Fidelity's Dale Nicholls bullish on China's 'domestic opportunity'
Trade concerns no deterrent to manager's outlook
Dale Nicholls, manager of the £1.2bn Fidelity China Special Situations Trust (FCSS), continues to take advantage of "the domestic opportunity" in China as he looks to find long-term winners in both listed and unlisted markets.
There are a number of concerns regarding the macro backdrop in China, including slowing GDP growth, the build-up of debt in the economy and the impact of trade tensions with the US.
Prepare for market correction as US-Chinatensions threaten to turn into currency war
Nicholls said he accepted these are real risks to the Chinese economy; the amount of debt in the system, which has increased 100% since the Global Financial Crisis, will lead to issues particularly with non-performing loans, for instance.
Trade, too, will cause short-term problems for industries such as autos and in personal computing, where around half of global production comes from China.
However, Nicholls noted the debt crisis is being dealt with by authorities and trade will mainly affect those firms that derive revenues from abroad.
For Nicholls, "the thrust of this portfolio is about the domestic opportunity in China."
"It is consumption, it is the natural development of the middle class, and it is the interesting technology trends," he said.
While higher wages pose a problem for margins as staff costs rise, according to the manager, that should be more than offset for domestically focused firms by the fact those higher wages will be spent in the economy.
Further, Nicholls thinks growth is slowing for the right reasons and noted consumption in China is growing at a faster rate in the high single digits.
"That is a market, as an investor, if you've got reasonable valuations, you should be able to make money in."
The natural development of the middle class in China is the biggest story, Nicholls said.
That encompasses a range of categories "where penetration really lags the sort of levels that we have in the West".
Foreign companies are making inroads, said Nicholls, but so, too, are Chinese firms.
"You are seeing a lot of domestic companies really getting traction, as well, and increasingly getting strong positions in a lot of the consumer markets."
Structural trends
One area Nicholls likes, despite the risks around trade and tariffs, is the autos sector, which he said has had "a very tough time", but is expected to improve from here. Indeed, June was the first month for a long time where retail growth returned to the market.
"The long-term story for growth in the auto space is still there," Nicholls added.
"China is the biggest market in the world, but the number of cars per 1,000 people is still only between 100 and 200; in the US it is around 800."
While he does not expect China to reach the same levels as the US due to congestion issues in Beijing there is still a lot of scope for growth.
Nicholls also said that many of the structural trends that are seen as positive in Western markets, particularly the US, are also prevalent in China - and they are moving much faster there, too.
