This emerging markets fund is trading at a discount and is an opportunity to gain exposure to some large tech stocks.
BUY: Fidelity Emerging Asia (FSEAX)
From Fidelity Monitor & Insight
Fidelity Emerging Asia (FSEAX) offers fast growth in industry “disruptors. Last month, we added to our Emerging Asia exposure in several model portfolios. While we understood that trade tensions were heating up—especially between the U.S. and China—we pointed out that “The emerging markets offer exposure to newer companies that are competitive threats to more established ones.” We also noted we had “room” to step up risk a bit in some models.
But soon after our purchases, Emerging Asia other, more regionally diversified emerging market funds, took a hit alongside U.S. tech stocks. Eventually, many American technology companies worked their way out of their holes. But those in the developing markets continued to struggle—even as President Trump’s trade rhetoric eased.
One reason for this lack of buoyancy for emerging market funds could be history. In the 1990s, many developing economies were hyper-sensitive to U.S. interest rates: as they rose, so did our dollar. Because of their deep indebtedness and currencies that were dollar-denominated, our rising rates caused real pain: borrowing costs rose across those countries and markets.
The risk of profit compression, defaulted loans, and even bankruptcy, rose with each tick up of the Federal Funds rate. But that was a long time ago. Today’s emerging market countries are far more developed. (Emerging market funds have now tiptoed into the so-called frontier markets in Africa, the Mideast and Central America.) Their economies are less dependent on labor-intensive industries and exports of raw materials; their indebtedness is far more manageable, and their economies are more diverse.
In particular, “developing” Asia is now a significant player in technology. With its roughly market-weight in tech, Emerging Asia is 29% allocated to tech; China Region is 43%. These exposures are even higher than the S&P 500’s 25%. The four tech companies with the biggest impact on the emerging markets are China’s Alibaba and Tencent, Taiwan Semiconductor and Samsung Electronics (South Korea). In that order, they are Emerging Asia’s four top holdings, accounting for almost a quarter of its assets.
With many notable exceptions, emerging-market tech companies are generally less “disruptive” —not as innovative—as their U.S. counterparts. (That’s why President Trump has made intellectual copyright infringement a central issue in dealing with China.) It’s estimated that about half of all emerging market tech stocks are economically cyclical—waxing and waning to the rhythms of global demand for electronic equipment, hardware and semiconductors.
Thus, their sales and earnings growth are less robust. So, when compared to the biggest stocks powering Nasdaq Composite, their shares don’t demand as high a premium. Indeed, their lower price-to-earning ratios help to explain why their shares weren’t as quick to rebound last month.
But rebound they likely will. The long-term story for the volatile emerging markets and their tech companies (which are now central to their economies and markets) is still a game with many innings left to play. On that field, the U.S. itself has an important role in that growth, through trade, corporate partnerships and even education
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight,
www.fidelitymonitor.com, 800-397-3094, May 2016