Chinese consumer services are primed to prove the country’s best sector bet in the coming year, according to Fidelity’s Raymond Ma.
The Citywire A-rated manager made the comments in an investor outlook for his $2.9 billion Fidelity Funds – China Consumer fund.
Ma, who previously highlighted opportunities in this area in a Citywire Star Manager profile, said sub-sectors related to logistics and the environment were the best placed to outperform.
‘I expect China’s service sector to boom with logistics and environmental protection in particular set to deliver at least two times that of China’s GDP growth. I continue to prefer companies that have strong cash generation capabilities and I also like companies with strong balance sheets,’ he said.
The Chinese equity specialist said the sector will prove positive over the next 12 months, as well as driving returns on a three- to five-year basis. He said reform of state-owned enterprises in this area will prove particularly important.
‘In light of property downturn and an uncertain economic recovery, the Chinese government is likely to accelerate service sector reforms and undertake other measures to promote consumption,’ Ma said.
‘As such, I will continue to focus on service sector growth, as this sector is expected to produce double digit growth over the next three to five years. This is despite the slowing down of China’s GDP growth.’
Services set to star
Ma, who previously backed consumption to increase by 10% over the course of 2014, said goods-focused investing will give way to investing in service areas, such as telecoms and IT.
IT is currently a 1.1 percentage point overweight, accounting for 13% of the fund, while financials (37%) is the largest single sector. However, Ma remains cautious on Chinese financials given high-profile headwinds for the sector.
‘The ongoing property market correction and structural issues in the banking sector remain my key concerns. While I will closely monitor the process of China’s SOEs reforms and the possible easing of Chinese monetary policy in 2015, my bottom-up stock selection remains a primary driver of portfolio positioning.
‘The Chinese economy still faces downside risk in 2015 and we see further pressure on investment in manufacturing due to the relatively weak demand and the huge overcapacity issues in most traditional industries,’ he added.
The Fidelity Funds – China Consumer A-ACC-USD fund returned 54.5% in US dollar terms over the three years to the end of December 2014. This is while its benchmark, the MSCI Golden Dragon TR USD, rose 42.1% over the same timeframe.