Mark Dampier: China may divide investors but the untapped potential is vast


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The Independent Online

There are times when I am reminded: time flies by faster the older you get. I recently had one such moment when I met Dale Nicholls, manager of Fidelity China Special Situations. Unbelievably, the investment trust launched almost five years ago.

Following a short spell of poor performance in the trust's early days, I can't help but feel that some of the media had some responsibility for scaring investors away at exactly the wrong time. The trust's original manager, Anthony Bolton, took a fair amount of flak at the time; most of it unwarranted, in my view. Indeed, those of us who invested at launch have been rewarded so far: the trust's share price has grown by 46.5 per cent, with dividends reinvested, against the benchmark MSCI China Index return of 28.1 per cent.

Mr Nicholls took over the trust on 1 April 2014. I continued to rate the trust and I am encouraged by the results so far: over the new manager's tenure the share price has risen by 30.7 per cent, in line with the performance of the MSCI China Index.

China seems to divide investors like no other nation. In the UK, prolonged negative sentiment towards China has contributed to the widening discounts seen on many investment trusts investing there. At the time of writing, Fidelity China Special Situations is trading on a discount of 13 per cent.

In our recent meeting, Mr Nicholls touched on his wider economic views. However, I would point out that he places far more emphasis on the prospects for individual companies when it comes to constructing the portfolio. He feels more assured lately about the property market. He has seen a clear change in mentality from both buyers and developers, particularly within the major cities, where developers are beginning to think about raising prices and where demand is picking up.

He is slightly more negative on debt levels. According to Mr Nicholls, the rate of debt growth is slowing, although he would prefer it to slow at a faster rate. His big worry is that China ends up in a similar scenario to Japan, without full recognition of the correct number of non-performing loans (that is, a loan in, or close to being in, default). As such, he does not own any of the big banks.

The opening up of China's A-share market presents a big opportunity. The market is under-researched and is full of companies unknown to many investors. Further extension of the Stock Connect programme and the inclusion of A-shares in the MSCI indices could also be potential catalysts for this area of the market. Opening the market has also boosted transaction volumes, benefiting brokers such as Citic Securities and Haitong International, both of which are held in the portfolio.

E-commerce remains a fantastic opportunity in China. Internet penetration is still only 50 per cent, compared with more than 90 per cent in the West, meaning there is plenty of scope for growth. The trust's largest holding is Tencent, China's largest internet service portal buy likely to be virtually unheard of in the West.

The better-known Alibaba was held in the trust before it listed on the stock market (and was initially bought by Mr Bolton). Mr Nicholls has since taken some profits from this position – this appears to have been the correct call as the company's latest results were a little disappointing.

Other sectors he favours include insurance, with companies such as Ping An Insurance featuring in the trust. Again, compared with the West, penetration is low in this sector. He has also invested in a number of railway companies.

The opportunity in China is a long-term story and is very much still intact. Perhaps more importantly, valuations are extremely attractive, according to Mr Nicholls, while the trust is forecasted to see average earnings growth of 20 per cent over the course of this year (as measured by earnings per share for the trust's underlying holdings). The trust employs gearing of 26.7 per cent, reflecting the manager's confidence towards the market, and while it trades on a significant discount to NAV, it offers true value to private investors.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit

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