Sunniva Kolostyak: Welcome to Morningstar. There is a lot happening in Asian emerging markets at the moment. I'm today joined by Catherine Yeung, Investment Director for Fidelity Asian Values, to talk about the opportunities in this region.
Catherine, thank you very much for being here. I want to start with small caps in Asia and China in particular. This region has often been seen as being very entrepreneurial, but after Covid, after government intervention, is this still the case?
Catherine Yeung: Well, definitely, the entire region remains very entrepreneurial, especially as you see many governments across Asia really, really focus on innovation, encourage R&D for companies. When we look at China in particular, despite a lot of concerns from a regulatory perspective, the reforms we did see a couple of years ago were really targeting a lot of the larger companies to really ensure that the smaller companies or new entrants could take up some of that market share. And again, in China, it's very, very much pronounced by the government to really encourage this R&D, this innovation, climbing up the value chain. And in fact, when we look at areas such as autos, in July, we saw Chinese exports outpaced that of Japan. And from an EV perspective or just the type of cars that are being manufactured, they're very, very high-tech. So, we think that innovation, the entrepreneurial spirit, is alive and well.
Kolostyak: So, in this environment, then, if we look at how – I mean, there's been quite a lot that's happened in the past year. How do you work to identify opportunities? Across Asian markets, what are you looking for in a company that you invest in?
Yeung: So, in terms of long-term performance for investors and clients, it's really all about ensuring you have a robust investment process and adhere to that process, no matter where we are in the cycle or where we are when it comes to market dynamics. So, for example, if the market is really being skewed by momentum or pro-growth companies. For us, the first criteria is, well, we're looking for a good business. So, what product and service do you offer? Am I going to see long-term gains, long-term earnings, long-term market share? Don't tell me about pie in the sky, kind of, scenario. I want to see actual profitability.
Then the second criteria is good management. So, are you honest? Are you competent? We go back and look at years and years or all the history we can find regarding the quality of management, how they treat their staff in terms of have there been any accidents in their manufacturing plants? How have they rewarded minority shareholders is also really, really key, as well as how they manage balance sheets. And then, on top of the good business, the good management team, the final criteria is what's the price? So, it has to be good. It has to offer a margin of safety. And again, in a market such as Asia, it's far from being a homogenous region. We find all sorts of companies that adhere to those three criteria, no matter where we are in the cycle.
Kolostyak: So, which investments is it that's done well this year for you?
Yeung: So, again, because of this criteria in terms of our investment process, a good management team, good product or good business and then good price, we are seeing contributors from around the region. If we had to say though, from a country perspective, China and having about 30%-35% exposure to Chinese stocks, so that's including Hong Kong as well as mainland China, has been a drag in terms of that country exposure. Although stock selection in China has been very, very strong. And then, being underweight markets such as Taiwan and Korea, which have really been driven by that tech cycle, especially when it comes to memory and semis, again, that's detracted. But the individual stocks in those countries, again, have rewarded us.
So, it is a mixed bag. We've got some exposure, about a 20% exposure to India, about a 14% exposure to Indonesia. And again, those companies adhere to those three criteria I mentioned and predominantly focused in the financial segment as well as some consumer names in Indonesia. But again, it's a bit of a problem of plenty at the moment. Despite a lot of the macro woes, especially coming out of China, we're still finding some very attractive companies where their ROE and the quality of these companies actually is significantly higher than the benchmark.
Kolostyak: Well, Catherine, thank you very much for joining me today. For Morningstar, I'm Sunniva Kolostyak.
