The Chinese bets of Fidelity's Nicholls

The Chinese bets of Fidelity's Nicholls

Dale Nicholls, portfolio manager of Fidelity Special Solutions PLC, gave his outlook for Chinese equities as the Chinese New Year, which will be the Year of the Rooster, approaches.

He stressed the election of Donald Trump was not a major talking point to companies based in China, because of the lack of real clarity around policy and the focus of local companies on the significant domestic growth opportunities ahead of them.

“The trust continues to be heavily weighted in companies set to benefit from the growth and development of the domestic consumer as opposed to overseas markets that could become tougher to access. There remains significant growth potential in companies related to consumption and the changing ways in which people consume. Many categories of consumer goods in China are still underpenetrated relative to other countries.

“The bigger risk in China in my view remains the growth in credit, and while we have seen signs of this slowing, particularly in the so-called shadow banking area, more progress needs to be made here,” Nicholls commented.

The Fidelity Special Solutions PLC still keeps a strong bias towards private consumer-related companies in “new economy” areas. However, Nicholls has increased the trust’s exposure to companies that are best placed to benefit from the expected State Owned Enterprise reform of the Chinese government.

“Big wholesale SOE changes have so far eluded us, but there have been signs this is changing,” Nicholls said.

“One of the portfolio’s top five holdings, China Petroleum & Chemical, recently announced that it was exploring the possibility for the spin-off and IPO of its garage forecourt retail/convenience store business, which should be positive in terms of recognising the value here.

“Other SOE’s have the potential to benefit from changes in regulation especially around pricing in areas like transportation. For example, the trusts holdings in the railway sector are indicating more confidence around tariff increases.”

The trust can invest up to 10% in Chinese unlisted companies. It has initiated new unlisted position in Yiguo. The trust participated in a round of funding that valued the company at US$1bn and the company is around 1.1% of the portfolio today.

Nicholls said : “Yiguo is an early mover and leading fresh food e-commerce company which aims to create a ‘farm-to-table’ e-commerce platform. It is the exclusive operator of the fresh food segment on Alibaba’s T-Mall Supermarket and both Alibaba and its management team are strategic investors. This is a relatively underdeveloped industry in China and one that offers huge growth potential as consumers become more health conscious whilst also seeking greater convenience.”