In 2014, slowing GDP, growing debt and decreasing property prices jarred with the Shanghai exchange turning in the best performance of the global stock markets.
While some investors have been discouraged by the slowdown in economic growth – with the Chinese government admitting on 14 March that it is struggling to hit targets – others are in favour of reducing the rate from 7.5% to a more sustainable 5%.
Though Nicholls, manager of Fidelity’s China Special Situations Fund, conceded that China does have issues to sort out, he is confident that there are certain sectors ripe for capitalisation.
“The course is set for an unprecedented reform programme that will open up the Chinese economy and its markets,” he said.
“There are many ongoing economic and social reforms that address issues such as reducing government intervention, allowing markets to determine prices and improved welfare. These changes tend to take baby steps forward, so can often slip under the radar, but in aggregate they are really changing the investment landscape.”
Looking beyond the headline figures
So where does Nicholls see opportunities for investors?
As of 31 January, 65.9% of the China Special Situations portfolio is dedicated to China, alongside 30.9% invested in Hong Kong.
Sector-wise, the fund’s largest weighting is in consumer discretionary, a 23.8% slice that underlines Nicholls’ belief that the Chinese government is backing increased middle-class spending despite recently-implemented anti-corruption measures.
“Chinese wages continue to see solid increases and the growing middle class wants to spend on goods, services and travel,” he explained.
“All this is happening against the backdrop of a government looking to shift the economy to a consumption-led model, so we can expect further policy tailwinds to support this consumption trend.
“Much has been made of the recent anti-corruption crackdown. While this has had an impact at the luxury end, I believe that this should have little impact on the underlying drivers behind mass market consumption.”
Nicholls also expects the benefits of more take-home pay spilling over into the healthcare sector, which accounts for 11.8% of his portfolio.
“As people get wealthier they want to get healthier,” he explained. “China’s per capita expenditure on healthcare is well below that of developed nations, but we are seeing this pick up. China’s low cost advantage also makes it attractive as research and development outsourcing centre for the large Western pharmaceutical companies.”
‘E-vestment’
The second-largest fund weighting is a 21.3% slice in information technology, a sector that Nicholls believes is poised to benefit from an impending jump in internet usage.
“China’s shift to online represents one of the biggest commercial opportunities that most investors will see in their lifetimes,” he declared.
“Admittedly this is a global trend, but it is occurring even faster in China, partly because traditional bricks and mortar retail infrastructure has not been built out to levels common in the West.
“Internet usage in China is still only around 50% of the population, so there is still growth potential for e-commerce. There are also attractive businesses springing up related to internet security and data storage that investors cannot ignore.”
Another significant weighting in Nicholls’ portfolio is 20.8% in general finance, while his lowest convictions are in utilities, consumer staples and telecommunications, which carry 3.7%, 2.1% and 1.6% respectively.
