Fidelity China Special Situations hails ‘cheap China’ and cuts fee

Chinese shares are about one-third cheaper than global peers, making them a compelling investment as growth rebounds, argues Fidelity.

Super 60-rated Fidelity China Special Situations beat its benchmark on a net asset value (NAV) basis for the 12 months to 31 March 2023, but its shares underperformed due to a widening of the discount.

The investment trust delivered a 0.3% share price return and 2.6% NAV return compared with a 1.4% return for the MSCI China Index, according to its latest annual results.

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The trust seeks to profit from the rise of the Chinese consumer, as economic growth leads to a larger and wealthier middle class.

Its top stocks include internet and e-commerce firms Tencent and Alibaba, as well as insurance group Ping An and food company China Foods. Around two-fifths of the £1 billion market cap trust is invested in consumer-exposed shares, according to fund manager Dale Nicholls.

Chinese shares have been under pressure this year due to disappointment around its economic recovery following the end of Covid-19 restrictions. The trust’s share price is down 13% year-to-date and now trades at a 10% discount to NAV.

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Nicholls said: “As I write this year’s annual review, questions are once again being raised about China’s economic recovery, which is likely the main factor behind recent market weakness. While growth rates on the whole have clearly tempered in the second quarter, the government’s GDP target of 5% for the year looks achievable. This will make China one of the few large economies that will see accelerating economic growth in 2023.

“The biggest change post-Covid is the outlook for the consumer. While the recovery is bumpy and varies somewhat by sector, the path to recovery is clearly there.”

He says that as economic growth recovers, corporate earnings should also bounce back. He adds that Chinese shares are historically cheap, making them attractive relative to global peers despite a strong growth outlook.

The MSCI China index trades at a price-to-earnings (p/e) ratio of 12.9, as of the end of May this year. This compares with 13 for emerging market shares more broadly and 18.2 for the MSCI All Country World index.

Nicholls flagged its holding in JNBY Design, fashion company, as good value.

“Its differentiated ‘fashion forward’ product offerings are backed by a strong and stable local design team. Valuation-wise, JNBY is trading on a p/e multiple below 10 times, which is very attractive for a company with a solid growth profile and track record,” he said.

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Fidelity China Special Situations has 13.6% in unlisted shares, below its 15% limit. Fidelity announced it hired an expert in unlisted Chinese equities to help oversee this part of the portfolio.

The board of the trust also announced a cut to its fees. Charges will fall from 0.9% to 0.85% for the first £1.5 billion of assets. It will remain at 0.70% on net assets over £1.5 billion. The ongoing charge for the last financial year, which includes trading fees, was 0.98%.

The dividend was increased 13.6% from 5.50p to 6.25p. The shares currently yield 2.5%, based on the past 12 months of dividends.

Chair Mike Balfour said: “It was pleasing to see positive net asset value and share price returns and a return to outperformance for the company against its benchmark index.

“While we expect the company to generate its returns primarily from capital, corporate earnings growth in China and the maturing of business models has meant healthy growth in dividends.”