Dale Nicholls, Fidelity International
Recent regulatory events should be viewed as part of an overarching aim to foster sustainable growth, boost social equality and transition to a consumption-led economic model, Andrew McCaffery, global chief investment officer at Fidelity, told a media roundtable this week.
Although the swiftness of policy actions, the regulation of seemingly “untouchable” sectors such as technology and the simultaneity of fiscal and regulatory tightening seem to be daunting, investors should be reminded not to miss the bigger picture, McCaffery argued.
“Global investors tend to fixate on the rate of China’s economic growth, but it’s worth remembering that there is often a low correlation between economic growth and capital market returns. China’s policymakers have adjusted their philosophy towards sustainable economic growth, rather than posting a high number – this is something that global investors have yet to fully digest,” he said.
The forward price-to-earnings ratio for the Chinese equity market is showing a significant discount as compared with the US markets. That discount has expanded significantly over the past few months and is approaching historically high levels, Dale Nicholls, portfolio manager at Fidelity International, told the roundtable.
“Look at some large-cap tech firms, for example, Alibaba. Shares in its core business have been trading at a low-teens multiple, and it is at 70% discount to Amazon, which has similar businesses,” Nicholls said.
The recent round of regulation and the collapse in the prices of stocks in affected sectors can be seen as an opportunity to add to positions. Although there is a still a lot of fear among investors, that anxiety has largely been priced into the market, offering attractive risk-return possibilities, according to Nicholls.
“Stocks which have suffered the biggest corrections are probably presenting the most opportunities right now,” he said.
Rising middle class
Nicholls also likes China’s long-term consumption story: any investment thesis looking at China is around its expansion of the middle class. Fidelity believes the recent regulations will be supportive of the growing middle class.
Personal income levels are growing in China on the back of further urbanisation. According to China’s latest Five-year plan, it targets to increase the urbanization rate to 65% from 61%.
In a global context, China’s urbanization rate is still relatively low and there’s still long-term potential for that to grow. The difference in both income and spending power between urban and rural consumer is significant, according to Nicholls.
The rise of the middle class and income per head will naturally lead to a continued booming in the auto sector, where China is already the world’s largest market, he said.
Another element to focus on is the emergence of local brands. Fidelity asked Chinese consumers where their preferences lie and saw an increase in the proportion of consumers that are focused on local brands.
Maintaining an active approach to Chinese equities could also help identify opportunities in areas aligned with the direction of policy such as green energy, semiconductors, new infrastructure, electric vehicle supply chains, artificial intelligence and high-end manufacturing, according to Nicholls.