporations, financial markets, consumers, NGOs, think tanks, academics and economic planners to include green considerations in the economic rebound. Government advisers are recommending an increase in the proportion of green projects, such as sustainable buildings and renewable technology, within government-funded initiatives to create infrastructure, which will lock in environmental impact for decades. The State Council of China has pledged to support a “green silk road” with high environmental standards for projects within its international Belt and Road strategy. There is also momentum to mandate minimum green credentials for projects not explicitly labelled as green.
Another example is the rollout of electric vehicle subsidies for car dealers in some cities. ESG disclosure too is an important piece of the puzzle. Many had expected that 2020 could be the year in which disclosure of ESG factors by listed companies and primary bond market issuers would be made mandatory. Such a move would allow global investors to assess more accurately how green Chinese companies are.
Greater disclosure requirements could now be delayed due to the coronavirus, but there are reasons to believe that China’s commitment to greater transparency and stricter environmental enforcement will continue to grow. Its environment ministry is today invested with much greater authority than before.
Paradoxically, China is the world’s biggest emitter of greenhouse gases and its biggest producer of renewable energy – here, Paras Anand explores which side of the environmental divide China might favour as it recovers from Covid-19
Rebounding with some green characteristics
Like other countries, China’s priorities are first to look after the health and welfare of its people and then to revive its economy, even as Covid-19 continues to resurface with a new outbreak in Beijing. China’s economy shrank 6.8 per cent(1) in the first quarter and the government has pledged significant investment in infrastructure and other projects in order to jumpstart its faltering industrial machine.
China green bond sales in recent years
Source: Climate Bond Initiative, Fidelity International, August 2020.
The private sector steps up
The corporate sector is also engaging in China’s recovery with innovation and an evolving ESG consciousness that could ultimately bear fruit in greener industries. Chinese companies already operate in a society where their social value is important. But now, more large investors such as insurance giant Ping An are signing up to the UN’s Principles of Responsible Investing (to which Fidelity is also a signatory), and building in-house ESG teams and their own ratings system as more clients worry about the environment, food safety and pollution.
Positive change through policy
Policy action gives further cause for optimism that China will gradually take more of a global leadership role on climate. One example is the People’s Bank of China’s decision to exclude “clean coal” (projects that make fossil fuel use more efficient) from its list of projects eligible for green bonds. This aligns China more closely with international standards, though it has yet to set carbon emissions thresholds for issuers. Nonetheless, green bond sales rebounded strongly from the March sell-off, demonstrating renewed appetite for this kind of financing, which has been growing in popularity since 2015.
Meanwhile, tech giants such as Alibaba and Baidu(2) are deploying AI acumen to develop Covid-19 diagnosis and analysis tools, and making the technology available to researchers. Many other Chinese companies have acted to benefit society in the wake of the disease, and one example of stakeholder engagement comes from a ride-hailing platform. The firm has looked after its drivers by setting up hundreds of disinfecting stations during the pandemic, giving them two free masks per day and offering financial relief.
This kind of corporate social responsibility will be a force for change. Even though the contours of a post-Covid-19 world as yet remain undefined, a convergence of factors – from government action to global investor advocacy and a new corporate commitment to business-for-good – is sowing the seeds of hope for a green bloom in China that may be felt far beyond its borders.
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. A focus on securities of companies which maintain strong environmental, social and governance (ESG) credentials may result in a return that at times compares unfavourably to the broader market. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1020/32301/SSO/0320
“Pressure is growing to include green considerations in the rebound”
view their insight here
How does Asia measure up in a new world where greater emphasis is being placed on social good? Flora Wang, a director in Fidelity’s sustainable investing team, and analysts Minlin Lee and Nan Sheng review how sustainability factors are moving up the corporate agenda in Asia and outline how we engage with companies to improve practices and investment outcomes.
Inside Asia: Establishing a more sustainable Asian investment
china's belt and road initiative
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Jan - Jul
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(1) washingtonpost.com
The Covid-19 crisis has provided Asian companies with a unique opportunity to look beyond the narrow focus of how to meet this year’s financial targets. As a long-term investor, I’ve been encouraged that an increasing number of companies are clearly using this crisis as an opportunity to protect and enhance the long-term value of their businesses. This is in sharp contrast to the market’s traditional focus on short-term earnings.
Author Alex Edmans, in his book titled ‘Grow the Pie: How Great Companies Deliver Both Purpose and Profits’, argued that companies that adopt a pie-growing mindset - aiming to improve value for all stakeholders rather than putting one ahead at the expense of the other - will be the companies that can deliver sustained value creation.
In that sense, while it may seem like shareholders have been at the receiving end of the crisis-related pain through earnings cuts, lower dividends and reduced share buybacks, the reality could be that many companies will be able to enhance stakeholder value by cushioning the impact for at least some of them during this crisis.
At a company level, we’ve seen several examples of this long-term approach over recent months:
Fidelity Emerging Asia Fund’s Dhananjay Phadnis says a focus on sustainability could help identify Asia’s long-term winners.
Mapping the transformation on-the-ground
We have been able to map this transformation of corporate purpose through a post-crisis survey of more than 140 of our analysts worldwide. Over half of the responses indicated an increase in company plans to step up focus on workers, consumers and the wider community as a result of the pandemic. Notably, for our analysts based in Asia this figure was over 60%.
Fidelity Analyst Survey - how will the Covid-19 crisis affect your companies' approach to social issues?
Source: Fidelity International, May 2020. Note: The survey was conducted between 6-11 May and featured 205 responses from 145 analysts around the globe (analysts who cover more than one sector or region take the survey more than once).
Sportswear
One of the significant benefits of purpose-driven companies is that they attract motivated talent. A great example is Indian pharma company Cipla which embeds affordable drugs in its mission and has consistently demonstrated its care for lower income groups. Cipla’s employees voluntarily contributed US$400,000 to add to the company’s own virus- related donations. Companies that will make a genuine effort to help the community should benefit from a motivated and purpose-aligned workforce.
Five questions for sustaining long-term returns
As we move beyond Covid-19 and the near-term winners and losers, the challenge for investors is to a maintain longer-term view and assess the extent to which the future prospects for individual stocks and sectors is already priced into markets. To do this, one must consider the following five questions:
Differentiating between the trends that will persist and those that fade offers investors the potential for a significant differential in future investment outcomes. By keeping our focus on sustainability and extending our investment horizon, we believe we can identify companies that can create long-term value for both their shareholders and stakeholders.
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Emerging Asia Fund 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. The fund has the potential of having high volatility either due to its composition or portfolio management techniques. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (ESG) credentials may result in a return that at times compares unfavourably to the broader market. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1020/32301/SSO/0320
Dhananjay joined Fidelity in 2004 as an Investment Analyst. In 2008 he became portfolio manager of the Fidelity Indonesia Fund and was later appointed Director of Research in Hong Kong in 2009. Dhananjay took over portfolio management responsibilities for the Fidelity Emerging Asia Fund in November 2013. He has also managed the Luxembourg-domiciled Fidelity Asia Focus Fund since March 2015. He graduated from Pune University in India and holds a Post Graduate Diploma in Management (Finance) from the Indian Institute of Management. He is a CFA Charterholder and an Associate of the Institute of Chartered Accountants of India.
Dhananjay Phadnis
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Chinese sportswear companies Anta and Li Ning implemented a series of initiatives, including buying back inventory from distributors, providing subsidies, cutting/delaying future shipments and extending credit terms to save distributors from a severe profit and liquidity squeeze. But more importantly, it protects the brands from excessive discounting thereby sustaining the franchise value over the long-term.
Healthcare
China Mengniu
Banks have been in the eye of the storm given many of their borrowers have seen a significant disruption to cash flows. In Indonesia and India, the government and central bank moved to offer assistance to help banks extend credit to borrowers via interest rate subsidies or loan guarantees. Several banks such as Bank Rakyat in Indonesia have been proactively restructuring loans, while in India the central bank has ensured loan moratoriums for several types of borrowers.
Banks
This will almost certainly hurt near-term earnings via margin compression and potentially increase credit costs and non-performing loans. However, by helping their borrowers survive and by enhancing customer loyalty during difficult times, many of these well-capitalised banks will likely see their long-term value rise.
China Mengniu plans to convert this raw milk to milk powder to store up as inventory for future use. While this will affect the margins in the near-term, it will protect the supply chain and enhance the sustainability of their business over the long-term.
Leading Chinese dairy products producer China Mengniu kept its commitment to buy milk from dairy farms and honoured its procurement obligations through the crisis. It even provided zero-interest funding to help farms with temporary liquidity pressure. Not only will this help farmers survive, but it will also help save a lot of raw milk from going to waste.
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Companies are waking up to the financial and reputational risks of alienating their broader stakeholders. With the bottom line seemingly no longer the top priority that it once was, many are now recognising that a focus on employee wellbeing will help them survive and thrive in the long run. So the way that we analyse companies and choose to invest must evolve too. Join our experts, including Dhananjay Phadnis, as we shine a light on the unstoppable ascent of sustainable investing and debate the role we can all play in shaping a more sustainable future.
Investing in a sustainable future
New CPD accredited virtual event: 11 November
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“Will a pie growing mindset help deliver sustained value creation?”
Will people continue to devote as much time to playing online games? Will as many people still want to work from home? The answer probably lies somewhere between the pre-Covid and mid-Covid levels of activity.
Will current behavioural patterns persist a year from now?
1
2
Are the company’s actions leading to higher operational robustness and improved customer and employee loyalty? In the examples of Mengniu, Anta and many of the banks, we saw that they are investing in the sustainable growth of their businesses via cushioning the near-term impact for their stakeholders. As a result, these businesses will have made their business models even more sustainable in the long-term.
Will the short-term earnings hit actually lead to an increase in long term value of a business?
3
Most large companies have done the right thing by postponing any staff-related cost rationalisation in the midst of this crisis. But what happens once the dust settles? Companies, big and small, will need to review their operating models. In some cases, this will mean a faster move towards automation (driven by hygiene as well as cost imperatives), while in the case of others this will mean jettisoning parts of the portfolio to protect the core.
What does the business structure look like in the medium to longer-term?
4
We have seen many companies boost earnings per share (EPS) through a massive levering up of the balance sheet with low cost debt to pursue buybacks and thereby enhancing the company’s EPS growth rates. Many others have also reduced the level of investments, helping their stock valuations. Going forward, the market is likely to place a discount on this form of earnings enhancement which makes the business less sustainable by taking on excessive debt or by risking their future due to under-investment.
What is the real earnings power of a business?
Governments across the world have pulled out all the stops to protect their economies during this crisis via a combination of fiscal and monetary measures. As and when the intensity of this crisis reduces, several sectors will be at risk from government intervention. For instance: state-owned banks may be forced to forgive loans, while drug companies could come under pressure to make their drugs more affordable. It is also likely we see higher tax levels for several sectors and groups of citizens which could alter the long-term value of the business.
What is the level of government interference in the business going forward?
Dhananjay'S BIO
Dhananjay joined Fidelity in 2004 as an Investment Analyst. In 2008 he became portfolio manager of the Fidelity Indonesia Fund and was later appointed Director of Research in Hong Kong in 2009. Dhananjay took over portfolio management responsibilities for the Fidelity Emerging Asia Fund in November 2013. He has also managed the Luxembourg-domiciled Fidelity Asia Focus Fund since March 2015.
He graduated from Pune University in India and holds a Post Graduate Diploma in Management (Finance) from the Indian Institute of Management. He is a CFA Charterholder and an Associate of the Institute of Chartered Accountants of India.
Chinese sportswear companies Anta and Li Ning implemented a series of initiatives, including buying back inventory from distributors, providing subsidies, cutting/ delaying future shipments and extending credit terms to save distributors from a severe profit and liquidity squeeze. But more importantly, it protects the brands from excessive discounting thereby sustaining the franchise value over the long-term.
The Funds
Past performance is not a reliable indicator of future returns. The value of investments can go down as well as up and you may not get back the amount invested. The Fidelity funds featured invest in overseas markets which means their value can be affected by changes in currency exchange rates. The funds may also use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. They invest in emerging markets which can be more volatile than other more developed markets. The shares in Fidelity investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. They can gain additional exposure to the market, known as gearing, potentially increasing volatility. They invest in emerging markets which can be more volatile than other more developed markets. They also invest 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. Investments in Fidelity funds should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1020/32301/SSO/0320
Past performance is not a reliable indicator of future returns. Morningstar as at 30 September 2020, bid-bid, net income reinvested. ©2020 Morningstar Inc. All rights reserved. All ratings as at 30 June 2020.
Discrete five year period performance overview
We currently manage more than £55.9bn of AUM in Asia Pacific ex Japan(1)
Seven strategies unique in style and composition to provide differentiated regional exposure
We currently actively cover 951 companies in the Asia Pacific ex Japan region(1)
Explore our broad range of Asia equity strategies
Our Asian equities range offers different and distinct ways of accessing this exciting region. All funds in the range benefit from the insight of Fidelity’s 122 Asia based investment professionals.(1) Each portfolio takes an active, bottom-up approach which maximises our research-led philosophy and seeks to deliver returns for your clients.
Source: Fidelity International as at 30 September 2020. Assets quoted include Assets under Administration. Investment professionals includes both analysts and associates.
Fidelity Asia Pacific Opportunities Fund
Fidelity Emerging Asia Fund
Fidelity China Consumer Fund
Fidelity Asian Dividend Fund
Fidelity China Special Situations PLC
Fidelity Asian Values PLC
Fund RATINGs
Launch date
13/10/1984
Fund AUM
£3,548m
Holdings
80-100
Comparative index
MSCI AC Asia ex Japan
Fund details
A core fund of quality well-run companies that are positioned to benefit from ongoing structural change and reforms across the region. Teera adopts a disciplined investment process to identify stocks trading below their intrinsic value. He looks for companies where improving fundamentals are not reflected in the price, or where the growth potential is not fully understood. He also favours restructuring and turnaround opportunities, as well as cyclical turns in certain industries to find overlooked potential.
• • •
Managed by Teera Chanpongsang since 1 January 2014
Fidelity Asia Fund
China Consumer Fund
Asia Pacific Opportunities Fund
Asia Fund
Emerging Asia Fund
China Special Situations PLC
Asian Dividend Fund
Asian Values PLC
Fidelity's FUNDS AND investment trusts
24/09/2014
£872m
25-35
MSCI AC Asia Pacific ex Japan
A high conviction stockpicking approach which brings together the region’s best investment ideas in a concentrated portfolio. Anthony looks for three key characteristics in a stock: weak sentiment and low valuations, where fundamentals are strong and improving relative to consensus expectations. If a stock ticks all three boxes – and liquidity is ample and correlation with other holdings low – he is willing to take a significant active position.
Managed by Anthony Srom since 24 September 2014
11/07/2011
£89m
60-90
MSCI Emerging Markets Asia
Focused exposure to Asia’s true emerging economies such as ASEAN, China and India through a portfolio of high-quality growth stocks. A key characteristic of Dhananjay’s focus is moat stocks. In this approach he looks for companies with sustainable growth prospects with the ability to reinvest at attractive rates. Dhananjay favours industry consolidators with improving returns and is cautious on stocks with high regulatory risk.
Managed by Dhananjay Phadnis since 1 November 2013
Fund RATING
14/09/2011
£278m
30-50
MSCI Golden Dragon Custom Consumer Index
Investing in companies related to what China consumers buy and the way they consume; trends underpinned by the long-term structural drivers of China’s growing middle class, rising income, increasing urbanisation and technological innovation. Hyomi looks for solid cash generative businesses based on bottom-up research and value-chain analysis, as well as looking for incremental change that will drive an improvement in a company’s earnings. The portfolio exhibits a structural growth bias and will tend to be more expensive than the broader China market as growth, and especially certainty of growth, comes at a premium.
Managed by Hyomi Jie since 1 August 2017
19/08/2013
£75m
MSCI AC Asia Pacific ex Japan High Dividend Yield
An unconstrained approach which aims to deliver a dividend focused total return with an emphasis on capital preservation. Jochen looks for companies with a good track record of capital allocation and an attractive yield struck off a dividend that will be well-supported throughout a range of economic scenarios. Combining characteristics like strong balance sheets and predictable cash flows with a strict valuation discipline also has the potential to provide strong relative downside protection.
Managed by Jochen Breuer since 1 October 2016
19/04/2010
£1,813m
120-160
MSCI China
Investing in the key beneficiaries of China’s new growth drivers, fully utilising the enhanced investment powers of the trust’s closed-end structure. Dale seeks out solid cash generative businesses with good long-term prospects which may not be well understood by the market, and are therefore not reflected in valuations. He also focuses on smaller companies as these tend to be less well researched and, therefore, more often mispriced.
Managed by Dale Nicholls since 1 April 2014
13/06/1996
£282m
120-200
MSCI AC Asia ex Japan Small Cap
Nitin is a value investor who prefers to invest in underappreciated small and medium sized companies with an emphasis on downside protection. His investment decisions are based on rigorous fundamental analysis, with a bottom-up stock selection approach making use of Fidelity’s proprietary research resources. Investing across a large and diverse universe of over 17,000 listed stocks to find Asia’s smaller companies that have the potential to turn into the winners of tomorrow.
Managed by Nitin Bajaj since 1 April 2015
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W-ACC-GBP
FUND FACTSHEET
W-INC-GBP / W-ACC-GBP
FUND FACTSHEETS
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12 month rolling returns %
Fidelity Asian Values PLC share price
.........................................................................................................................................................................................................................................................................................................................
12.4
-7.0
Sep 19 - Sep 20
2.2
5.6
Sep 18 - Sep 19
4.4
1.1
Sep 17 - Sep 18
18.8
11.7
Sep 16 - Sep 17
36.3
49.5
Sep 15 - Sep 16
His investment decisions are based on rigorous fundamental analysis, with a bottom-up stock selection approach making use of Fidelity’s proprietary research resources. Investing across a large and diverse universe of over 17,000 listed stocks to find Asia’s smaller companies that have the potential to turn into the winners of tomorrow.
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Nitin is a value investor who prefers to invest in underappreciated small and medium sized companies with an emphasis on downside protection.
Fidelity China Special Situations PLC share price
27.3
51.2
1.7
-2.0
-1.8
28.8
21.6
31.7
50.3
Dale seeks out solid cash generative businesses with good long-term prospects which may not be well understood by the market, and are therefore not reflected in valuations. He also focuses on smaller companies as these tend to be less well researched and, therefore, more often mispriced.
Investing in the key beneficiaries of China’s new growth drivers, fully utilising the enhanced investment powers of the trust’s closed-end structure.
FUND FACTSHEETs:
W-INC-GBP W-ACC-GBP
Peer group: IA Asia Pacific ex Japan
8.1
-10.6
-8.8
5.8
2.6
11.5
3.7
13.9
15.6
16.5
10.4
37.3
37.2
40.1
Jochen looks for companies with a good track record of capital allocation and an attractive yield struck off a dividend that will be well-supported throughout a range of economic scenarios. Combining characteristics like strong balance sheets and predictable cash flows with a strict valuation discipline also has the potential to provide strong relative downside protection.
An unconstrained approach which aims to deliver a dividend focused total return with an emphasis on capital preservation.
FUND FACTSHEET: W-ACC-GBP
Peer group: IA China / Greater China
26.1
24.7
25.6
4.8
0.7
10.7
2.8
23.7
25.2
34.1
38.0
Hyomi looks for solid cash generative businesses based on bottom-up research and value-chain analysis, as well as looking for incremental change that will drive an improvement in a company’s earnings. The portfolio exhibits a structural growth bias and will tend to be more expensive than the broader China market as growth, and especially certainty of growth, comes at a premium.
Investing in companies related to what China consumers buy and the way they consume; trends underpinned by the long-term structural drivers of China’s
growing middle class, rising income, increasing urbanisation and technological innovation.
15.8
10.1
3.9
4.9
19.9
16.9
41.3
A key characteristic of Dhananjay’s focus is moat stocks. In this approach he looks for companies with sustainable growth prospects with the ability to reinvest at attractive rates. Dhananjay favours industry consolidators with improving returns and is cautious on stocks with high regulatory risk.
Focused exposure to Asia’s true emerging economies such as ASEAN, China and India through a portfolio of high-quality growth stocks.
8.3
11.2
3.6
14.8
4.6
13.1
51.6
Anthony looks for three key characteristics in a stock: weak sentiment and low valuations, where fundamentals are strong and improving relative to consensus expectations. If a stock ticks all three boxes – and liquidity is ample and correlation with other holdings low – he is willing to take a significant active position.
A high conviction stockpicking approach which brings together the region’s best investment ideas in a concentrated portfolio.
12.3
16.1
7.7
6.2
43.1
Teera adopts a disciplined investment process to identify stocks trading below their intrinsic value. He looks for companies where improving fundamentals are not reflected in the price, or where the growth potential is not fully understood. He also favours restructuring and turnaround opportunities, as well as cyclical turns in certain industries to find overlooked potential.
A core fund of quality well-run companies that are positioned to benefit from ongoing structural change and reforms across the region.
(1) Fidelity International as at 30 September 2020. Assets quoted include Assets under Administration. Investment professionals includes both analysts and associates.
