Fidelity Sustainable Asia Equity Fund portfolio managers Dhananjay Phadnis and Flora Wang review how the region is measuring up in today’s world where more emphasis is rightly being placed on sustainability practices. They outline the improving trajectory they are seeing on-the-ground across Asia and reveal the areas where they see greatest investment potential for 2022 and beyond.
Next year will see some interesting factors play out for Asia investors. We have the ongoing recovery from Covid, especially in ASEAN and India, potential normalisation of supply chains and further progress on some of the recent climate commitments. We will be watching how these events impact the earnings progression of portfolio companies, while looking for new opportunities in the market.
From a sustainability perspective, we expect Asian companies will continue to improve ESG-related disclosures as well as improve their sustainability practices to catch-up to the standards demonstrated by companies in developed markets. This structural trend will continue to create investment opportunities for us as we pick such companies early in their sustainability evolution and look to generate alpha as they go along this journey.
What could surprise markets in 2022?
Potential surprises could be around faster-than-expected reopening of global borders and normalisation of trade and travel. Another could be linked to better geopolitical relationships which could potentially reverse the current trend of deglobalisation. We could also see much more favourable policies in China that could reverse the current downward trajectory of the economy.
However, there is a chance we see market resilience being tested due to a sustained surge in inflation or a risk of further deterioration in geopolitics. Although unlikely, there is also a tail risk of a further mutation in the virus which is resistant to current vaccines and drugs, leading to a resurgence in cases and a reversal in reopening moves.
Positioning for what lies ahead in 2022
The three key areas we are focusing on are around Covid normalisation, supply chain changes and understanding how businesses are adapting to the new regulatory environment.
Areas of the market that might look interesting will likely be around Covid recovery laggards like in ASEAN and India. High quality financials and consumer companies may be a good way of getting exposure to this rebound. Insurance could be another beneficiary, especially where inability to move easily across borders may have affected product sales. Should demand surprise on the upside and inventory risks abate, the semiconductor sector will look interesting.
In addition, we will continue to engage with our investee companies and encourage them to improve their disclosures and ESG practices to create more value for our investors. This remains a strong structural opportunity in Asia that will continue to be a source of alpha.
On the other hand, we could see some froth come out of the Covid beneficiaries, including the ecommerce and internet space. Some of the green-related themes also seem to have run ahead of fundamentals and may face a correction if they are unable to deliver on expectations. For instance, the recent focus on the renewables sector has meant that valuations in areas like renewable energy, EV-plays and the hydrogen supply chain have become quite stretched. While these themes have a long way to run, the underlying stocks can be very volatile, especially when they are already pricing a lot into the future.
Sustainability factors are critical in driving long-term returns in our opinion. We see sustainability as a core part of understanding both risks and returns. Companies which build sustainability into their processes and operating model are the same companies that will be able to manage risks better and deliver compounding in value in the medium to long-term. This is also why we work very closely with our investee companies and engage with them and encourage them to improve on sustainability factors. As long-term investors, our interests are fully aligned with the companies in that we both aspire to drive long term value creation for all stakeholders.
This post was funded by Fidelity
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