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July 2009
Fidelity Funds - China Focus Fund
China - On its way to
recovery
Martha Wang is the portfolio
manager of Fidelity Funds China Focus Fund.
Martha joined Fidelity in mid2005 and took over management
of Fidelity Funds - China Focus
Fund in May 2006. Martha has
nearly 16 years experience
researching Chinese companies,
having worked with Indosuez WI
Carr Securities, First State
Investments and HSBC Asset
Management.
The latest economic data suggests that China has managed to achieve its growth
target but questions remain over the magnitude and sustainability of the recovery.
What is clear is that aggressive fiscal and monetary stimulus measures have been
effective in supporting economic activity. Martha Wang assesses the extent of the
recovery in China and strong market upturn so far this year.
Q: What is behind the equity market rally and is it sustainable?
Martha Wang: Strong credit and liquidity in the market and signs that the economy is recovering
more than expected has help boost investor sentiment and has seen Chinese equities perform strongly
year-to-date.
Evidence points to a rebuilding of global inventory after months of unprecedented destocking and
record fiscal and monetary easing. While there are risks that the rally may not be sustainable, stronger
production should boost job levels and we should see further positive effects from the stimulus
measures that have been implemented. I have already been encouraged by the improvement in credit
markets and bank lending attitudes. Recent trade data also showed the contraction in exports was
less severe than consensus estimates and investor optimism was further stoked by the Purchasing
Managers Index (PMI) data, which has risen above the expansionary threshold of 50 over the last few
months. While these could be sustainable market drivers, perhaps a stronger factor is the infrastructure
stimulus and the internal demand that it generates.
In contrast, industrial production growth has remained weak, reflecting falling production of consumer
goods for export and oversupply in industrial materials such as steel. However, I expect to see
continued robust domestic consumption, notably in home and auto sales.
ANNUALISED PERFORMANCE
as at 30 June 2009
China manufacturing PMI
Source: Fidelity
Performance figures are in USD terms NAV to NAV with dividends
reinvested. Past performance is not indicative of future
performance.
Since inception date: 18 August 2003
Benchmark: MSCI China Index (Capped 10%)
Source: CEIC, JP Morgan, June 2009
Industrial production growth
July 2009
Q: Is the government’s target of an 8% economic growth rate achievable?
Martha Wang: The stimulus measures implemented by the government are in line with China’s goal
to transform itself from an export-based economy to one that relies more heavily on domestic demand.
Consequently, the Chinese government has proposed to “revitalise” ten major domestic industries
and has introduced measures to stimulate its property markets.
This recovery has been supported by a healthy banking system that has provided ample liquidity to
boost the economy while, at the same time, the government has been able to successfully implement
its expansionary monetary and fiscal policies. China also benefits in that it does not have an overleveraged population, unlike the US and Europe. As a result, so far this year, we have seen many
leading indicators pick up and China’s second quarter GDP rose to 7.9%, putting it on track to achieve
its 8% target growth rate.
However, while the level of growth has increased, it is important that the quality of growth is maintained.
This is something the Chinese government is focused upon and an area that I continue to monitor.
Q: Do you share the view that China will lead a global economic recovery and, consequently,
that Chinese Equities will out-perform?
SECTOR ALLOCATION (%)
as at 30 June 2009
Financials
Energy
Industrials
Consumer Discretionary
Telecoms Sevices
Information Technology
Consumer Staples
Materials
Utilities
Cash and Others
Fund
44.6
10.2
9.9
8.1
8.0
4.8
3.5
3.4
3.2
4.1
Benchmark
40.4
17.9
9.0
3.9
13.4
4.2
3.5
5.4
2.0
0.2
Martha Wang: Stock markets in China are likely to remain volatile in the near term as the global
economic and investment outlook is still uncertain. Global recession presents a challenging operating
environment for companies this year.
However, Chinese names could out-perform world equities over the longer term, given China’s
structural growth potential, favourable demographics and high saving rate. This should result in
superior corporate performance and healthy growth in domestic consumption. I am especially positive
in view of the country’s strong financial position and the room it has to apply monetary policy stimulus.
I believe that firms with strong balance sheets, good execution strategies and solid management
teams should be able to grow their market share and emerge stronger.
Source: Fidelity
Benchmark: MSCI China Index (Capped 10%)
Q: The Chinese government has encouraged banks to lend to stimulate the economy. Could
this result in problems like rising debt defaults?
Martha Wang: We know that Chinese banks have been relatively insulated from the credit crisis due
to a limited involvement in global capital markets. Investors can have confidence in the Chinese
financial system as there have been no cases of bank insolvency. Credit expansion has helped stabilise
the economy. New loans have soared in March, which is indicative of the expansionary monetary
policy. While the government has expressed concern over the quality of lending, it is likely to continue
to maintain a loose monetary policy. Looking forward, loan growth in likely to moderate in coming
months.
China new Renminbi Bank lending and loan growth
Source: CEIC Data Company Limited, CLSA, May 2009
July 2009
TOP TEN HOLDINGS (%)
as at 30 June 2009
China Construction Bank
Industrial & Commerical
Of China
China Mobile
China Petroleum &
Chemcial
Bank Of China
Pin An Insurance
Li Ning
Tencent Holdigs
China Life Insurance
China Resources Power
Holdings
Q: Has the government been successful in mitigating external weakness by supporting domestic
demand?
Fund
9.3
Benchmark
7.7
7.1
5.3
6.4
9.9
4.9
4.7
4.1
3.7
3.5
3.4
2.7
6.0
1.9
0.5
2.3
6.0
3.0
0.8
Martha Wang: Yes, government policies have been successful in stimulating consumption. For
example, both central and local government have increased subsidies for low-income households,
provided consumption coupons and raised incomes for teachers, civil servants and pensioners. In
addition, the government has also helped boost end demand. For example, the recovery in passenger
car sales was supported by a cut in purchase taxes on cars with small engine sizes. There are also
signs of a decoupling of growth within China. Previously it was the coastal first tier cities that
experienced the highest growth levels. However, over Q1, Shanghai GDP only grew by 3.1% yearon-year, compared to some in-land provinces that saw double-digit growth.
Real retail sales growth
Passenger car sales
Source: Fidelity
Benchmark: MSCI China Index (Capped 10%)
References to specific securities are for illustrative purposes
only and subject to change without notice. They should not
be construed as a recommendation or an advice to transact
in the securities.
Source: CEIC, JP Morgan, May 2009
Q: Are current valuations still attractive?
Martha Wang: Overall, valuations are slightly above long-term historical averages. However, we
should note there is a wide divergence at the sector level. For example, defensive sectors such as
telecoms and utilities have only managed single digit returns, whereas cyclical sectors such as
property and materials have risen over 50% this year. As a result, valuations in these sectors have
risen to levels that I am not comfortable with and I have therefore reduced exposure, notably in
property and energy.
Given the surge in the market, I am quite cautious towards valuations and remain disciplined in my
investment approach. However, there are some sectors where I see more attractive value such as
within the consumer discretionary space. Certain plays here are supported by robust domestic demand
and are likely to benefit from further policies to support demand.
Q: How has the fund recently performed?
Martha Wang: Over the second quarter, the fund underperformed its benchmark. Security selection
in the energy sector undermined returns. A below-benchmark exposure to China Shenhua Energy
hurt relative returns as share prices rose following robust first-quarter earnings.
I continue to be disciplined in my approach and retain an underweight stance in a number of cyclical
stocks, given their high valuations. Within the real estate sector, not holding Agile Property Holdings
and an underweight in Shimao Property Holdings proved unfavourable. These companies benefited
from increasing margins as demand recovered. A position in Jiangsu Expressway detracted due to
increased competition from a high-speed rail line.
Conversely, an overweight allocation in consumer durables and apparel firms added value. A position
in sports clothing manufacturer Li Ning proved profitable, given its improving product development
and strong balance sheet. Shares in Dongfeng Motor Group rose on the back of an improving automobile
market outlook.
Q: What changes have you recently made to the fund?
Martha Wang: I have raised exposure to financials, especially through adding some banks to my
portfolio. I feel these will benefit from accelerating cash flows, supportive government policies and
improving market outlook. I established a new position in Bank of Communications and added to the
existing holding in China Construction Bank. I have also increased holdings in consumer staples as
these should benefit from China’s consumption growth. I bought shares in personal products companies
including Hengan International Group and Bawang International.
Conversely, I have reduced exposure to the telecommunications sector as I can now find better
opportunities elsewhere. Exposure to the industrials sector was also trimmed. I disposed off the
holding in China Communications Constructions due to its high valuation and the weak outlook for
the ports machinery business.
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