Fidelity China Special Situations PLC’s Dale Nicholls reviews the current landscape and the significant policy response from the Chinese authorities to the coronavirus outbreak. He discusses some of the recent shifts he has made to positioning, while also taking a longer-term view of the structural growth opportunities that are now on offer at very attractive valuations.
- The Chinese government’s efforts to curtail the coronavirus outbreak has been succeeding but clearly there will be a significant hit to economic activity.
- The correction in markets has gone some way to price in the risks and there are opportunities to acquire long-term winners at attractive valuations.
- We have been reviewing beneficiaries of potential stimulus and focusing on companies that are able navigate and emerge stronger through this period.
Currently, I am most concerned at the global macroeconomic impact of the coronavirus as it continues to spread beyond China. Whilst the year-to-date severity of the slowdown in China is now being reflected in economic data releases - such as Industrial Production and Retail Sales - the recent correction in the market has helped to price in most of the risks. However, I also expect general forecasts will need to revised down in the near-term as we see further pressure being put on balance sheets.
Overall, amid increasing global cases of the virus, weaker consumption demand and limited room of monetary easing, the global economy is likely to witness more fiscal stimulus support. Against this backdrop, I remain cautious over the shorter term, and am focusing on how to capture opportunities when things stabilise over the longer term.
Focus on China
New cases have fallen significantly in China and it’s clear that the Chinese government’s efforts to curtail the outbreak has been succeeding. I would note that there has been a significant short-term impact, particularly on travel and tourism-related sectors, which will see revenues negatively impacted.
While it is extremely challenging to estimate the specific impact of the outbreak immediately, it is important to draw attention to the substantial steps Chinese government and policymakers have taken to contain the outbreak as well as provide support to economic activity. As soon as the Chinese markets opened in February, policymakers infused liquidity and lowered the short-term repo rates.
Since then, they have also implemented various other measures such as cutting tax rates and fees to support small and medium-sized enterprises and asking banks to support troubled companies by lowering interest rates and rolling over loans. I expect further stimulus - both monetary and fiscal - and with lower global interest rates being put in place to support economic growth, China has the capacity to ease further (it will be interesting to see if President Xi will keep China’s 2020 growth target in place).
Whilst the short-term impact from the virus is notable, it does not derail the structural shifts underway in the region. I remain cautious as it is difficult to predict the extent and time this will last for, however if we see continued signs of the virus being contained then this impact could be short-lived as sentiment and demand would improve quickly. This should result in interesting opportunities to purchase structural long-term winners at attractive valuations in sectors like technology, where there are a number of global leaders.
Within Fidelity China Special Situations PLC, I have been reviewing beneficiaries of potential stimulus and paying attention to companies that I expect to be able navigate and emerge stronger through this period. I have also been raising exposure to names where more attractive liquidity opportunities have appeared as a result of the markets’ moves. Notably, in select consumer staples, discretionary and insurance names.
I have also been reducing financials, given that credit cycle dynamics are deteriorating and also taking down some industrials exposure, especially where it is more global. The protection strategies (via index puts) are coming into play, which in turn has seen the portfolio’s net exposure fall over recent times.
The portfolio remains focused on companies with good long-term growth prospects that are cash generative and have strong management teams. These include 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. I also maintain that premiumisation or “trading up” within individual consumption categories will continue and this will create some interesting investment opportunities across a range of areas, including sportswear, toothpaste and coffee chains.
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