With global markets having been heavily sold off following the impact of the coronavirus pandemic, Fidelity China Special Situations manager Dale Nicholls explains why he thinks the impact will be short-term in nature and how it affects his long-term outlook.
As the epicentre of the outbreak, the Chinese economy was the first to go into lockdown towards the start of the year.
China had already been undergoing an economic slowdown prior to the coronavirus outbreak as annual growth rate decreased from 6.4 per cent to 6.2 per cent, said Nicholls (pictured).
However, the coronavirus outbreak and the virtual halting of all retail sales and production is likely to bear some further weight on short-term GDP growth.
“I also expect general forecasts will need to be revised down in the near-term as we see further pressure being put on balance sheets,” he said.
Yet, Nicholls said he is more concerned about the spread outside of China and its potential impact on the global economy.
“Currently, I am most concerned about the global macroeconomic impact of the coronavirus as it continues to spread beyond China,” said Nicholls, as the number of cases in Europe and the US continue to reach new highs and those in whilst China appear to be tapering.
The Fidelity China Special Situations manager said Chinese authorities will likely follow in the same steps as other countries that have made use of fiscal and monetary stimulus to help their economies through the outbreak.
“I expect further stimulus – both monetary and fiscal – and with lower global interest rates being put in place to support economic growth, China has the capacity to ease further,” he said. “It will be interesting to see if president Xi Jinping will keep China’s 2020 growth target in place.”
But the manager maintains that whilst the short-term impact will be intensely felt “it does not derail the structural shifts underway in the region”.
“I remain cautious as it is difficult to predict the extent and time this will last for,” he explained. “However, if we see continued signs of the virus being contained then this impact could be short-lived as sentiment and demand would improve quickly.” 
All of this he believes will result in interesting investment opportunities for the £1.6bn trust to buy into “long-term winners”, especially in sectors such as technology which he believes is home to several global leaders.
Nicholls said he had been reviewing beneficiaries of potential stimulus and paying attention to companies that he expects to be able navigate and emerge stronger through this period.
In addition, the manager said he was shoring his exposure to names which had brought about “more attractive liquidity opportunities have appeared as a result of the markets’ moves”.
Especially, he said, in select consumer staples, discretionary and insurance sectors.
One change the manager has made to the trust’s portfolio as a response to the spread of Covid-19, is to reduce his financials exposure, “given that credit cycle dynamics are deteriorating and also taking down some industrials exposure, especially where it is more global”.
Nevertheless, Nicholls said the measures put in place to protect the strategy during times of greater market stress are starting to come into play.
“The protection strategies – via index puts – are coming into play, which in turn has seen the portfolio’s net exposure fall over recent times,” he said.
This appears to have worked well for the fund as the sell-off has not massively ‘derailed’ his long-term returns.
“The portfolio remains focused on companies with good long-term growth prospects that are cash-generative and have strong management teams,” Nicholls added.
“These include companies that have carved a niche for themselves in the segments they operate in, and often offer an intersection of technological leadership and strong consumption outlook.
“I also maintain that premiumisation or ‘trading up’ within individual consumption categories will continue and this will create some interesting investment opportunities across a range of areas, including sportswear, toothpaste and coffee chains.”
Over the past five years, Fidelity China Special Situations has made a total return of 55.12 per cent compared with a 40.31 per cent return for the MSCI China benchmark.
Performance of fund vs sector & index over 5yrs
Source: FE Analytics
The trust is currently was trading at a 9 per cent discount to net asset value (NAV), is 25 per cent geared, and ongoing charges at 0.93 per cent (as at 31 March).