As Fidelity China Special Situations PLC passes its 10th anniversary, portfolio manager Dale Nicholls reflects on how the Chinese equity market has transformed over the last decade. He discusses the opportunities that have been created by the rise of the domestic consumer and looks ahead to what the coming years could have in store for investors.
Over this 10-year period China has seen tremendous change and it is of little surprise that this country is now recognised as a key driver of global growth.
China’s economic emergence has primarily been driven by the domestic consumer; the rise of the middle class, its tremendous spending power, increasing aspirations and the way they consume. These are the areas where the trust has focused its exposure and it is pleasing that this has in turn rewarded investors over the last decade.
A decade on - what’s changed?
There has been a marked shift in the economy away from a reliance on investment and towards consumption, as well as continued high levels of innovation and development in areas like technology and healthcare. Well managed companies have emerged and, in some cases, grown very significantly. This change has been reflected in the composition of the index where technology and consumer-related companies now dominate.
The rise of Tencent is a prime example - the first internet company to list on the Stock Exchange of Hong Kong in June 2004. It was added to the MSCI China Index in May 2008, and since then its total market cap has risen from US$3bn to around US$488bn. Its weighting within the MSCI China Index increased from just under 2% at the time of inclusion to 14.5% as at the end of March.
Environmental, Social and Governance (ESG) is moving up the agenda
With increased government support and regulations, we have seen progress in how companies address sustainability issues. For example, in 2018, the China Securities Regulatory Commission (CSRC) established an ESG information disclosure framework which means that by this year all listed companies and bond issuers are mandated to disclose ESG risks in their annual or semi-annual reports.
From a corporate level, many Chinese companies are making strong efforts to improve their ESG focus, including disclosure, reporting, responsible sourcing and monitoring. For example, Alibaba issued its first ESG report in 2018, which identified related issues as most critical to the sustainability of the company. The results of this can be seen in breakthroughs in recent years including the expansion of Alibaba Anti-Counterfeiting Alliance, express IPP, multilingual trademark support and enhanced reporting channels. Domestic and international investors are also accelerating ESG integration in China and raising awareness among corporates.
Looking to the next decade
The core focus of the trust remains on consumer and technology-related companies, which should continue to benefit from the growth drivers that we have been highlighting over the past years. Since the outbreak of Covid-19, we are now seeing signs of activity slowly resuming across many sectors and it is notable that the virus is likely to accelerate areas of positive change within China.
The shift online, be it in e-commerce or services like online education, coupled with the need to manage the data that drives this, will become even more paramount.
We estimate over 40% of the trust’s holdings will be beneficiaries of such shifts. Including sectors like healthcare and life insurance, which is an already an area of structural growth, but is likely to see renewed interest post-virus, this exposure moves well north of 50%.
Given the price action we have seen over recent weeks, more opportunities are also emerging in globally-focused companies. From aircraft leasing to textiles, there are China-based companies that are globally competitive that have been sharply sold-off given concerns around the global slowdown on the back of lockdowns globally. While assessing the balance sheet strength to survive the current downturn is crucial, we are also focusing on how we expect companies to be placed in a competitive sense as they come out of this hiatus.
By focusing on well-managed companies with a strong competitive position - and in many cases directly exposed to the structural growth of the middle class - we are confident that the trust can continue to reward investors over the next decade.
|Since launch||Apr 2015 - Apr 2016||Apr 2016 - Apr 2017||Apr 2017 - Apr 2018||Apr 2018 - Apr 2019||Apr 2019 - Apr 2020|
|Share price (%)||151.8||-16.6||42.0||26.1||2.0||-4.7|
|MSCI China (%)||95.9||-27.2||39.4||27.1||1.3||1.2|
Past performance is not a reliable indicator of future returns. Source: Fidelity International as at 30 April 2020. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only. Basis: bid-bid, income reinvested in GBP. Launch date: 19 April 2010.
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Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments are subject to currency fluctuations. Fidelity China Special Situations PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This Investment Trust invests in emerging markets which can be more volatile than other more developed markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.