China can be seen as a challenging market for inexperienced investors. Yet, for those with on-the-ground knowledge of businesses and sectors, there are multiple opportunities to meet with local firms determined to succeed, regardless of the macro backdrop. Following a recent series of company visits, Jing Ning, Co-Head of Investment in China, and Dale Nicholls, Portfolio Manager, joined forces to discuss the mood of corporate China and assess the landscape of the world’s second-largest economy.
As China emerges from its post-pandemic reopening, there are questions about the pace of its recovery. “We saw significant growth in the first quarter of 2023, but that is now slowing,” says Nicholls. More positively, equity valuations are below their historical average, with prices viewed as inexpensive compared to other global markets.
However, he adds that there’s a mismatch between what traders see on their screens and the feedback he receives from Fidelity’s China-based analysts and the experience gained from his research trip. “From what I witnessed, the general pathway is towards recovery.” What could affect China is the knock-on effects of a global slowdown, but it will still see accelerating economic expansion, which is not something that many other major markets are expected to enjoy. “On a relative basis, China really stands out,” Ning adds. “We have been covering China’s success for more than 20 years, and during that time, the sky has never been completely clear, so we believe there is no need to be overly concerned as we still see a lot of value.”
The consumer will drive China’s recovery
Consumption was highlighted as a solid example of a force that could bolster China’s upturn, with a lot of pent-up spending expected to be released. “One thing mentioned at my meetings was that consumer companies at the low and high ends of the market are relatively resilient. However, mid-level producers are weaker,” notes Nicholls. Overall, the outlook remains positive, particularly compared to the West.
Innovation and overseas investment
Two other themes emerged from their visit. The first was innovation, especially within the electric vehicle market, where the country’s competitive position is solidifying. “Moreover, this forward-thinking attitude isn’t restricted to leading centres such as Shanghai and Beijing. Other cities are attracting overseas companies who appreciate China’s desire for technological change,” observes Nicholls.
Ning also points out that in tandem with innovation, urbanisation is still powering growth, something reflected in, for example, the number of university campuses being established.
Companies poised for the AI revolution
Secondly, businesses in China commented on developments in artificial intelligence (AI), which Nicholls thinks will signal the beginning of another technology cycle. “We are at a turning point where no one is sure how this new technology will play out, and that makes it exciting.” This sense of anticipation not only applies to Chinese businesses at the forefront of AI buildout but also to firms in most other sectors who know it will potentially change how they operate. “As investors, this also presents us with multiple new opportunities,” continues Ning. “There'll be winners and losers as always, so we need to work hard, meet with companies and evaluate who will achieve success.”
China’s finance industry will not be immune to change, but its direction is beginning to take shape. “AI will be helpful when gathering data. But we should remember that finance is a subtle mix of art and science,” observes Ning. Analysts represent the art element, developing views and drawing conclusions, while AI could help with the scientific aspect.