‘New China’: A smoother ride through trade tensions?

Asset Class in Focus

Fidelity’s Raymond Ma overweights China’s new economy companies and says smart technologies can address old economy deficiencies.

“China is migrating towards the fourth industrial revolution, or industry 4.0, which comprises the introduction of smart technologies and autonomous machinery,” said Ma, portfolio manager of Fidelity’s China Consumer Fund, speaking at a recent Fidelity event in Singapore.

“Long-term structural factors such as rising average wages and a shrinking working population in China are pushing the development and adoption of new innovations,” he explained.

He sees opportunities in robotics and automated manufacturing, where he believes China has made huge advances, and in the semiconductor industry.

Growth strategy

Ma’s consumer fund holds about 100 positions. The growth strategy seeks four types of characteristics: turnaround growth, high growth, under-appreciated growth or sustainable growth.

He prefers companies with combined growth and cash flow, which acts as a buffer against market risks. “Even if the market sees something unexpected, the cash flow will protect them,” he said.

Yet the fund’s three-year annualised volatility is 18.46%, higher than the Greater China equity category average of 16.43%, but lower than the benchmark (19.98%), FE data shows.

About 43% of his fund is in the consumer products sector. “Domestic consumption is very much resilient” to the trade tensions, he said.

Indeed, the MSCI All China Consumer Demand Index is up 32% year-to-date, despite the trade dispute, a 30-year low for China’s quarterly GDP growth and the Hong Kong protests.

Yet there are risks. China’s rising housing prices mean less disposable income to spend. Moreover, domestic auto sales have plunged and the mainland’s slowing GDP growth could impact consumer demand. The market expects that the government will take stimulus measures to address these issues.

The fund’s exposure to the TMT sector is mainly Alibaba and Tencent — the two largest holdings that together make up almost 20% of the portfolio.

He sees the companies’ use of data as a key advantage.

As an example, he mentioned Alibaba’s database of consumer behavior data compiled from $768bn worth of retail transactions (in 2018) to help companies focus their product marketing.

“In the future the economy will be based on data and the companies that can better utilize data will see a strong growth momentum,” he predicted.

He rejected concerns about Alibaba’s financial transparency, which has kept some of his competitors away, and he told FSA that the tech giant “is very transparent.

“We know more and more about Alibaba’s different business segments, which is very helpful”, he said, giving as an example the company’s annual investment day, which he believes sheds some light on the company’s complex financial structure.

“When [Alibaba affiliate] Ant Financial is publicly-listed, it will be so much better,” he added.

A key underweight is Chinese banks. “I still own some good banks. Valuations are not expensive, but I think the funding cost will possibly start to rise [putting pressure on interest rate margins],” he explained.

Hopes are high that phase one of the US-China trade dispute is about to be settled. Ma thinks risks posed by trade or China’s GDP slowdown are limited because the market has generally accepted them. “The uncertainties have become more certain and there is a kind of consensus about them.”


China Consumer Fund vs the peer category average and benchmark

Source: FE. Cumulative 3-year return in US dollars.

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