Mark Dampier: While the West is worrying, back renewal in 'New China'

Concerns over global growth have led much of the Western media to conclude we are entering a new phase of the 2008 crisis. Mark Dampier don't think this is the case

Mark Dampier
Friday 26 February 2016 20:35 GMT
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Fears over slowing growth in the People's Republic hit the stock market hard last year, and so far 2016 remains dominated by the China story.

In January, sentiment worsened when the Chinese authorities instituted a circuit breaker – which is designed to stop market crashes by halting trading for 15 minutes if shares fall by 5 per cent or more. The hope had been that this would prevent investor panic.

While this mechanism works quite effectively in the West, where institutional investors hold sway, it was found wholly wanting in China, which is dominated by domestic investors who appear to treat their stock market as an extension of the Macau casinos.

What strikes me is that nothing much has changed – it has been known for years that Chinese growth is slowing. However, this is the world's second-largest economy and concerns over global growth generally have led much of the Western media to conclude we are entering a new phase of the 2008 crisis.

I don't think this is the case, but there is no denying the world is undergoing a gigantic financial experiment and there is still plenty of scope for it to end in tears.

Last week I met Dale Nicholls, manager of the Fidelity China Special Situations investment trust. He thinks the banks (which he doesn't hold in the portfolio) are the biggest risk to China's economy as there has been a huge expansion in credit. The level of non-performing loans continues to rise and he suspects the situation is worse than the official figures suggest. Japan had a similar problem 20 years ago and has yet to admit its non-performing loans are a key reason why its economy has been stagnant for so long.

Yet China remains a fascinating place to invest. I have been fortunate enough to visit on a number of occasions and, during my trip in 2012, it was clear the country was divided into two separate economies – the old and the new.

There has been increasing dislocation between the two as the country makes a transition from a focus on property and infrastructure to being driven by domestic consumption. As a result, "old" Chinese sectors such as construction are finding the going tough, while retail sales and online shopping continue to grow. Indeed, China is the biggest ecommerce market in the world with year-on-year growth of 40 per cent.

The trust aims to benefit from the trend and so is focused on consumer spending and the development of the middle class. Such factors are rarely mentioned by Western media, even though domestic consumption is a more important barometer of Chinese health than its GDP.

While sentiment towards China is extremely negative in the West, it becomes more positive the further east you look, and Asian companies trading with China are generally comfortable.

Mr Nicholls has been increasing exposure to beaten-up sectors such as industrials and energy, reasoning that crude oil prices are nearing their bottom and many companies in this area are undervalued. He also feels the energy sector is shifting to renewable options, and therefore holds stakes in wind farm operators and companies that provide the materials for solar panels.

He has also taken advantage of market falls by increasing the gearing (borrowing) within the trust. He has used this additional finance, which currently stands at 26 per cent, to increase exposure to his favoured holdings.

The trust trades at a discount, which has continued to widen, and at the time of writing stands at 17.5 per cent. Mr Nicholls is focused on narrowing this discount via strong performance from the underlying assets.

In the meantime, investors keen to access the "New China" story are presented with the opportunity to invest in a well-managed trust at a heavy discount.

If you can stand the extra volatility that gearing brings, I believe this is one of the most exciting ways to invest in China.

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