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.
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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.
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