Fidelity China looks for lockdown’s end to ‘unleash’ growth

After a record rebound from the pandemic, the last 12 months have been difficult for Fidelity China Special Situations but fund manager Dale Nicholls is confident the easing of lockdowns will enable small and mid-cap portfolio to thrive.

Fidelity China Special Situations (FCSS ) fund manager Dale Nicholls remains positive about investment in China as valuations become more attractive, with increasing confidence in government signals to support growth and the loosening of Covid restrictions this week.

The manager of the £1.4bn closed-end fund believes the Chinese government is unlikely to make as heavy regulatory interferences as in 2021, which saw the portfolio’s net asset value with dividends included slump 34.9% for the 12 months to the end of March, and the MSCI China Index benchmark by 29.3%.

During the same period, the shareholder total returns slumped 39.2% as the discount to net asset value widened from 1.1% to 7.5%.

This was in stark contrast to the previous 12 months when the smaller and mid-cap stock trust’s NAV soared 81.9% in the rebound from the pandemic.

Nicholls has added to industrials, the largest sector overweight position in the portfolio, after identifying opportunities in the fragmented building materials market, the insurance industry within financial services, and tech names such as Alibaba.

‘I remain positive on the long-term potential of the Chinese consumption theme and believe that there is good potential for the unleashing of spending power as the country comes out of the pandemic,’ Nicholls (pictured below) said in a portfolio update this month.

Despite loosening restrictions this week, Covid continues to form a worry in Nicholls’ mind as China’s economic growth slowed this year, exacerbated by dwindling consumer activity and supply chain problems.

‘I do not think that we should underestimate the risks from the zero-Covid policy and I expect the short-term outlook for the consumer sector will be difficult; and this is partly reflected in the portfolio’s current underweight to consumer discretionary positions,’ he said.

The consumer discretionary sector formed the largest sector weighting at 33.5%, according to the April factsheet, overweight by 4.9% relative to the index.

Nicholls was happy about the government’s increased monetary and fiscal action after the central bank cut five-year loan prime rates, or main mortgage interest rate, by 0.15%. The move lends support to the property sector that has been a major factor limiting growth, since the defaulting of $300bn property titan Evergrande last year.

Government announcements that policy would shift to support economic growth through increased infrastructure spending, more supportive property measures and the healthy development of internet platforms which will help underpin consumption and encourage spending, give cause for further optimism.

‘On the regulatory wave in general, I believe this has good potential to ebb, with a shift towards the implementation of announced policies versus policy surprises,’ he said.

The 2.2%-yielding portfolio’s top holdings include social networker Tencent (42%), e-commerce market Alibaba and biotech company WuXi, which all saw share price falls of more than 35% over the 12 months. 

Nicholls continues to support them, citing their dominance in the market and sizeable followings which position them well for future earnings growth.

Top detractors to performance in the year to March include internet data centre (IDC) operator VNET Group, which was weighed down by weaker demand from wholesale customers, increased competition and regulatory concerns that have generally applied to US listed Chinese companies.

Shares in the company fell 81.6% in the year to the end of March, further dampened by concerns over strategic shareholder Tuspark’s pending sale owing to its debt restructuring.

Other detractors include marketing tech company iClick Interactive Asia Group, e-commerce service provider Baozun and fin tech group Linklogis, which were caught in the broader market sell-off.

Top performers include unlisted artificial intelligence company SenseTime, purchased in 2018, after a rallying share price following its initial public offering.

In the year to date, the portfolio has returned -19.1%, almost 10% below its benchmark. The shares have fallen 18.3%, and closed last week at 254p, a 1.8% discount to net asset value. 

Over 10 years, the trust has returned 300%, compared to 99% for its benchmark.

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