As Chinese equity markets trade at a near 60% discount in comparison to the US, Dale Nicholls, manager of the Fidelity China Special Situations trust, said he is still “cautiously optimistic” towards the market’s outlook.
China has struggled to recover in the wake of Covid-19, continuing into the second quarter of 2024 where GDP growth fell short of expectations, increasing by 4.7% year on year instead of the anticipated 5.1%.
In response to the lacklustre growth, the Chinese government has introduced a series of policies to stimulate the economy, including lowering a key interest rate in July and subsidy programmes for home appliance upgrades.
Nicholls said another point of change for China is a split of markets into “old economy”, characterised by energy, utilities, and communication, and “new” categories, including consumer areas and healthcare. This new sector specifically has struggled amid China’s volatility.
“While this shift poses challenges for investors like us that are focused on the long-term growth drivers in the Chinese economy, it also offers attractive opportunities for investors with a longer-term view,” Nicholls said.
“Industrials, the largest sector weight in Fidelity China Special Situations, offers significant potential, driven by factors such as consolidation and the bifurcation of supply chains. China’s focus on innovation, exemplified by its increasing R&D spending, is also evident here, with companies enhancing their competitiveness through technological advancements and consolidating market share in a fragmented industry landscape.”
In addition to the industrials space, Nicholls saw positive prospects for the auto sector, where China recently became the largest car exporter in the world. China also accounts for 60% of the share globally for electric vehicles. One of the trust’s investments in this sector is auto maintenance company Tuhu, which as of the end of July, made up 1.9% of the portfolio.
“As the largest player in a growing market, Tuhu stands to benefit from the increasing number of vehicles requiring maintenance, underpinned by China’s position as the world’s largest auto market,” Nicholls said.
“This investment aligns with our broader strategy of focusing on market leaders in sectors with strong structural growth drivers.”
While the market itself in China remains volatile, some companies, namely in the financial sector, have been able to maintain stability and begin dividend and share buyback programs.
“The macroeconomic backdrop, while under pressure, is expected to stabilise as the government’s stimulus measures begin to take effect. Significantly, the Chinese consumer, despite current weakness, has a strong balance sheet with significant savings,” Nicholls said.
“This could translate into increased spending once confidence is restored. This latent demand, combined with the structural trends in sectors like industrials and technology, supports our positive long-term view.”
This story first appeared on our sister publication, Portfolio Adviser.
