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Sunniva Kolostyk: Welcome to Morningstar. There is a lot happening in Asian emerging markets at the moment. I’m joined today by Catherine Yeung, Director of Investments at Fidelity Asian Values, to talk about the opportunities in this sector.
Thank you so much for being here, Catherine. I want to start with small caps especially in Asia and China. This sector is often seen as a very entrepreneurial sector, but post Covid, post government intervention, is this still the case?
Catherine Yung: Well, of course, the whole region remains very entrepreneurial, especially when you look at a lot of governments across Asia, really focused on innovation, encouraging R&D for companies. When we look at China specifically, despite a lot of concerns from a regulatory perspective, the reforms that we saw a few years ago were really targeting a lot of the big companies to make sure that smaller companies or new entrants can work. some of that market share. And then, in China, there’s been a lot of push by the government to really encourage this R&D, this innovation, to move up the value chain. And in fact, when we look at sectors like auto in July, we saw Chinese exports overtake Japan. And from an EV perspective or the types of cars that are being built, they are very, very high-tech. Therefore, we think that the spirit of innovation, entrepreneurship is alive and well.
Kolostyak: So, in this environment, if we look at how — I mean, a lot has happened in the last year. How do you go about identifying opportunities? What are you looking for in a company you invest in, across Asian markets?
Yung: So, in terms of long-term performance for investors and clients, it’s really about making sure you have a strong investment process and follow that process no matter where we are in the cycle or Where are we in terms of market dynamics? So, for example, if the market is being distorted by really dynamic or pro-growth companies. For us, the first criteria is that we are looking for a good business. So, what product and service do you provide? Am I going to see long term profit, long term revenue, long term market share? Don’t tell me about Pie in the Sky, the scenario. I want to see real profitability.
Then the second criterion is good management. So, are you honest? are you able We go back and look at years and years or all of history with regard to the quality of management, how they treat their employees, have they had any accidents in their manufacturing plants? How they’ve rewarded minority shareholders is also really important, as well as how they manage the balance sheet. And then, apart from good business, good management team, the ultimate criteria is what is the price? So, it should be good. It has to provide a margin of safety. And again, in a market like Asia, it’s far from being a homogenous region. We find all kinds of companies that meet those three criteria, no matter where we are in the cycle.
Kolostyak: So, which is the one investment that has worked well for you this year?
Yung: So, again, because of this criteria in terms of our investment process, a good management team, good product or good business and then good value, we’re looking at contributors from across the spectrum. However, if we have to say from a country perspective, having around 30%-35% exposure to China and Chinese stocks, which includes Hong Kong as well as mainland China, a constraint in terms of exposure to that country Has been Although stock selection in China has been very, very strong. And then, having underweight markets like Taiwan and Korea that are really driven by that tech cycle, especially when it comes to memory and semi, again, it diverges. But the individual stocks in those countries have again rewarded us.
So, it’s a mixed bag. We’ve got some exposure, about 20% exposure in India, about 14% exposure in Indonesia. And again, those companies follow the three criteria that I mentioned and primarily focused on the financial sector as well as some consumer names in Indonesia. But then again, this is a huge problem at the moment. Despite a lot of macro problems, especially coming from China, we still find some very attractive companies where their ROEs and the quality of these companies are actually well above the benchmark.
Kolostyak: Well, Katherine, thank you so much for joining me today. For Morningstar, I’m Sunniva Kolostyk.
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