Confidence in Chinese investments has taken a knock following the recent tightening of Chinese regulations. However, fund manager Fidelity International believes the Chinese growth story is intact and there are opportunities for long-term investors as the underlying trends have remained intact despite increased state intervention.
Better quality growth
Global Chief Investment Officer at Fidelity International, Andrew McCaffery understands why investors have reacted negatively to the government measures given the speed with which they have been implemented and the impact they have had on the untouchable technology sector, among others. “But they should not lose sight of the bigger picture: the middle class will continue to grow while average incomes will continue to rebound strongly. The Chinese government’s actions are aimed at more sustainable economic growth, rather than just high growth rates.”
Fidelity colleague Paras Anand, CIO of the Asia-Pacific region, also points out that the stricter Chinese regulations have not come out of the blue. “This strategic move has already been underway since 2017 as the Chinese government has gradually increased its focus on the potential risks of unbridled growth. It has identified three issues, namely (property) ownership, education and healthcare, which it believes are key to reversing rising inequality. And investors may experience short-term pain but the reforms should lead to long-term gains as it will result in better quality growth.”
Opportunities for investors
McCaffery pointed out that due to the negative market sentiment, the Chinese stock market is now trading at a significant discount. “The low valuation creates opportunities for investors who see the strong long-term growth potential of the Chinese economy.” Dale Nicholls, manager of the China Special Situations fund, joined his colleague in saying that sentiment has taken a bigger hit than fundamentals. “Chinese companies are showing resilience despite the profound changes as they now quote at historically low valuations and at significant discounts to sector peers globally.”
McCaffery also said that he sees opportunities in the credit market. “It has been 2011-2012 since the average yield on the Chinese high yield market was this high, while uncertainty has also driven yields on Asian HY sharply higher, which means that yields are now twice as high as on European and US HY paper. It is also notable that the spread between Asian IG and HY paper is at its highest level since the beginning of the century.” For the Global CIO, the challenge now is to find the individual companies that have been unfairly punished by the market.
Paras Anand did find one positive in the recent wave of selling. “The renminbi has held up well in recent months, indicating there has been no capital flight and underlining how resilient China’s capital markets have become. The goals of further developing China’s capital markets and internationalising the currency still stand.”
Where to look?
Director of Asian equities, Victoria Mio said she sees opportunities in market segments that the government has focused on, such as green energy, semiconductors, new infrastructure, electric vehicle supply chains, artificial intelligence and high-end manufacturing. “We also see deep-value opportunities in the Chinese offshore market, as well as in A-share companies that clearly have less regulatory risk and will benefit more from looser fiscal and monetary policies.”
“The key will be to pick up companies with solid business models and strong pricing power.” Finally, she also expects the MSCI China universe to become more balanced around sector weightings in the coming years, with internet names declining and industrial and IT companies rising.