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Fidelity looks past China woes with cautious optimism

Attractive valuations, government commitments and targeted policy support offer hope for a measured recovery.

Despite recent and unsettling market turbulence in China, its growth prospects still outshine many global counterparts.

According to Fidelity International, the country remains fertile ground for investment over the long term, driven by an expanding middle class, rising incomes and technological innovation.

These factors should be encouraging for those investors who are recalibrating expectations for GDP growth and policy support after recent market weakness and the sharp stock market sell-off over the past month.

“Beneath this challenging backdrop, there are reasons for cautious optimism,” said Marty Dropkin, head of equities for Asia Pacific at the fund house.

“It’s important that investors do not lose sight of the broader context and potential for long-term investment opportunities in mainland China.”

Attractive valuations

Fidelity points to the appealing value that Chinese stocks now offer compared with their own history, as well as with other markets in Asia.

For example, the one-year forward price-to-earnings ratio for MSCI China is 10x versus its 10-year average of 11.4x. “That is close to the largest discount to the rest of Asia for the past 20 years,” Dropkin said.

He also believes the corporate earnings cycle has bottomed out in most sectors, with double-digit earnings growth forecast for MSCI China in 2023 and 2024 based on consensus median estimates.

Yet investors still need to be cautious, he added. “While aggregate metrics reveal market valuation and earnings trends, they overlook the vast array of dynamics within the Chinese stock market.”

Discerning consumers

The resilience of key sectors and individual companies should also fuel investor optimism.

In particular, certain businesses are set to benefit from domestic substitution and the move up the value chain, plus they exhibit some pricing power. “[These companies] can now be found at more appealing stock valuations,” said Dropkin.

He also sees more targeted consumer demand having an impact, especially in cases of experience-based spending, health consciousness and “premiumisation”. With more choice across different price points, consumers can more precisely allocate their spending, he explained.

More broadly, businesses offering real consumer value, strong branding and communicate effectively to buyers can continue to grow, Dropkin added.

Supportive policies

In Fidelity’s view, investors in China can also count on the government to balance short and long-term objectives – providing a potential floor for market weakness and prospects for recovery.

“The government has shown its commitment to instilling investor confidence and supporting the economy with continued and wide-ranging measures,” explained Dropkin.

Examples include direct support for households, such as mortgage rate adjustments, which could meaningfully stimulate a consumption-driven recovery.

At the same time, Dropkin urges prudence when considering investing in property developers while the physical market remains weak.

Other investment opportunities to watch stem from China’s pace of innovation, coupled with the drive to automation amid an aging population and the energy transition. “Many of these lay within core industries that hold strategic importance for the government’s overarching agenda,” said Dropkin.

Part of the Mark Allen Group.