An opportunity that you could throw a dart at and still do well

An opportunity that you could throw a dart at and still do well

This video first appeared in Livewire on 8 April

It's been a tough few years for investors with exposure to China. The benchmark CSI 300 Index has fallen around 40% since hitting a peak in February 2021, and that's despite the Index rebounding around 4% this year.

In fact, Fidelity International's Amit Goel says the amount of pessimism that he has seen in Chinese assets has been greater in the last 12 to 18 months than at any other time in the decade-plus of investing in the region.

"There was a massive disregard for what was happening on the ground because of the top-down view on China. That's why we saw foreign investors selling China," Goel says.

Today, he believes it would be "risky" for investors to ignore the opportunities in the region today - arguing that while investors still need to be wary of some of the risks, it's time to be greedy.

"Some of the opportunities that I see in China are the best I have seen in the last 10 years," he says.

In this episode of The Pitch, Goel outlines why Chinese equities have rebounded in 2024, shares why it won't take much for this to continue over the next 12 to 24 months, and outlines some of the opportunities that are currently trading at "throwaway" prices.

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EDITED TRANSCRIPT

Why have Chinese equities rebounded (and can they continue to surprise in 2024)?

Amit Goel: I think when you talk about Chinese equities in 2024, you have to think about what happened to Chinese equities in 2023. China was a market where everybody was concerned about geopolitics. Everybody was concerned about domestic politics. Everybody was concerned about what was happening on the domestic consumption front and that's why I think it was the most hated market.

I've been investing in China for the last 10-12 years and the amount of pessimism that I've seen in China has been greater than ever in the last 12 to 18 months. So I think there was a massive disregard of what was happening on the ground because of the top-down view on China. That's why we saw foreign investors selling China by the amount they have sold.

Markets have been sold down excessively last year, and that's why you have seen this bounce back. There's no data improvement as such. It's just that things have started to be less bad and they have been sold to such cheap valuations that it makes all the sense to buy Chinese equities at this point. Less bad news, it's better capital management and I think that can continue this year without data being even good in the short term. Then I think in the medium term, in the next 12 to 24 months, the data can cyclically improve as well, and that can add further upside to Chinese equities.

Which risks should investors be aware of when investing in this region?

Amit Goel: The two big risks that I see are geopolitics and demographics. Geopolitics is a very general risk and I think, in my view, everybody has been talking about that for the last two years, which means that it might be priced in as well. It can be binary as well. So nothing is priced in when it is binary, but I think everybody who could have sold China has sold China last year. So that is also a reflection of how people are looking at that risk.

I think from a medium to long-term perspective, I think demographics are a higher risk than it was. We all knew that China going to age and slow down, but what we saw in the last two years is that the birth rate collapse in China was higher than expected. China's birth rate went from 1% to 0.5% in six to seven years. It was supposed to be 0.8%.

Demographics are easily predictable. So everybody has some expectation of how demographics would be, but I think China's demographics have worsened more than what they should have in normal models.

This is such a short time, two years in a very long duration of demographics. So it might be cyclical as well. I think from a medium to long-term perspective as a risk for a bottom-up stock selection, I put a higher rate on demographics. For top-down risk, I put a higher rate on geopolitics - but I think geopolitics is something that is increasingly getting priced in as well.

How would you approach value in the region?

Amit Goel: Once you get a sense of the demographics, you can easily align your portfolios to demographics. The key is whether the country can still grow at 3-4% real, which we think it can, and how demographics can change that growth profile. I think China can still become productive in parts of the economy, which can drive growth. So I still believe that 3-4% growth is possible, and then you can change your portfolio concerning demographics.

There will still be categories where consumers will spend more. On healthcare services, as you age more, you spend more on that. Education - you need to up-skill yourself as you go along. You spend more on sportswear because you want a healthy lifestyle as you age. There will be categories where even worsening demographics will improve them. So you can easily modify your portfolio. I think at this point, we are still not sure whether these demographic changes that we saw in the last two years are more cyclical or structured.

What would you say to investors who remain reluctant about investing in China?

Amit Goel: I think what my advice would be to investors is that we should be looking at China in a very pragmatic way. You have to look at what is structural, what is cyclical, and what is price-taking. I think you can still have your long-term structural concerns on China, which are valid, but there are a lot of medium-term opportunities because investors have sold these stocks and they're trading at the best valuations we have seen on them in the last 10 years.

So I think it would be very risky for investors to ignore those opportunities. I think some of the opportunities that I see in China are the best I have ever seen in the last 10 years. So this is the time to be more greedy, but with the sense that you have some of these long-term concerns. So you have to manage how you have your exposure to China.

Can you take us through a few examples of these opportunities?

Amit Goel: So I spoke about China's consumer being an area where I'm very much focused on. I think it's very cheap relative to the market, related to their history on an absolute basis.

On a related basis, I think this is probably the only time in the last 12 years of my investing where you can probably throw a dart and buy any of them.

If you specifically ask me, I think sectors like staples and the dairy sectors. There's a company called China Mengniu Dairy (HKG: 2319). You go to the sportswear sector, there are companies like Li Ning Co (HKG: 2331) and ANTA Sports Products (HKG: 2020). And there's the Chinese beer sector as well.

So I think these are sectors where you have consolidated industry structures. The bigger companies are getting bigger, they're taking share. The underlying economies are either going through pricing through premiumisation while volume growth is low, but they're becoming more branded. They're taking share. Consumers are spending more in these categories. So I think some of these names and categories are trading at such reasonable throwaway prices as well, that it doesn't take a lot in terms of growth or improvement for you to make money in these companies.

10 April 2024

Emerging markets

Amit Goel

Amit Goel

Lead-Portfolio Manager, Fidelity Global Emerging Markets Strategy and Portfolio Manager, Fidelity India Fund

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