The Chinese government intervention in stockmarket activity over the past months has been “disappointing”, says Fidelity China Special Situations manager Dale Nicholls, but he continues to see China as a long-term bet.
The fund manager of the £1.1bn investment trust, who has been focusing on China and Asia Pacific for more than 20 years, says government policies and companies’ corporate governance will continue to play a critical role in China as the world’s second biggest economy gradually attempts to open up its market.
Nicholls says: “In China you’ve got to accept that the government plays a big role in the economy so you’ve got to be well aware of government policies and how those are changing. Also, corporate governance generally is challenging in China as well as other emerging markets. Systems are not that developed and are in a nascent stage.
“Many companies have not been around for so long, so I think that is a risk you need to be factoring in when you look at any individual company because you want that extra level of valuation support.”
The Chinese government has introduced a number of measures aimed at stabilising the A-share market, starting with the People’s Bank of China cutting interest rates and the reserve requirement ratio.
This was followed by the suspension of IPOs, the injection of liquidity into the China Securities Finance Corporation to help support the market, and the creation of a ‘stabilisation fund’ by onshore brokers which collected 120bn yuan (£12bn). In addition, the government has banned major shareholders from selling their own shares.
Also, during the summer, only a couple of weeks after devaluing its currency, the PBC cut again its main interest rate by 0.25 percentage points for the fifth time in a row in an attempt to boost the economy.
Nicholls says: “In the last few months the level of intervention of the government we’ve seen in the market has been disappointing because I think the mid-term story for China is about opening up and liberalising the markets and yet we’ve seen a pretty heavy-handed reaction, which has been a backward step.”
Following the falls in the market, Nicholls says from a valuation perspective in China “things are pretty compelling”.
He says: “There is a great deal of fear out there that is getting reflected in valuations, which are closer to their historical low. As a stock picker, that sort of environment with a lot of value and a lot of negative sentiment is generally a good environment. I’m more positive versus six months ago.”
The fund manager says the “real opportunity” in China is about consumption as well as new developments on the increasing internet usage in the retail space where he believes China is ahead of the US and is moving “very fast”.
He says: “So much of the consumption story is going to happen naturally and that goes across goods and services. It is just a natural development of the middle class.
”The trend of things moving online is happening globally but I think you can argue it is happening faster in China. If you look at ecommerce penetration, it has already gone beyond the US.”
Nicholls mentions giant online retailer Alibaba as the biggest player but also fast-growing online retailers such as Jingdong Mall and BysoftChina.
The other area of interest for the fund manager is healthcare.
He says: “The healthcare sector needs to catch up in terms of social-enabling companies and the health insurance industry. These are themes which are going to increase.”
A potential link between the London and Chinese stockmarkets, as recently spoken about by George Osborne, could give a further boost to Chinese markets and is “a step in the right direction in the very long term”, says Nicholls.
He says: “[A link with London] is what the local Chinese market needs as it is still a very retail-driven market. Just look at how markets have developed in other countries over time, such as Japan and Korea. With foreigners coming into the market I think it is generally something that is positive in the long term.”