Time to invest in China?
The highest-profile casualty of the trade-war tension between the Chinese and US governments has been China, where many believe that the recent sell-off has left the market attractively valued.
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Adventurous, contrarian investors who think that the trade dispute will be settled relatively painlessly might be tempted to try to take advantage by using one of the specialist single country funds that operate in this area. A good example is the £1.2 billion Fidelity China Special Situations (LON:FCSS) investment trust, which is currently trading on a 12% discount to NAV.
It has been a tough time for the fund, which reported a 9.1% fall in its NAV over the six months to the end of September, compared to a 4% decline in the MSCI China benchmark. The underperformance was due to the fact that several of its holdings were marked down sharply and it also suffered from being underweight in energy shares that benefited from the rising oil price.
The two largest holdings are the online retailer Alibaba and internet platform Tencent
By far and away the two largest holdings are the online retailer Alibaba and internet platform Tencent. Both have been big positive contributors to the long-term performance, but they have each sold-off during recent months.
Dale Nicholls, the fund manager, has said that the consumer slowdown in China is a concern for Alibaba, but there is still significant potential for the company to monetise its customer base and he believes that the valuation is now back to compelling levels. He thinks that the fundamental growth story with Tencent remains unchanged despite recent setbacks and is closely linked to Chinese consumption trends.
The manager acknowledges that increased tariffs would impact the export sector, yet the fund should be relatively unaffected as only 1.5% of portfolio revenues come from the US, with 93% being generated in Greater China. The bigger problem would be a domestic slowdown, and although there has been a significant reduction in sales of large durable goods such as cars, retail sales growth is still OK with a year-on-year increase of 9%.
Selective additions
Nicholls has used the recent market weakness to take profits from some of the short positions in cyclical stocks and to add to some of the existing longs. There have also been a few selective additions in sectors such as the Industrials, including Artificial Intelligence and Surveillance companies, which have fallen to low valuations despite their strong mid-term growth prospects.
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The investment trust team at Numis have a high regard for the manager who has a good long-term track record, but acknowledge that the portfolio positioning means that the performance will be dependent on sentiment towards the Chinese consumer. FCSS aims to exploit the closed-ended structure via its active use of gearing (borrowing to invest), and its exposure to less liquid areas including the mid/small caps and unquoted companies.
The Chinese government is focused on bringing about a structural shift away from a reliance on investment towards consumption and Fidelity China Special Situations provides an adventurous way to invest in some of the companies that could lead the transition to a more consumer-focused economy. Trade-war tensions and slowing consumption growth have hurt the recent performance, but long-term risk tolerant investors might consider this to be a good buying opportunity.
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