The approach I take to managing the Fidelity China Special Situations trust is to focus on undervalued companies that have good long-term growth prospects and have been underestimated by the wider market. The Chinese market is the perfect hunting ground for such stocks. It is broad with the winners still growing rapidly, and there are plenty of hidden gems that fly under the radars of local and international analysts.
I hone in on opportunities in small and medium-sized companies, where lower levels of research by the market leads to greater potential for mispricing, but I also invest in large or mega-cap companies, including state-owned enterprises, where mispricing appears. China’s capital markets are increasingly dynamic, with new firms coming to market all the time. We are finding more opportunities to take positions in companies before they go public. In recent years the private markets have deepened; more companies are finding it possible to fulfil their capital needs with more rounds of capital raising before they float. The trust is free to invest up to 15% of the portfolio in unlisted companies.
The portfolio’s focus remains on “New China” and the domestic economy, which is benefiting from the increase in wealth and size of the middle class. Covid-19 has accelerated structural trends already underway in China, such as the wider penetration and acceptance of e-commerce, which bodes well for growth industries such as IT and certain consumer-discretionary sectors.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Opportunity in volatility
In recent weeks volatility has returned to Chinese equities, driven by an extensive regulatory overhaul of the education sector. Over the past year industries such as mobile payments, fintech and e-commerce have also been subject to regulatory clampdowns. China is a policy-driven market and you need to accept bouts of market volatility. In fact, volatility can create opportunities to invest in high-quality companies at attractive valuations. I see the current environment as one of those times.
One of our holdings is WuXi AppTec (Shanghai: 603259), a global biopharmaceutical and medical-device company. It has benefited from ongoing strong global demand for contract research and manufacturing services. The company’s ability to grow its strong talent pool is a key strength. There is exciting potential from new technological developments in which the company continues to innovate, such as cell and gene therapy.
The newly rich need asset managers
A leading wealth and asset-management services provider, Noah Holdings (NYSE: NOAH), is a beneficiary of significant wealth growth and the increasing number of high net-worth individuals in China. Its core underlying strengths include trust from its client base in addition to its capable distribution team.
Given the low penetration in protection-type life insurance and expected demand growth given higher incomes, the insurance sector should see solid growth in the next few years. There could also be renewed demand post Covid-19 as people focus more on areas such as health insurance. China Pacific Insurance (Shanghai: 601601) is the sector’s third-largest company, comprising life, property and casualty divisions. I am also impressed by the management team’s new efforts to incentivise their workforce and boost productivity.
-
Which UK region has the most in savings? Average savings by areaThe amount people have in their savings differs from region to region in the UK. How does your nest egg compare to those living nearby?
-
Doug and Mary Perkins: Specsavers’ clear-sighted foundersHelped by the deregulation of the sector in the 1980s and brilliant advertising, Mary Perkins and her husband Doug have taken Specsavers to the top of the optometry market
-
Investment opportunities in the world of Coca-ColaThere is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.
-
Streaming services are the new magic money tree for investors – but for how long?Opinion Streaming services are in full bloom and laden with profits, but beware – winter is coming, warns Matthew Lynn
-
Trainline: a cheap cash machine for investorsOpinion Trainline’s shares have slumped owing to concerns about growth, but the sell-off seems overdone
-
Look to British stocks to lead the charge as the Magnificent Seven falterOpinion Gervais Williams, fund manager, The Diverse Income Trust, picks three British stocks where he'd put his money
-
'Pension funds shouldn't be pushed into private equity sector'Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
Greg Abel: Warren Buffett’s heir takes the throneGreg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.
