Fidelity’s China Focus Fund, which ranked first among China equity funds tracked and rated by Morningstar last year, is on track for another outperformance year. Morningstar reports that the China Focus Fund, with minimal losses of just 0.66% as of August 31, has fared better than China’s equity funds which have declined by 9.45% in the same period. The benchmark China index is down 3.82% for the year. Catherine Yeung is an investment director at Fidelity who focuses on equities in Hong Kong. She said that the China Focus Fund was a “value counterrian strategy”. She said that unlike value investing in developed countries that may focus on utilities, the strategy in China seeks out companies that are profitable and at a reasonable price. “We look at all kinds of information. We speak to suppliers and competitors. We check balance sheets. She told CNBC. According to a factsheet, the China Focus Fund owned 80 stocks on July 31. Most of them were in Greater China. However, some of these companies are from overseas that have their main business in China. As of the end July, $3.72 billion was under management by the fund. Yeung explained that it’s about identifying unloved industries where the market ignores these companies due to sentiment or predisposed views, even though they are growing. She said that the economic climate in China is challenging. “China’s now very different. You have to be stock specific,” Yeung explained. In the past, you could get into a brand name based on momentum or consensus around a theme. China’s economy grew by double-digits in the past, transforming the country from near poverty to the second largest economy in the globe in just a few decades. Growth has slowed in recent years as Chinese leaders have tackled long-standing debt problems. The economic recovery from the end Covid controls this year hasn’t been quite as strong as investors had hoped. A rapid decline in China’s massive property market also raises questions about the country’s long-term growth. It’s fashionable to have a negative view of China. Yeung stated that “we think sentiment is too negative and there are too many negative stories priced in.” She said that clients ask her every day about China, not about investing but what is happening. She said that the whole China story was about a reset of expectations. “We do not think that the China thesis has been broken.” Data released in the past few days indicate a positive trend after a poor couple of weeks. Caixin’s manufacturing purchasing managers index rose to 51, a return above 50 expansionary territory following a 49.2 print from July. In August, the China Beige Book conducted an independent survey of 1300 businesses. It found that consumer spending had rebounded and hiring was up in all sectors except property. China has started to ease home purchase restrictions over the past few days. Analysts expect that real estate as a whole will consolidate in the future. Yeung believes that more Chinese will invest in the stock market instead of buying property. This is in line with the recent announcements of a number of policies to help the development and growth in China’s stock market. It also comes at a time when China’s financial sector has been opened to foreign institutions over the past few years. These changes will not happen overnight, no matter how massive they are. China’s economy might also need more time. Yeung stated that, in general it takes different parts of the globe about 15 months to recover fully from Covid lockdowns. She said that “China reopened only in January.” She said that once there are signs of a recovery in manufacturing and confidence, the consumption is likely to benefit first. About one-fourth the China Focus Fund’s names are in the consumer discretionary sector. Alibaba and Macau casino operator Galaxy Entertainment Group are among the top 10 holdings of the fund. Fidelity has also created a China Consumer Fund that is down 8.75% so far this year, just slightly better than the peers according to Morningstar. The annual management fee for both Fidelity funds is 1.5%. Yeung’s main reason for purchasing Chinese stocks is the current price. She said that if you believe China will continue to play a major role in the global economy then this is the best time from a valuation perspective.
