TOL - 20th Apr, 2023
Fidelity: The next rally in Chinese equities will be "alpha driven"
And contrarian value strategies may be rewarded, argues Catherine Yeung.
The name of the investing game is to find winners. For a long time, these winners could have been earned passively or just by buying names that have heavy exposure to a reopening trade. But all that seems to have changed.
Catherine Yeung of Fidelity International argues the next rally will be "alpha-driven". Or put another way, individual company earnings and stories are now more important than ever.
"It will be the market leaders across all industries that should deliver good earnings, good market share, good strategy. These will likely underpin the next part of the recovery," Yeung says.
But she also cautions that famed names like Alibaba and Tencent, which have seen steep share price falls, may not experience the easy share price growth of the free money era.
In this edition of Expert Insights, Yeung illuminates us on the Fidelity team's investing strategy and why being counter-consensus is likely to pay off.
EDITED TRANSCRIPT
LW: What did you mean when you said the next rally in Chinese equities will be "alpha-driven"?
Yeung: The rally post the pivot announcement... It wasn't even tweaked to the COVID policy, like we had in Hong Kong or what you saw in Singapore or other parts of Asia. It was just, we're going from here to here, and it happened very, very quickly. But because sentiment was so, so poor, you started seeing this rush of money going back into the market, but it was really driven by those recovery or reopening names.
We're seeing this sort of pause, and it's like investors will readdress companies and it'll be the market leaders across all industries (not just consumption) that are going to deliver or should deliver good earnings, good market share, good strategy growth, and they're going to be the likely supporters or not supporters, they'll be the ones that underpin the next part of the recovery, which again, relative to the rest of the world, we do think China will outperform.
LW: What are some contrarian investment ideas right now?
Yeung: You don't find many investors who are contrarian value or who are truly value. Now, we could sit here and the well-known loved names like Alibaba and Tencent became fallen angels or value oriented names because of what happened to them, from both from a slowing economy perspective, as well as regulatory reforms that targeted certain internet names or big monopolies.
But for us, being value contrarian in China means we can identify opportunities no matter where we are in the cycle across a number of sectors. We've been talking a lot about the consumption theme. Historically, most people, if they had an exposure to China, would be a play on the consumer. But in China, there is so much more. Interestingly at the National People's Congress, what came out as part of the messaging was essentially making the state-owned enterprises (SOEs) or putting in place KPIs for them. Rewarding minority shareholders through dividend payments or payouts, really ensuring that the ROE (return on equity) is on par with the private enterprises (POEs).
That's really, really important because it provides diversification of opportunity for investors, and, really importantly, for domestic investors. That's what we mean about don't just follow the crowd or consensus. I think now when you invest in China, it's not going to be as easy as the returns you used to see in China. Oh, I'll just own these five names and I'll do well.
It's going to be about really identifying opportunities and not just following a particular theme, but ensuring those companies are rewarding you as a minority shareholder.
LW: What common traits do your best investment ideas share?
Yeung: It's about finding good businesses. What product and service are you selling me? This isn't a blue-sky scenario. This is a product or service that has a long shelf life, and then are you a good management team? Do I trust you? Do you have questionable accounting? What's your debt levels? Going back through all the history of annual reports to see, or for example, did you ever have any accidents at your plant? All that kind of stuff.
Then the final bit, at a good price. What's my margin of safety? That goes back to the contrarian point about if something's so expensive and over-owned, what do we know that our competitors or other investors don't know? Good business, good management team, and good price.
I think a theme that's really under-looked in China that's likely to also be equally as important as the rise of the Chinese consumer is a rise of the domestic investor. The rhetoric was all about the importance of domestic sentiment and domestic demand. Again, that domestic investor story, the growth of Chinese capital markets is so crucial because it's not just consumption alone that can drive growth.
Whether it's fixed income, whether it's equities, you're seeing the development of these markets because all that household wealth that I mentioned because household debt to GDP is very, very low in China.
But where's that wealth going to go? If you see further pension reform, let's say China ends up having a superannuation system, more and more money comes into the household. But where does it go? At the moment, you're quite restricted. You can put it into a bank account, get a deposit. You can't put it into property anymore because of the very stringent property rules.
From an asset allocation perspective, this is why you need to have equities. This is why you need to have fixed income. Equities historically has been a bit like going to a casino in Macau and punting and just hoping for 50% in a week of what you maybe buy or sell. It's now about educating the citizens and ensuring that a bit like an Australian household, that they're looking at the total return focus. Capital appreciation of a company, as well as very, very importantly, that income angle.
It's contrarian, it's exciting. We do think, again, it's going to be a very long-term driver of Chinese growth, and of the market overall.
Managed Fund
Fidelity China Fund
Global Shares
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ETF
Fidelity Global Emerging Markets Fund (Managed Fund) (FEMX)
Global Shares
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
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