How consumers will put paid to a China crisis

A SLOWDOWN in economic growth, together with the threat of a trade war with the United States, has sent the Chinese stock market into a tailspin in recent months. But it has not dented the enthusiasm of Dale Nicholls, manager of investment trust Fidelity China Special Situations.

In the UK while Hong Kong (his home) and mainland China celebrate the Lunar New Year and the Year of the Pig, Nicholls believes the investment case for China remains as robust as ever. It is just that the way to extract investment return from the market, he says, has changed.

Now nearly nine years old, the £1.1 billion trust has a portfolio primarily exposed to the domestic economy – with most of the 150 stocks generating their revenues from the Chinese consumer rather than overseas trade. ‘The development of the consumer is the biggest theme in the trust,’ says Nicholls, talking from Fidelity’s London offices late last week in between meeting big investors in the trust. ‘Consumption is the biggest component of China’s economic growth and the development of the middleclasses over the next decade will drive the economy forward. Consumption will continue to grow every year in high single-digit figures.’

This focus on the domestic consumer is reflected throughout the trust – from the biggest holding (internet giant Tencent) through to the 5.5 per cent exposure to companies yet to list on the stock market (unquoteds).

Nicholls says: ‘Although nearly 15 per cent of the trust’s assets are in Tencent, this is an underweight position compared to the market. Yes, the company has encountered some issues with the granting of gaming licences by the Chinese authorities, but it remains a dominant force. It is the leader in the world of Chinese social media with WeChat, the equivalent of Facebook, having more than a billion users. If anything, the company’s shares are undervalued.’

Other key ‘consumer’ holdings include China Meidong Auto that runs car dealerships for the likes of BMW, Lexus and Porsche, as well as selling finance and insurance. Nicholls also has a stake in Li-Ning, a Chinese sportswear manufacturer whose wares have gained traction among the young middle-classes. The company was set up by former Chinese gymnast Li-Ning.

Among the trust’s unlisted holdings is DiDi, China’s version of taxi service Uber. ‘It’s everywhere in China,’ says Nicholls. ‘It delivers 2.5 million people every day to where they want to go to – more than Uber does globally.’ Nicholls, Australian by birth but who has spent half a century working in the Far East as an investment analyst and fund manager, says anyone investing in China must accept that the ride is going to be volatile. He says: ‘As a fund manager the key is to find companies that are cash generative, have good long-term prospects and are run by good people.’ To help him find these company gems, he draws upon research from more than 20 Fidelity analysts based in Hong Kong and Shanghai.

Anyone who invested in the trust’s launch in spring 2010 – when it was managed by the legendary Anthony Bolton – would have doubled their money. But over the past year the trust’s share price has fallen 15 per cent. Fidelity China Special Situations is a well-run trust investing in companies looking to grow on the back of China’s continued economic growth. It is not for widows, nor orphans. It should represent no more than five per cent of an investment portfolio.