China’s sustained reform agenda will drive investment opportunities in 2016, says Fidelity’s Jing Ning
Hong Kong, 1 December 2015: China’s strong reform agenda will drive new, and sometimes contrarian, investment opportunities in 2016 that should offset any expected slowdown in overall growth, says Fidelity International’s Jing Ning.
“The market continues to believe that China’s new economy will drive much of the investment opportunities in 2016”, says Jing Ning, portfolio manager of Fidelity Funds- China Focus Fund, Fidelity International. “While this will certainly be the case, investors shouldn’t be overly confident about the pace of growth in the new economy as there are ample opportunities in the so-called old economy that remain under-valued as we move into 2016.”
“I adopt a diversified approach when investing in China and pay close attention to those companies likely to be direct beneficiaries of strong reform agenda as they will be attractive investments with plenty of upside in the short to medium term,” she explained. “Companies in the oil, infrastructure, heavy machinery and property sectors are all likely to benefit from China’s sustained reform agenda next year.”
Growth stimulus to support property and infrastructure
“Next year, the government will stimulate domestic demand to support the economy and this will likely come from property and infrastructure as both are meaningful contributors to the economy,” says Ms Ning.
“The stimulus packages this time will focus strategically on projects that will improve efficiency and will not create oversupply such as high voltage transmission, high speed rail, city planning, sewerage works and waste treatment. I expect property policy will remain supportive. With demand turning, the property sector is entering a steady cyclical upturn. I’m seeing opportunities in quality property developers with exposure to tier-one and tier-two cities,” she explained.
State-Owned Enterprises (SOE) reform is another area of focus. “I expect to see the creation of a comprehensive pension scheme. Pensions are likely to heavily invest in SOEs, which may increase the demand for dividends and encourage SOEs to be more efficient with capital. We may see SOEs adopt a more shareholder friendly approach as a way of competing for and capturing foreign investment.”
Ms Ning said she also remains overweight in the consumer discretionary sector as it provides some exposure to the ‘new’ Chinese economy, as part of a more diversified approach. “I continue to like the consumer discretionary sector, largely driven by deep-value large-cap stocks in the A-share market. I like companies that are beneficiaries of the structural growth demand driven by increasing urbanisation,” she explained.
“It’s important to note also that while a change to a more consumer-driven economic model is happening, it is adding more efficiency and transparency rather than generating much new demand so investors need to have realistic expectations about annual growth. For example, moving a business model from offline to online is more efficient, but it does not necessarily mean a consumer will buy two pairs of shoes instead of one. It does, however, mean that the company could become more profitable as a result of managing their cost base more efficiently. This is a pattern I expect to see continue in 2016.”
China’s 13th Five Year Plan
“Expect to see more details to emerge early in 2016 and policy changes implemented towards the end of next year. The five-year plan shows positive signs of China’s intentions. I see three areas interesting - the change in one-child policy will lead to long-term investment implications on baby goods and upgrading of property; pensions system development will be further established which lays a more sophisticated long-term investor base; and reform should accelerate production and commercial scale,” said Ms Ning.
MSCI’s ADR move
“While this has been well flagged, its significance should not be overstated”, explained Ms Ning. “The move has no bearing on whether or when China A-shares will be included in MSCI’s emerging market indices. The ADR inclusion process will be in stages, but once it is complete next year, Fidelity expects US-listed Chinese names to represent around 15% of MSCI’s China index. This will result in the index becoming a better reflection of ‘old’ versus ‘new’ China. I would also expect this change to attract more foreign institutional investors, which could dampen long-term volatility.”
About Fidelity International
Fidelity International offers world class investment solutions and retirement expertise. As a privately owned, independent company, investment is our only business. We are driven by the needs of our clients, not by shareholders. Our vision is to deliver innovative client solutions for a better future. Established in 1969 as the international arm of Fidelity Investments, which was founded in Boston in 1946, Fidelity International became independent of the US organisation in 1980, and is today owned mainly by management and members of the original founding family. We invest USD $258 billion globally on behalf of clients in Asia-Pacific, Europe, the Middle East, and South America. Our clients range from central banks, sovereign wealth funds, pension funds, large corporates, financial institutions, insurers and wealth managers, to private individuals. In addition to asset management, we offer investment administration and guidance for employer benefit schemes, advisers and individuals in several countries. We are responsible for USD $81 billion in assets under administration. (Data as at 30 September 2015)
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