01 Feb 2023
As China prepares to welcome the Year of the Rabbit, Dale Nicholls, portfolio manager of Fidelity China Special Situations PLC, shares his latest views after a very tumultuous period for China’s markets. As the country reopens its borders after three years of strict Covid-19 curbs, and with valuations looking attractive, he reviews an increasingly supportive backdrop and discusses the key areas of emerging opportunity.
Key points
Consumer confidence and spending in China took a hit in 2022 from widespread lockdowns and government crackdowns on the important property sector. Related stocks had suffered, but with these lower valuations, the strong long-term story in place and increasing potential for policy change, we have increased our positions from last year. The recent reversal in the Zero-Covid policy has clearly played out faster than we expected. This focus on restoring confidence and reviving growth underpins an increasingly positive outlook for China in the Year of the Rabbit.
With a broader recovery in sight, the portfolio has maintained an overweight exposure to companies that stand to benefit from a improving consumption outlook. While consumer sentiment currently remains weak, with challenges around weak economic trends and property sector, we think the prospects for improvement are strong, supported by significant household savings built up over the past three years which should help accelerate consumption and boost economic growth.
Within Fidelity China Special Situations PLC, in the last 12 months we have added to macro-sensitive discretionary names like branded variety retailer Miniso Group and retail jewellery player Luk Fook - both offer substantial growth opportunities through the recovery. Within consumer staples, China Foods is positioned to benefit from a re-opening driven sales increase and an upgraded beverage product mix.
The property sector as a whole has been punished by deleveraging challenges and liquidity issues primarily faced by private developers. While we believe keeping property prices affordable maintains a priority as part of policymakers’ common prosperity goals, we are seeing more meaningful supportive measures to stabilise the sector.
With valuations across the sector at very low levels, we have recently moved to add to state-owned enterprise property developer China Overseas Grand Oceans Group from the second half of 2022. The company looks well placed to benefit from the decline in privately-owned developers in China’s lower-tier cities, while its solid balance sheet and compelling valuation offers a decent margin of safety.
Regulatory and policy headwinds in the China internet space over recent years have also made it very difficult for tech giants to maintain market share and return to strong margins, which had been reflected in low valuations. However, with an improving earnings outlook and easing regulation, we see an increasingly attractive risk-reward pay-off among the likes of Tencent and Alibaba, which remain large positions in the portfolio. Encouragingly, both stocks have started to reverse their declining trend and have risen over the past month.
Our holdings in Macau gaming player Galaxy Entertainment, travel names Trip.com and Travelsky Technology have also surged, driven by China’s faster and earlier-than-anticipated broader re-opening timeline. Following a sharp uptick in valuations, we have moved to partially trim these positions.
Elsewhere, we maintain a high degree of conviction in the long-term structural growth opportunity of China’s underpenetrated insurance industry. We have been holding insurance companies like China Life, China Pacific Insurance and have bought Ping An Insurance in the fourth quarter of 2022. We also continue to hold wealth management service provider Noah Holdings, which is set to benefit from significant wealth growth in China. With household assets shifting more into alternative or capital market products, this should form a strong tailwind for Noah.
More generally, we are focused on potential investment opportunities that could benefit from policy support and long-term structural trends. For example, the accelerating development of domestic industry and supply chains is being clearly supported by the Chinese government and is a trend we are watching closely.
This evolving backdrop will continue to create a range of opportunities. Overall, we remain optimistic about our holdings and confident in the ability of our strong on-the-ground team to help deliver returns over the long-term.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Fidelity China Special Situations PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.