Raymond Ma, the Citywire A-rated manager of two Fidelity China equity funds, has said he is backing five under-penetrated New China sectors for long-term growth.
'Rather than chase stocks that are only expected to outperform in the next two to three quarters, I will maintain an overweight stance in 'New China' sectors and will continue to identify long-term secular growth stories,” the manager of the Fidelity Funds - China Consumer Fund and Fidelity Funds - Greater China Fund said in an investment commentary.
In the commentary, Ma outlined five New China sectors he is backing:
Insurance: The sector is expected to benefit from pension reforms and the subsequent increase in sales of life insurance products.
Brokerage: Chinese brokers should benefit from an improvement in trading volumes in the near term and an increase in direct financing and broadening of capital markets in the long term.
Environmental protection: Green energy (solar, wind and gas) and environmental protection (waste water treatment) development should continue to benefit from the government’s emphasis on environmental protection.
Pharmaceuticals: An ageing population, widening insurance coverage, better health care affordability and improving innovation capabilities should support strong growth in the sector in coming years.
Internet: As of June, China had 632 million internet users and a penetration rate of 46.9%. The country boasts the largest number of e-commerce transactions in the world and is expected to witness superior growth in coming years.
Ma said that while valuations of New China stocks seem relatively expensive compared with Old China stocks, the valuation premium is justified as it is supported by solid fundamentals.
'The outperformance of ‘New China’ stocks over recent years has been largely driven by superior earnings growth of 20–40% per annum on average,’ the commentary said. In contrast, ‘Old China’ companies have only been able to deliver an annual earnings growth of less than 10% in recent years.
The sector to avoid
Ma also said that he was not positive on banking stocks. ‘Despite their cheap valuations, I am concerned about the asset quality and rising leverage in the banking sector,’ he said in the note.
‘Although a liquidity crunch is not likely in the near-term as the deep-pocketed Chinese government should be able to avoid this problem, the margins and profitability of Chinese banks are likely to be undermined in the medium term.
‘In addition, the interest rate liberalisation that took place in the Chinese banking sector could lead to a compression of net interest margins (NIMs) and falling profitability,’ he said.
‘As such, I see limited growth potential in the banking sector for the foreseeable future.’
Within the financial sector, Ma prefers Chinese insurers and brokerage companies, the commentary noted.