Liu looks to contrarian bets in crisis markets

The Fidelity South East Asia fund manager warns share prices and currencies are pricing in a crisis scenario despite solid fundamentals.

Allan Liu, manager of the £2.4bn Fidelity South East Asia fund, is betting on tech stocks and “counterintuitive” companies as markets price in a crisis scenario.

Liu said markets were trading at distressed levels but warned “it is not just a question of buying everything that stands to benefit” when sentiment picks up again.

“Asian markets and currencies are now at crisis levels, without there actually being a crisis. The risk for the moment is in valuations; it has not touched the solid fundamentals of most Asian corporates,” Liu said.

But the manager said a slowdown in the earnings growth gap between Asia ex-Japan corporates and those in developed markets, a result of greater competition and the arrival of developed market multinationals, would make stock selection even more important once markets overcome macro concerns.

However, he cited his” counterintuitive” positions in Korean carmakers Hyundai and Kia Motors as an example of this selection.

The companies are two of the largest active positions within the fund, at 1.8% and 1.3% above their weightings in the MSCI Far East ex-Japan benchmark, and Liu said the pair had proved their worth.

“Carmakers may seem a counterintuitive bet given the developed market concerns. But they have proved they can gain market share in OECD regions even in a tough economic environment.”

The manager said Hyundai and Kia were growing market share in the US – a “very tough” market, and also emphasised their presence in the Chinese and Indian markets.

Liu is also preparing to add more money into microfinance specialists such as Indonesia’s Bank Rakyat.

“Inflation numbers seem to be under control at 4%, and a lot of microlending companies tend to be better businesses with smaller debts than consumer lending divisions,” he said.

The fund’s largest active position is in Sina, a Chinese equivalent of Facebook and Twitter, both of which are banned in the country, and Liu also has a significant overweight in the country’s search engine leader, Baidu.

He expects both firms will benefit from rising advertising spend and greater internet penetration in China.

The fund is top quartile over three years within the IMA Asia Pacific ex Japan sector, returning 73.6% against a sector average of 54.1%.

Liu is relatively cautious on the wider economic outlook for the Asian economies but said they are now better placed to cope with any slowdown in external demand.

“If there is a need, Asian governments can easily afford to increase government expenditure to fill any gap an economic slowdown would create,” he said.