Throughout his career, Nitin Bajaj, portfolio manager of the Fidelity International China Focus Equity Strategy, has had a consistent investment approach that remains unchanged in any market environment: “I look for good businesses run by competent people and buy them with a margin of safety,” he said.
Experience guides him that during bear-market phases, investors are so worried about the market mood that they overlook good-quality, profitable businesses that are market leaders, with strong balance sheets, offering a product or service that will remain in demand over the long term.
For instance, 2008 provided a great opportunity to invest in the US following the global financial crisis. A similar scenario unfolded in India between 2012 and 2014, and he feels the situation in China is redolent of these two phases.
“In fact, we have built a portfolio of businesses in China that will be around for many years, that are run by competent people and were bought at deeply discounted valuations,” said Bajaj (pictured).
Value investing
“Fundamentally, China is well-suited for value investing,” he emphasised. Any industry in China that earns abnormal profits in the short term attracts intense competition. As a result, there is less certainty associated with both excess profit margins and premium valuations enduring over time.
This aligns with recent trends, where both profitability and valuations have corrected in sectors once favoured by investors. “Therefore, taking a contrarian approach and buying quality businesses when they are out of favour should be a good strategy over time to invest in China,” said Bajaj.
His view on China tech is directly connected to his investment approach and the focus on margin of safety. “Given the euphoria around artificial intelligence, the global technology sector has seen so much momentum and China is no exception. In such a backdrop, it is hard to find businesses where I can have a differentiated opinion or an edge versus other investors,” he said.
Governance improvements
Meanwhile, there is a change in Chinese corporate attitude towards minority shareholders, which is likely due to changes in incentive structures and a genuine desire to transform. As the pace of economic growth slows, companies are likely to return capital to shareholders.
“We are also seeing a deliberate push from government-owned enterprises to improve their return-on-equity, which has been an important aspect of improving capital allocation in China,” said Bajaj.
While the current narratives of weak macro environment and geopolitics are doing the rounds, he believes China’s workforce quality and technological expertise will remain its competitive advantage.
“China’s economic importance extends beyond its domestic market, with Chinese companies gaining significant global market share in several industries and remaining a key link in global supply chains.”
