An investment approach for China

Examining the volatile market environment and current outlook for China with Fidelity’s Dale Nicholls

China has long been viewed as one of the world’s most exciting growth stories. However, recent market volatility has thrown the spotlight on China for quite different reasons. While new cases of coronavirus in China have now fallen significantly, the spread of the virus around the globe and the actions taken by governments to contain it have hit economic activity hard, which in turn has sent global stock markets tumbling.

Hong Kong-based Dale Nicholls manages the Fidelity China Special Situations PLC Trust (LSE: FCSS), the UK’s largest China investment trust, which recently celebrated its 10-year anniversary. With the help of Fidelity International’s extensive, locally-based analyst team, Nicholls runs a portfolio of more than 100 underlying investments, focusing on undervalued companies – often small or medium-sized businesses – with good longterm growth prospects. It’s a role that enables him to garner bottom-up insights into what is currently going on, and into what this might mean for Chinese markets and the economy in the longer term.

For now, Nicholls is most concerned about the global impact of the coronavirus outbreak. He says the slowdown both in China and in other economies “has been severe and places major pressure on balance sheets”. Recent falls in markets have helped to price these risks in, and we are likely to see ongoing fiscal support from global governments, but earnings forecasts are likely to fall even further – particularly in the hardest-hit sectors, such as travel and tourism.

That said, Chinese policymakers have already taken substantial steps both to contain the outbreak and to support economic activity, and further easing is possible. And despite the undeniable short-term impact, the outbreak “does not derail the structural shifts underway in the region”. The growth of China’s middle class, and the move to refocus the economy on domestic consumption (as opposed to manufacturing and infrastructure investment), remain key drivers of China’s economy going forward and coronavirus does not change that. So while Nicholls is cautious in the short term, he is now “focusing on how to capture opportunities when things stabilise over the longer term”.

Where might these opportunities arise? Nicholls has been reviewing beneficiaries of potential stimulus and in particular, those companies that are likely to emerge stronger through this period. He has also taken advantage of recent market moves to increase exposure to attractive companies in the consumer staples, discretionary and service sectors. Meanwhile, he has been cutting the portfolio’s exposure to financials, for whom the environment is at risk of deteriorating, and also to those industrial companies that are more vulnerable to slowing global demand.

Overall, Nicholls’ key goals remain the same – he wants to invest in companies “with good long-term growth prospects that are cash generative and have strong management teams”. In many cases, these are “companies that have carved a niche for themselves in the segments they operate in, and often offer an intersection of technological leadership and strong consumption outlook”. Demand from Chinese consumers for increasingly high-quality goods will also continue to grow, meaning prospects for companies in these sectors remain bright.

In short, despite the current challenging environment, China’s growth story remains intact – and given its sheer scale and importance to the global economy, investors should seriously consider having exposure to the region as part of a long-term balanced portfolio. Learn more about the Fidelity China Special Situations PLC Trust at fidelity.co.uk/china