AAA-rated Price sees China value as Fidelity reshapes Emerging Markets trust

With Chinese tech giants trading at half their share price peaks, value is now starting to emerge, says Fidelity Emerging Markets fund manager Nick Price.

On 19 November, Fidelity Emerging Markets Limited told investors that its new fund managers had effectively completed the realignment of the trust’s portfolio, highlighting several new positions already shown in its October factsheet.    

Following a challenging few months for the Chinese market, value is now starting to emerge, says Fidelity FAST Emerging Markets fund manager Nick Price.

‘It is going to be a classic case of climbing a wall of worry,’ AAA-rated Price told Citywire. He and co-manager Chris Tennant took over the former Genesis Emerging Markets investment trust in October, which has now been renamed Fidelity Emerging Markets Limited (FEML ).

‘I don’t think the newsflow is going to be particularly positive over the course of the next couple of quarters, but then again there is an opportunity,’ Price (pictured above) added.  

For example, the manager said the liquidity crisis at Evergrande, one of China’s largest property developers, has presented investors with an opportunity to differentiate between the more challenged players in the sector with those that stand to gain market share.

China has been one of the worst performing emerging markets so far in 2021, after a regulatory crackdown across the technology, gaming and private education sectors hit investor sentiment. Things then went from bad to worse when Evergrande started to teeter on the brink of collapse in September – a process that remains ongoing.

However, with tech giants like Tencent and Alibaba 40% to 50% off their share price peaks and the Chinese market, as measured by the Hang Seng Composite index of Hong Kong-listed stocks, trading around 9 times forward earnings, Price believes a lot of the bad news is priced in.

‘I am increasingly constructive on China. When it comes to the internet space, I think we are through the worst of the regulatory onslaught,’ he said.

Price suspects that Chinese economic activity will remain sluggish for the next three quarters. In light of the issues facing the property sector, he anticipates that Chinese gross domestic product (GDP) growth could total around 3% next year, coming in lower than the usual 5-6%, which in turn could impact consumption.

Nevertheless, he says it isn’t all bad news. ‘There are some positive signs of life, not necessarily in the property sector but in terms of credit flowing through the economy.’

While regulatory changes have created significant market dislocations, Price’s co-manager Tennant does not view the Chinese government’s actions as irrational.

‘Whilst it has created a lot of volatility, I think the actual end-goal of the [Chinese Communist Party] with these regulatory changes has been a step in the right direction,’ Tennant said.

Portfolio transition

The managers’ comments follow a busy six-week period for their team. Since they took over the Genesis Emerging Markets trust in October, they have been tasked with repositioning the portfolio and liquidating 25% of the assets to cash to fulfil a tender offer. This saw 103.3m of the trust’s 121.5m shares offered for sale back to the company in October. However, the most the trust had offered to buy was 30.4 million.

There was strong demand to tender the shares, given the nature of the shareholder register, with more than half of the trust’s shares held by discount-hunting value investors like City of London, Lazards, Wells Capital and 1607 Capital Partners.

They were, no doubt, keen to sell some of their shares at a discount of 2% below net asset value, given it stood at close to 13% at the time of the tender offer, with some investors actively buying shares in a bid to tender them.

‘The results of the tender offer were exactly what we expected,’ said Alex Denny, head of investment trusts at Fidelity International.

‘We got a 75% of the vote in favour of the change in policy. The vast majority of shareholders remain supportive and in fact some have been buyers since.’

The £760m Fidelity Emerging Markets trust will be run along similar lines to the open-ended £347m FAST Emerging Markets fund, with the managers able to take both long and short positions. As well as backing businesses they have conviction in, they will aim to profit from stocks falling in value too. They can also use derivatives to increase the fund’s long exposure in areas where they see the greatest upside potential. Unlike the fund, the trust can also invest in unlisted businesses across emerging markets.

‘It is still very early days, but I am confident we will be able to attract new investors in and the discount will narrow over time,’ Denny explained.

He said the company is planning to launch a marketing drive soon to attract new investors.

Price’s Citywire AAA rating for performance also reflects his strong on record on several other mandates, including the firm’s £3.1bn Emerging Markets fund which he co-manages with Amit Goel.

Cyclical opportunity

In Price and Tennant’s opinion, one of the key differences between the Fidelity Emerging Markets investment trust and its predecessor is its openness to embrace more economically-sensitive businesses, also known as ‘cyclicals’.

Unlike many of its peers, the fund currently has a meaningful allocation to commodities stocks, particularly copper-related companies. ‘As the world migrates to a greener future, copper is going to play a key role in that. It is a pretty supply-constrained industry as well,’ Price said.

Both the fund and investment trust also have a significant allocation to financials. Here, Price said the portfolio holds an ‘eclectic’ mix of businesses, including Indian bank HDFC, Russia-based Sberbank and fintech Kaspi.

Over the three years to the end of October, the Fidelity FAST Emerging Markets fund has returned 56.3%, which compares to a 34.3% return by the average fund in the Investment Association’s Global Emerging Markets sector.

Meanwhile, the Fidelity Emerging Markets trust trades on a 12.1% discount. Over the past month, its net asset value has fallen by 0.7%, while its shares are up 1.3% under its new managers.

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