Vanessa Chan

Following a period of economic slowdown, China is engineering a ‘controlled stabilisation’ of its economy where stabilisation of growth is prioritised, rather than acceleration, in the short term.

Recent green shoots of improved sentiment have been supported by upbeat domestic consumption during the Lunar New Year and more recently the three-day break in early April, positive corporate earnings, and the 5.3 per cent Q1 GDP which has beaten consensus expectations and is within the target range set by policymakers.

Fidelity International believes there are opportunities in the next phase of growth as the long-term investment case for China remains intact.

Catherine Yeung, investment director, equities, at Fidelity International, comments: “One of the key features from the recent earnings period was the focus companies had on improving shareholder returns – this was primarily seen with a rise in dividend pay-outs and buybacks in response to SOE reforms and requests from shareholders.

“This improving corporate governance trend was particularly prominent in the financial sector where SOE companies increased dividend ratios or stabilised demand while smaller financial companies engaged in buybacks or boosted dividends given stock price pressure or due to meeting shareholders’ requests.

“Additionally, internet companies lifted their dividend pay-outs or buyback ratios; when looking at the total shareholder return yield (including both dividend and buyback yields), internet companies are beginning to stylistically shift from ‘growth to value’, which in turn, could see in the sector attracting a more diverse range of investors in the future given this focus on total returns.

“We have been closely monitoring Chinese companies’ dividend pay-outs, buybacks and restricted share units (RSU) for many years, and believe that across the board – be it SOEs to POEs, large to small cap companies, utilities to consumer names – several management teams are focusing on rewarding minority shareholders. Investors therefore could benefit from this trend in a similar sense to the corporate governance reforms witnessed in the Japanese market and investors’ optimism with Korea’s Corporate Value-Up programme. 

“In the meantime, focusing on bottom-up research to identify quality companies, managed by good company management teams and buying these stocks at attractive valuations which offer a margin of safety, remains key to constructing a resilient portfolio that compounds growth over the long-term,” Ms Yeung says.

Vanessa Chan, head of Asian fixed income investment directing at Fidelity International, comments: “We believe service-led consumption will dominate in the recovery in China.

“Within the consumption theme, services and tourism have showed a supportive trend. Recent data have shown that Chinese tourists spent more per trip over a holiday than pre pandemic level. The year-to-date railway travel have doubled, and air travel have almost tripled compared to 2023.

“Sectors such as Macau gaming, tourism and Internet platforms related to services are well-positioned to benefit. The government has continued measures to encourage durable goods upgrade through subsidies or targeted credit support, such as lowering down payment requirement for car purchases. We believe this will unlock more industrial production and manufacturing opportunities.

“From a policy perspective, the aim of the monetary policy is reinforced in earlier NPC meetings, to be prudent, flexible, targeted and effective, which reinforces the easing supportive stance of PBoC. Together with M2 and total social financing growth are aimed at consistent with expected economic growth and price levels, this may offer opportunity for credit growth.

“Rate cuts in China are unlikely to be aggressive, we believe monetary easing will probably play a supporting role to fiscal measures this year, with the expectation of shifting more expenditure to the central government.

“More effort will be exerted to defuse risks, as such, more local government refinancing bonds may be issued, LGFVs or off-balance sheet financing by local governments will be reviewed carefully. These supportive policies will provide a constructive backdrop for Chinese credits. Higher quality credits offer resilience to investors’ portfolio especially during macro-outlook uncertainties,” Ms Chan says.

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Catherine Yeung – Investment Director – Fidelity Worldwide Investment

The following Q&A was extracted from a Bloomberg interview in Hong Kong with Catherine Yeung, Investment Director.

As the National People’s Congress gets under way in China this week, Catherine comments on the prospects for further market reforms, the current policy mix, the earnings season and overall investment environment in China. 

Q: How do you see China’s recent tightening measures in the property sector?
A: Generally speaking, whether it is property-related or the government’s overall policy mix, China’s new leaders are expected to maintain a ‘fine balance’ approach. The property taxes announced last Friday aren’t new measures (they are trying to curb speculative buying) and you could see some reassessment of them or they may be rolled out quicker in certain cities such as top tier cities versus second- or third-tier cities, where you’re likely to still see quite accommodative policy.

Q: Do you expect anything substantive from this week’s National People’s Congress?
A: We don’t expect any surprises as such and the government is likely to look at the themes which the previous government introduced, in accordance with the current Five-Year Plan. The more significant reforms will likely be announced at the end of the year, at the annual conference which begins in November, which is when the new Party will likely make their mark.

Q: How do you see the investment environment evolving in the next few months?  Are we going to see earnings growth in China this year?
A: Everyone is keeping a close eye on China. When you look at what has happened – the government started easing in the fourth quarter of 2011 and the markets didn’t really react until the third quarter of 2012. Usually markets react positively when the easing cycle starts in anticipation of growth but last year, given the global risk-off environment, investors wanted to wait for the economic data to actually turn.

We do expect a re-rating of Chinese equities. The earnings season has just started. Generally speaking, overall we might see some disappointing numbers. Earnings expectations in 2012 were too high. The market could pull back in the current earning seasons but this would offer a good entry point for many stocks. It’s important to focus on what the companies are saying in terms of their outlook.

Q: Do you think that the growth momentum in China has eased off a bit?
A: Yes, a bit, but nothing goes up in a straight line. Relative to the rest of the world, we are still seeing very positive growth.  Again, it goes back to keeping a balanced policy, so you don’t want to see growth getting too much out of control because then we need to move to a tightening bias.

Also, looking at A-shares, when you look at what the government and regulators are doing – promoting A-shares via the QFII (Qualified Foreign Institutional Investor) expansion etc, we’ve found some very interesting investment opportunities in this area of the market, especially given the attractiveness of multiples. 

Q: Is the rotation from ASEAN equities into China based purely on valuation?
A: Valuation certainly counts – China is currently trading at around a price to earnings ratio of 9.4x, the second cheapest in the region. The long-term fundamentals of ASEAN remain very attractive. However, in the short-term, it’s a very overcrowded market at the moment with valuations very high at around the mid-teens for the region.

Q: Are we going to see more efforts to break up state-owned enterprises this year?
A: It’s likely. Don’t forget, the Chinese are looking at opening up their market, allowing in foreign competition and promoting the private sector. So generally speaking, liberalisation will take place. Interest rate reform is also on the cards – allowing banks to set their policies and rates independently as we see in developed markets etc. So there are lots of interesting things going on and that’s another reason why the market is likely to be re-rated.

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