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‘US-China competition will be with us for decades’, says Fidelity’s Nicholls

11 June 2024

The Fidelity China Special Situations manager explains the country’s regulatory and macroeconomic outlook.

By Jonathan Jones,

Editor, Trustnet

The ongoing battle for technological innovation between the US heavyweights and their Chinese counterparts is something that will go on for decades, according to Fidelity China Special Situations manager Dale Nicholls.

There have been myriad concerns over the trade war between America and China, causing the manager to work with Fidelity International’s legal and regulatory team to understand potential policies that could come into place.

“In general, we believe that China would be keen to have better relations with the US, and the greater dialogue between presidents Xi Jing Ping and Joe Biden is encouraging,” he said in the trust’s full-year financial results.

“There is no denying, however, that strategic competition between the two countries is going to be a factor that will be with us for decades.”

Mike Balfour, chairman of Fidelity China Special Situations, added this was the major risk to the board’s “cautiously positive outlook” on the country.

“US relations with China have stabilised somewhat, although increasing tariffs and trade restrictions remain a concern. There is a significant risk that relations could worsen and the US may implement measures such as raising tariffs on imports from China to 60%, which would significantly harm Chinese exporters, depress global trade and exacerbate US inflation trends,” he said.

This increase to 60% has been mooted by former president Donal Trump, who is contending to be re-elected later this year, although Nicholls noted that sticky inflation could make this a difficult policy to achieve.

Even if there are further trade sanctions on the way, the country has been “dealing with US tariffs for years” and companies are “well aware of the prospect that they might be higher in the future”.

Despite the potential trade tariff headwind, both the manager and the chairman were “cautiously optimistic” on the outlook for the world’s second largest economy.

For example, Balfour highlighted a strong March reading of the purchasing managers index (PMI) – a measure of the economic health of the manufacturing sector. It moved into positive territory for the first time in six months and was the highest it has been in a year.

Nicholls added consumer confidence could be picking up, having been weak for some time, with deposit growth – the amount people are putting away into savings – slowing, suggesting they are spending more.

“Bank deposits saw huge growth during Covid and household balance sheets are very strong, so there is spending power available, but people need confidence to unlock it,” he said.

Although China’s economy is forecast to slow from its current growth rate of around 5%, Nicholls added that it is expected to remain one of the fastest growing major economies in the world.

“Its gradual shift towards consumption-driven growth, fuelled by an expanding middle class, rising incomes and technological innovation, provides a solid backdrop for companies to thrive,” he said.

At a market level, he noted valuations are at “particularly low levels” and there should be “many opportunities for investors to participate profitably in the recovery”.

These views came in the trust’s full-year report in which it made a total loss of 16.3% for the financial year ended 31 March 2024. This was slightly ahead of the MSCI China Index’s 18.8% fall.

Consumer discretionary stocks were a big relative winner, with four of the firm’s top 10 best performers coming from the sector, including Hisense Home Appliances Group.

“While the ‘white collar’ area of the consumer market has had a tougher time, the lower end has been much more resilient, supported by government stimulus in the case of home appliances,” said Nicholls.

Industrials such as logistics firm Sinotrans also helped the portfolio to beat the benchmark over the past 12 months.

Energy stocks, which make up 2% of the trust, were the biggest gainers in absolute terms, while laggards came from financials and materials, where the trust is overweight, as well as its 3% holdings in the property sector.

He also commented on the trust’s gearing position, which peaked at 25.5% in August last year. “Gearing will naturally be higher when that opportunity set is plentiful and vice versa. Given the significant swings in sentiment towards the China market, we tend to see better risk-reward prospects when sentiment is weak and valuations are lower,” said Nicholls.

Currently it stands at 20.8%, which he noted was “a notable increase since late 2021” and reflects the “compellingly attractive valuations of the Chinese market”.

It was a detractor to performance last year, however, contributing a loss of 3.75 percentage points over the 12 months to March 2024.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.