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SIMPLYBIZ INVESTMENT SERVICES

China ’ s equity markets have faltered so far this year amid a lacklustre economic recovery and lingering property concerns . Against a backdrop of depressed sentiment , Dale Nicholls , portfolio manager of Fidelity China Special Situations PLC , believes opportunities are now emerging across a range of sectors which offer strong structural growth prospects at compelling valuations .

China ’ s equity markets have experienced notable volatility this year , significantly underperforming global peers . Investor sentiment has been dampened by a combination of geopolitical tensions , economic uncertainties and persistent concerns related to the property sector .

The broader macroeconomic picture also remains subdued , with GDP growth falling short of expectations , particularly in the second quarter of 2024 . A major contributor to this slowdown has been weak consumer sentiment , reflected in sluggish retail sales growth .

In a bid to stimulate consumer demand , the government has unveiled incentives such as subsidies to upgrade old home appliances , while also reducing interest rates . These initiatives are designed to catalyse demand and reinvigorate domestic consumption , thereby boosting an economic recovery . For business , these measures represent substantial new avenues for growth .

NAVIGATING SECTORAL SHIFTS

A key feature of recent market dynamics has been the stark divergence in performance , with traditional “ old economy ” areas - such as energy , utilities and communication services - outpacing the broader market . In contrast , sectors associated with the “ new economy ,” particularly consumer-related areas and healthcare , have struggled . While this shift poses challenges for investors like us that are focused on the long-term growth drivers in the Chinese economy , it also offers attractive opportunities for investors with a longer-term view .

Industrials , the largest sector weight in Fidelity China Special Situations PLC , offers significant potential , driven by factors such as consolidation and the bifurcation of supply chains . China ’ s focus on innovation , exemplified by its increasing R & D spending , is also evident here , with companies enhancing their competitiveness through technological advancements and consolidating market share in a fragmented industry landscape .

The auto space is another area that highlights China ’ s focus on innovation and increasing competitiveness . Exports of Chinese cars has quintupled in just three years , recently surpassing Japan to become the world ’ s largest car exporter . China ’ s share in terms of global electric vehicles ( EVs ) is approaching 60 % and continues to grow .

One illustrative example is the inclusion of Tuhu , China ’ s leading auto maintenance company , in the portfolio . As the largest player in a growing market , Tuhu stands to benefit from the increasing number of vehicles requiring maintenance , underpinned by China ’ s position as the world ’ s largest auto market . This investment aligns with our broader strategy of focusing on market leaders in sectors with strong structural growth drivers .

Another significant holding is Ping An Insurance , a company that offers compelling long-term value despite short-term pressures in the insurance market . Its focus on life insurance , a sector with low penetration in China compared to Western markets , positions it well for future growth . The company ’ s efforts to improve its agency force and its commitment to shareholder returns through dividends underscore its attractiveness at a time when the stock is trading at a significant discount to book value .

A GREATER FOCUS ON SHAREHOLDER RETURNS

Despite the overall underperformance of the Chinese market , the earnings outlook for many sectors remains stable and , in some cases , robust . Moreover , we are also encouraged by continued focus from companies on improving shareholder returns through dividend pay-outs and buybacks . This trend is particularly prominent in financials , where a number of State-Owned Enterprises have increased dividend ratios , while smaller financials companies have engaged in buybacks or boosted dividends .