Sentiment to China has never been so dire, top investor says

Chinese shares could be on the brink of a turnaround after taking a battering this year, writes Sam Benstead. 

The collapse in the value of Chinese stocks this year is overdone and buying opportunities are appearing for contrarian investors.

This is according to Fidelity China Special Situations’ manager Dale Nicholls, who argues that there are “a plethora of buying ideas and opportunities” as “valuations have moved to significant discounts versus both history and other markets”.

“Without a doubt, sentiment towards the China market seems dire. In fact, [it’s] probably the worst I have seen,” he told investors in his half-yearly report for the trust.

Nicholls’ view is that the peak of new regulatory reforms, particularly in China’s internet space, is now behind us, and so the new regulatory stability should result in more predictable earnings and higher share prices.

He argues that economic expansion remains a priority for the Chinese Communist Party, despite their strict lockdowns, and therefore there will be increasing measures in the future to spur growth.

Nicholls refutes the view that the consolidation of President Xi’s power will lead to more focus on social issues rather than an increased focus on spurring growth and innovation.

He said: “I believe these concerns are misplaced. It is worth highlighting that, despite the recent party congress delivering no overall change, policy tweaks are ongoing: from the move away from full city lockdowns to the potential to reassess policy if the World Health Organisation amends its overarching view on the virus.

“Hong Kong’s recent change in approach also bodes well for improvement. The significant impact of lockdowns on the economy are clear and should be a strong incentive for change.”

• Insider Interview: why India – not China – is the most exciting market in Asia
• China trust pulls IPO, blaming market conditions

Nicholls is so bullish that he has increased the gearing, or borrowing, on the trust to take advantage of cheap shares.

He also disclosed that he has “skin in the game”, owning 96,742 shares, worth £212,800 as of 1 December 2022.

The trust focuses on companies that will profit from the emergence of China’s middle class. In the past six months, it has upped its investments in consumer stocks, such as retailer MINISO and added a new holding in premium liquor producer Kweichow Moutai.

“It has a dominant position in the country’s high-end liquor market. With its strong brand and pricing power, the company stands to benefit from market share gains and improving management incentives to deliver earnings. It offers a structural growth opportunity in the Chinese consumption space,” Nicholls said.

• China’s stock market crash: biggest fund, trust and ETF losers
• Investing in China: buying opportunity or not worth the risk?

The trust is overweight the internet sector, which has been one of the worst hit by government crackdowns on the private sector.

“Nevertheless, I believe the worst is now behind us, and the focus going forward will be on refining and implementing those regulatory policies while being mindful of the inherent risk.

“Within the technology space, I added a new position in information technology services provider Longshine Technology, which is a major beneficiary of China’s power grid digitalisation. It is well positioned to benefit from grid digitalisation capital expenditure growth and its software solutions are critical in promoting grid digitalisation on the consumption side,” he said.

Fidelity China Special Situations net asset value (NAV) total return declined -8.4% in sterling terms, while the MSCI China Index total return declined by -5.5% in the six-month period to 30 September 2022.

The share price of the company fell by -9.8% over the same period, reflecting a widening of the discount to the NAV.

The trust can invest up to 15% in unlisted companies, with the limit applied at the time of purchase of the investment. As of 30 September 2022, it had 17.3% in unlisted companies, including TikTok owner ByteDance at a 2.3% position.

Fidelity China Special Situations is a member of interactive investor’s Super 60 list of investment ideas as an “adventurous” investment option.