Fidelity's Portfolio Manager of the Fidelity China Fund, Nitin Bajaj, and Investment Specialist, Keira Zhao, assess the performance of China’s equity market in the first half of 2023 and look beyond economic news flow, as well as volatile market sentiment, to pinpoint long-term investment opportunities.
The second quarter of 2023 saw market participants moderate their growth expectations for China amid a lack of stimulative policy measures and softer-than-expected economic data. “Investors were perhaps too euphoric about China’s reopening, and, as the year progressed, realised that the recovery would be more measured than originally hoped,” explains Bajaj. This serves as a helpful reminder that, when dealing with market sentiment that swings between hope and pessimism, the appropriate question should be: “How do we drive long-term value?” adds Zhao.
Opportunities exist in overlooked market segments
Despite the current challenges, Bajaj is keen to point out that clear opportunities exist, particularly in areas other investors may overlook: “China’s domestic economy is still vibrant and robust.” Despite a slower-than-expected pick-up, the domestic consumption segments of the economy are vibrant, and China continues to invest heavily in education, health care and research and developments. Plus, it retains world-leading manufacturing capabilities.
When translated into equity market terms, the disconnect between investor expectations and the reality of the economic backdrop has left Chinese shares trading at the lower end of their historical levels. Furthermore, they are available at a significant discount to those of other key global economies.
Autos, aircraft, energy, and property in focus
Drilling deeper and several market segments have proved rewarding. For instance, the demand for aircraft leasing means that commercial operators are appealing. The potential for industry consolidation among top-tier lessors has also helped the sector. Another area set to benefit from China’s reopening is heavy-duty truck manufacturers. It has seen solid demand growth, and sales are likely to grow in the near term.
Chinese automobile dealers may have experienced weaker demand and more intense price wars emanating from the expanding electric vehicle (EV) market. However, healthy used-car sales are boosting the sector, especially as current valuations offer a high margin of reassurance.
Bajaj also points out that the energy sector has some interesting opportunities. He explains that although crude oil prices have declined after last year’s peak, profits from natural gas have remained stable in the wake of Beijing’s move to reform the domestic gas market by linking residential gas prices with distributors’ fuel purchasing costs.
The real-estate sector also presents opportunities given its favourable risk-reward attributes following the recent market correction. This also includes building material names in the property value chain that are trading well below their true value.
Participating in the AI revolution
Within the technology sector, Zhao is analysing companies engaged in developing artificial intelligence (AI) related solutions. Also, the EV vehicle sector is still in scope, with its appeal boosted by active policy support. At the end of June 2023, the government extended its tax exemption on renewable automobile purchases in China out to 2027. She notes that this will boost domestic turnover and enhance China’s position as a global leader in the new-energy vehicle field. Elsewhere, within the retail sector, Zhao points to favourable support for retail pharmacies in China, where the structural penetration story “remains intact.”
Fidelity’s fundamental investment approach
“The core of our approach remains owning businesses with a superior return on capital that are managed by competent teams and available at reasonable prices,” says Bajaj. This allows our portfolios to rest on a foundation of robust stock ideas. It means that the strengths and vulnerabilities of a company’s business model can be assessed in tandem with the qualities of its management teams to establish its intrinsic value. “We firmly believe that by sticking with our tried-and-tested investment process and remaining disciplined, we will be well positioned over the long term, irrespective of market and style cycles,” concludes Zhao.
“China’s domestic economy is still vibrant and robust.”