This is for investment professionals only and should not be relied upon by private investors
NOVEMBER 2015
FIDELITY FUNDS CHINA CONSUMER FUND
Positioned to benefit from China’s
golden age for consumption
The fifth plenary session of the 18th Chinese Communist Party approved
the guidelines for the 13th Five-Year
Year Plan. These
The policy directions echo
those of the 12th Five-Year
Year Plan, i.e. to rebalance the Chinese
economy towards consumption and services, to prioritise
prioriti more
equitable wealth distribution and to improve the social security net.
Since the Fidelity Funds China Consumer Fund was launched in
February 2011, it has already been positioned to capitalise
capitali on these
changes. By adopting a rigorous bottom-up
bottom
stock selection approach,
Raymond has been actively identifying and investing in potential longterm winners among key policy beneficiaries. This investment focus has
resulted in significant outperformance since the fund’s inception.
WHAT IS YOUR VIEW ON CHINA’S FIFTH PLENUM?
th
The fifth plenary session of the 18 Chinese Communist Party made it clear that the
th
13 Five-Year Plan would continue with the objectives set out in 2010, which aimed to
develop China into a moderately affluent society by 2020. The key takeaways from this
plenum are as follows:
i)
ii)
iii)
iv)
v)
vi)
vii)
To double both GDP and income per capita by 2020 from 2010 levels. In
order to achieve this, the government’s target growth rate is expected to be
around 6.5% year-over-year for the next five years (versus
(v
the 7% target in
th
the 12 Five-Year Plan)
To promote internet-driven
driven innovation and industrial upgrades in order to
enhance productivity
To rebalance growth towards consumption and services
To reduce
educe income inequality and to narrow the income gap by further
strengthening the social safety net
To end the one-child policy
To open the economy and to make it easier for foreign businesses to operate
in China
To reduce environmental pollution and to support environmentally friendly
development
viii) To continue anti-corruption
corruption measures
Overall, I am positive on the messages from this plenum. Chinese authorities aim to
achieve quality and sustainable growth with higher efficiency over the next five years.
More reforms, including pro-consumption
consumption policies to drive domestic demand, are
expected to be rolled out to enhance productivity and rebalance the economy away
from investments and towards consumption.
On the social security front, the government is expected
expecte to extend old-age insurance to
the whole population. This, combined with further reforms
reform to improve insurance
coverage and better provision of social security,
security should boost household consumption.
RAYMOND MA is the portfolio
manager of Fidelity Funds China
Consumer Fund.
Raymond joined Fidelity International
(Hong Kong) Ltd. in 2006 as an
Investment Analyst and has covered
China Telecoms, Financials and
Consumer stocks. Raymond was
made the Consumer Sector Leader
Le
in
2009. He was promoted to Director of
Research in 2010 and then Portfolio
Manager in 2011.
Raymond has over 15 years of
experience in researching companies
in the China market. His extensive
research experience in the consumer
universe gives him an edge in
understanding regulations, industry
trends and competition within the
region.
Raymond graduated from Fudan
University, Shanghai, with a Bachelor
of Law. He also holds a Master of Law
degree from the same university.
HOW WOULD THE END OF THE ONE-CHILD POLICY IMPACT CHINA’S
CONSUMPTION?
CUMULATIVE RETURNS (%)
as at 30.09.15
The formal abolishment of the 35-year old one-child policy is a widely anticipated move
that attempts to deal with the pressure of an aging population, as well as to increase
the birth rate and boost domestic consumption.
10.0
7.4
5.1
3.8
5.0
0.7
TH
HOW IS THE FUND POSITIONED TO BENEFIT FROM THE UPCOMING 13
YEAR PLAN?
-5.0
-5.6
%
-10.0
-20.0
-19.6
Since inception
(annualized)
3-year
(annualized)
-22.7
1-year
-30.0
-16.4
-18.0
Year-to-date
-25.0
-5.0
-10.0
-11.4
-15.0
6-month
While the effectiveness of the policy relaxation remains to be seen, the rising number
of newborns would certainly help to support baby-related consumption. Key
beneficiaries would include companies that manufacture baby formulas, diapers,
children’s apparel and appliances, as well as education and health care firms, among
others.
0.0
3-month
China has previously relaxed its one-child policy a couple of times. The most recent
relaxation in November 2013 stated that couples can have two children if either parent
is from a single-child family. However, until July 2015, only 1.5 million of 11 million
eligible families filed requests to have a second child, much lower than the previous
estimate of 2–3 million requests. This indicates that younger couples are not too keen
on having more children despite the change in the policy. Hence, the impact of the full
relaxation of the one-child policy may not be as significant as expected.
FIVE-
I had long foreseen that consumption and services would emerge as China’s new
growth engines and would ultimately replace traditional growth drivers (e.g. investment
and manufacturing) in the medium to long term. As a result, since inception, the fund
has maintained a significant bias towards consumer-related and services sectors and
an underweight stance in traditional “Old China” sectors such as banking, energy,
materials and industrials. In particular, the steady growth in disposable income is
driving a gradual shift in consumption from staples to discretionary spending (e.g.
education, leisure and tourism). Therefore, I maintained a bias towards the consumer
discretionary sector.
In anticipation of the relaxation of the one-child policy, the fund maintained exposure to
baby-related consumption plays such as Goodbaby International (a manufacturer of
strollers and baby car seats) and Hengan International (China’s largest producer of
baby diapers).
I retained my high-conviction positions in quality insurance companies such as China
Life Insurance, China Pacific Insurance and Ping An Insurance. The insurance sector
should benefit from the upcoming pension reforms and the government’s thrust on
improving the social security net.
I also maintained the overweight stance in quality internet companies such as Tencent.
Supportive policies will help to accelerate the integration of the internet and traditional
industries, and will continue to drive the growth outlook of key internet players.
Finally, I remain positive on environmental protection plays in light of the government’s
strong advocacy of a cleaner China. I believe that green energy (e.g. solar, wind and
natural gas) and environmental protection development (e.g. waste water treatment)
will be the key beneficiaries going forward.
WHAT CHANGES HAVE YOU MADE TO THE PORTFOLIO RECENTLY?
Within consumer discretionary, I raised the exposure to selected Chinese automobile
and automobile-related plays. There has been an improvement in underlying
automobile sales data, as well as a decline in inventories and a stabilisation in
discounts. As such, the sector appears oversold, which implies significant upside
potential.
I also increased the allocation to Chinese telecommunications companies. There
appears to be some potential for restructuring in the telecommunications sector, which
could benefit these companies’ book values.
Within financials, I sold holdings in key Chinese securities brokers and reduced the
exposure to selected insurance companies. This is because weak equity market
performance could weigh on their investment income.
In the information technology sector, I took some profits in key internet players over
the last quarter. These stocks were expected to underperform in a volatile market as
investors looked to lock-in gains.
FF China Consumer Fund
Index
Source: Morningstar, NAV-NAV, gross
income reinvested excluding initial charge
in USD.
Index is the MSCI China Index. The fund
was launched on 23 February 2011.
TOP 10 ACTIVE POSITIONS (%)
as at 30.09.15
Fund Index
AIA Group Ltd
7.3
0.0
China Life Insurance Co Ltd
9.3
3.3
Cathay Financial Hldg Co Ltd
4.6
0.0
China Pac Ins Group Co Ltd
4.7
1.3
Ping An Ins Group Co China
Ltd
6.5
3.3
Sands China Ltd
2.9
0.0
Far Eastone Telecom Co Ltd
1.7
0.0
Hengan Intl Grp Co Ltd
2.6
0.9
WH Group Ltd
1.6
0.0
Galaxy Ent Group Ltd
1.3
0.0
Source: Fidelity International.
Index: MSCI China Index
Top overweights and underweights are
those securities that had the largest active
positions relative to the index. Holdings in
different securities issued by the same
company are aggregated, along with any
exposure achieved by derivatives.
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SSO12292