Fidelity Asian Values Manager Cautious on Rebound

A notoriously valuation-driven manager, Bajaj was particularly active in November and December when stocks had reached a depressed level. “According to our traders, he’s the strictest when it comes to price limits and finding value,” says Medha Samant, investment director at Fidelity.

“He was just not budging [last year] until November, when he started telling me he was finding a lot more opportunities cropping up. When he says that, it means the market is really cheap and he gets very excited.”

Samant says it was at that point Bajaj started putting his dry powder to work, with the trust’s cash position reduced from double figures at the end of September to almost zero by the time of its annual general meeting in December.

“Most of the opportunities came from China because valuations had completely fallen off based on headwinds,” Samant elaborates. “He started finding stocks between 4-6 times [price/earnings ratios], which is his sweet spot, and fundamentally these stocks still displayed double-digit return on equity.”

As a result, the average price/earnings ratio of the portfolio is currently at the lowest level it has ever been, but has its highest ever return on equity ratio. “This means he has been able to buy stocks at the right level without having to compromise on the quality of the companies.”

Taking Profits From Alibaba

And some of the opportunities Bajaj was finding were in areas he’s not dabbled in much previously like the large internet names. One stock that sums up Bajaj’s trading strategy in the past six months is e-commerce giant Alibaba (BABA).

An impressive run saw the share price almost double in 2017 alone, peaking in June 2018 at an all-time high of $211. At that point, Samant says Bajaj saw no margin of safety in the share price.

But the story unravelled through the second half of last year as concerns over governance, which eventually saw co-founder Jack Ma step aside as executive chairman, and future strategy, combined with China-related macro issues, conspired to drive the stock down to as low as $132 by Christmas.

It was around that time Bajaj started buying a small stake in the firm, which owns some of the largest online retailing outlets in China. Samant explains that Bajaj valued Alibaba solely off its core e-commerce business, attributing “almost zero value to the rest of the business”, which includes banking arm Ant Financial.

“Based on that he thought [$130] was a decent entry point,” says Samant. “We went through this whole thesis about Alibaba and he said, ‘I’ve never said it’s a bad company; I’ve always said there’s no margin of safety for me in that stock’.”

With the share price having recovered back up to $185, Bajaj has been banking some quick profits. And now, says Samant, it’s a completely different story. Bajaj is still finding the odd, selective opportunity, but “he’s being very cautious about it now and taking a breather”.

“Markets have had a sharp run up year-to-date, again driven by hopes and expectations with really nice outcomes being priced in, rather than fundamentals,” Samant adds. Those “really nice outcomes” include a full agreement for the Chinese and American authorities to end their trade hostilities imminently and a dovish Fed.

Hong Kong and Thailand Offer Value

True, a large part of the rally in 2019 has been a recovery from last year’s events, but some parts have run way too hard, Samant laments. Two places in particular are Chinese A-Shares and Indonesia.

The former is a straight-forward story, with the planned inclusion of domestic Chinese A-Shares into benchmarks run by high-profile index providers MSCI and FTSE Russell boosting the asset class.

The inclusion will take place in three tranches through 2019 and investment bank UBS has predicted A-Shares will see inflows of up to $67 billion this year alone with further expected through 2020 and onwards.

The MSCI China A Onshore index is already up 37% in US dollar terms in the year to April 15, compared with just MSCI China’s 21% and MSCI Golden Dragon’s 19%. That divergence is only likely to get wider as the year progresses.

Despite the expected gains for A-Shares, which could total up to 10-15% more, that’s all down to both retail investor and index-driven sentiment. As a result, Samant says Bajaj isn’t buying: “He’s just going to let it play out now”.

Instead, Bajaj sees more value in Hong Kong-listed stocks, or H-Shares. One example of a 2019 purchase is the country’s largest retail pharmacy, China National Accord Medicines.

Samant explains that of the three ways for Bajaj to play healthcare, two – hospitals and innovators – are heavily regulated and driven largely by policy, meaning margins can be unpredictable.

The third, as easiest, way is through investing in drug distribution platforms. “As [Chinese consumers] are getting richer and incomes are growing they want more private drugs and Western medicines,” Samant continues.

This is providing opportunities for the likes of China National Accord, which sells a portfolio of drugs for many different conditions including cardiovascular, respiratory and digestive problems. The stock more than halved between July 2017 and January 2019, which is when Bajaj bought.

Elsewhere, while he’s sticking with his long-term holding in Fast Food Indonesia, which holds the sole KFC franchise in the country, Bajaj has been trimming his position in Indonesia. For example, he sold his holding in tobacco firm Gudang Garam after its valuation reached 30 times earnings.

He’s replaced those with new holdings in Thailand, including commercial banking services provider Kasikornbank, chip-maker Hana Microelectronics and real estate developer LPN Developments.