Investing in China equity markets, stocks and growth sectors (FCSS interview)

Fidelity China Special Situations plc (LON:FCSS) is the topic of conversation when Portfolio Manager Dale Nicholls caught up with Fidelity International’s Associate Director Natalia De Sousa for an exclusive interview.

Q1: So, now that the year of the rabbit is underway, I was hoping you’d give us your outlook on Chinese equities, particularly as the country emerges from its zero COVID policy.

A1: I think things are actually shaping up pretty well. Clearly, the zero COVID policy, the lockdowns etc. were a pretty big constraint on growth last year so given that we’re through that, we’re opening up, the growth outlook is actually shaping up pretty well.

I think  we can look forward to accelerating economic growth and, on the back of that, probably accelerating earning growth. We’re actually seeing earnings upgrades come through which I’d say probably contrasts pretty well with a lot of other markets globally. So, that outlook is good.

Having said that, we’ve seen a pretty big move in markets so I wouldn’t say valuations are as compelling as they were a few months back but still look pretty good versus the growth prospects.

Q2: What particular sectors are you seeing rebounding faster? Is it the normal reopening plays you’d expect?

A2: I guess that’s been the first area to move and I guess we shouldn’t be surprised that the consumption related plays, particularly areas like travel and areas like that, as you say, the obvious reopening plays have done the best.

Clearly, consumption will be the biggest driver of growth this year, we’ve had consumers that have been locked up for some time and household savings levels have really picked up so I think there’s pent up demand that is there to be released. There are some things we need to consider there, I think we need to see things bottom in the property sector but overall, I think things are shaping up pretty well for the consumer.

In terms of the market, I think probably from here, again given that we’ve seen big moves in a lot of the reopening names, from a stock picking perspective, I might look a bit broader to second level plays. I think perhaps some of the broader industrials, financials, those types of areas could be more interesting from here, but overall definitely seeing quite a bit of opportunity.

Q3: Are there any stock specific examples you could provide?

A3: There’s many because there’s obviously a lot going on but if you think of a company like Autohome Inc. (NYSE:ATHM), I’m not sure if you’re familiar with Autohome but they’re really the leader in the auto vertical in terms of advertising for that space.

So, with reopening up, clearly auto demand is set to increase and I also think you’re going to see a lot more competition in the auto space. So, advertising is going to be a key weapon that Autohome should benefit from and they’ve also got quite an interesting business in used cars as well which his an area that I think has pretty good mid-term growth potential.

So, I think that’s an interesting example that’s going to benefit from reopening, has been sold off overall with the rest of the tech sector but is also a pretty compelling long-term story.

Q4: Thinking of auto, what’s your view on EV?

A4: On the EV space, China continues to move ahead, you’re looking at penetration rates in EV that are approaching 30%. So, the penetration story is very alive and well.

From a stock picking perspective, as I touched on, I think it’s an area we’re going to see increasing competition, you’ll see a lot of new plays enter the market, a lot of capital, a lot of capacity that’s been added.

So, I’d be actually a little bit wary of the OEM’s themselves but I do think the supply chain is interesting, there’s many companies that are set to benefit from that increasing penetration of EV in terms of content per car.

Q5: Just looking at how you pick stocks, I know you have a lot of support from our research team, and I think globally we have around 250 research analysts. How many roughly are there in China, for example, in our focus there?

A5: When I think about the dedicated team we have on equities, we have 25 dedicated analysts, and there are other analysts who have some exposure to Chinese companies but may not be completely dedicated.

Importantly, I think we’re very lucky to have the team on the ground in China so obviously it’s been tough to visit companies during COVID but it’s great that we’ve had that team on the ground that’s been able to give us real-time insights.

Q6: And they haven’t been hindered by the zero COVID policy? They were still able to meet via Zoom etc.?

A6: Yes, they have, they’ve been impacted as well. A lot were based in Shanghai so they went through quite a tough period during the lockdowns but in general, I think that period of COVID overall, they’ve been pretty mobile and been able to get out, visit companies, visit factories and really get a sense of what’s going on with the company.

So, I feel pretty blessed that we’ve had that team, it continues to grow.

Q7: Moving back to the trust itself, what would you say are the key differentiating aspects of the Fidelity China Special Situations  trust versus its peers?

A7: I have to say the flexibility and the breadth, we’re really trying to capture all the best investment opportunities that are available to us, investing in the broader Chinese economy.

So, the ability to invest in early stage private companies, we continue to build that team out, the ability to short, the ability to have leverage and obviously, as a closed-end vehicle, not having to worry so much about liquidity I think is a differentiator.

The biggest differentiator really is the strength of the team, the quality of the team and the fact that we continue to expand and grow the team.

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