‘Three or four years before we even launched the China Consumer fund I could see there was going to be a change in Chinese growth at a structural level.'
'We were already alert to the term ‘New China’, which many asset management companies are now using,' says Raymond Ma.
The Citywire + rated manager of the $2 billion Fidelity Funds – China Consumer fund since its launch in February 2011, is now based in Hong Kong but grew up on the mainland, where he benefited from the country’s booming university sector both as a student and teacher.
He then gained his first investment role at BNP Paribas Peregrine in Shanghai, where he worked as an assistant director of its consumer team between 2000 and 2006.
Tracking this journey through to his current role at Fidelity, Ma has witnessed China’s economic reinvention first hand.
‘In the 1980s, at the start of the growth period, most people lived with their parents under a state-owned business framework, but this has changed. We have moved to a private market economy, which has led to a growth in consumption.
‘Admittedly, other companies have started to realise there is going to be a move away from what fuelled growth over the past 30 years. For example, there is not going to be so much fixed asset investment as we have seen and, with the move towards urbanisation, the drivers will be different.’
‘We are now looking at one China which is made up of two parts – old and new,’ says Ma. ‘China has, without question, undergone austerity measures over the past few quarters as it attempts to take a different growth path.
‘The government has also made high-profile attempts to crack down on corruption, which could potentially restrain retail sales by 2%. However, organic growth in consumer stocks is up 10%, showing the sector is very resilient.’
But while many investors have now acknowledged that the direction of Chinese growth is changing, Ma believes his peers may not be looking deep enough.
In order to make the most of the shift, Ma has fine-turned his approach from the broad ‘emerging consumer’ theme followed by many of his competitors, to six core strands: internet; insurance; environmental protection; brokerage; pharmaceuticals; and consumer services.
Consumer services is a case in point. Most investors are alert to trends such as Chinese corporates increasingly buying up luxury brands, as well as Western companies gaining traction in the Chinese domestic market, but Ma says the story is no longer so simplistic.
‘After about 10 years of growth, we are now seeing a move away from goods-focused investing and over the next four years there will be a shift to services,’ says Ma, who has backed domestic consumption to increase by 10% over the course of 2014.
‘The services theme, which I intend to play over the next three-to-five years, is more local, it is more internal. This is from things like education, tourism and areas such as plastic surgery.’
These sectors, Ma says, are likely to deliver above-GDP growth in the next three to five years.
Another area of interest is ecommerce. Ma’s stake in Tencent Holdings, the biggest bet in his consumer fund, reflects this rapidly developing sector.
One major plus for IT stocks, Ma says, is there is relatively limited government involvement. At present, the state only controls 4.4% of this market, compared with 61% of financials and 74% of telecoms.
However, in another example of his more nuanced approach to asset allocation, Ma is only marginally overweight IT at 13.4%, compared with a 13.3% position in the MSCI China index. Instead he is homing in on sub-sectors tied to the market, such as smartphones.
There are currently 500 million internet users in China with room to grow, Ma says, while market penetration for smartphones has now exceeded 50%.
‘More and more people are going online through handsets, rather than computers, so we will see a potential boost for some of these “old China” stocks.’
Dialing up new leads
He now holds 9% of the fund in telecoms, up from 2-3% at the start of the year.
‘We owned some China Mobile, which we bought at $75 in the first quarter, and we added to more considerably when the price fell and it is now climbing higher.'
‘Problems remain unresolved and China clearly has issues with liquidity, you can see that with the volume of non-performing loans. There is an argument that the government would need to supply sustainable liquidity injections to ensure there is no major financial crisis in the Chinese market.'
‘We are looking mainly at the insurers and the brokers rather than the banks, which also stand to benefit from the Chinese government’s reform agenda. These businesses are showing good organic growth and here I am overweight that sub-sector of the financials market.’
Ma names Ping An Insurance as an example of an exciting growth story, as well as AIA Group. He is excited by these stocks as he sees them as prime beneficiaries of pensions reform.
‘Right now China’s insurance products are investment-linked and I think the Chinese government will protect these. They are likely to be pilot test areas for the state to try out tax deference to encourage the pension sector to use long-term products.’
Riding the through train
The Shanghai-Hong Kong Connect, otherwise known as the ‘Through Train’, is a stock exchange link programme to allow mainland China and Hong Kong-based investors to tap directly into each other’s markets.
While tests took place in September, the full programme is set to come into effect this month, with Ma among those watching to see what implications it will have for Chinese equity investing.
‘The Through Train is an interesting idea,’ says Ma. ‘There are some stocks which I see in the A-Shares market that would also be accessible through a similar process via Hong Kong. ‘I would say there are around 10-20 names which are meeting the criteria of being both attractive and investable for me. I could potentially get a favourable valuation by going for A-Shares rather than H-Shares.’
Ma says the difference in dipping into the A-Shares market could be worth a discount of up to 30% on some stocks, although this window is closing fast as the programme becomes more established.
‘People will undoubtedly buy the discounted one, which will see them, for example, snap up the China-listed Ping An Insurance as opposed to the Hong Kong version.’ There are some drawbacks, Ma says, notably liquidity.
‘There are of course further considerations when we consider liquidity, as there will be a difference between A-Shares and H-Shares, because of Hong Kong’s ties to the US dollar.’
Rise and shine
Ma’s fund has gained a steady lead over the last three years to the end of August, returning 36.3% in US dollar terms compared with 30.3% from its Citywire benchmark, the MSCI Golden Dragon TR.
What these figures don’t show is the solid ascent of the fund over this time frame, which trailed the benchmark up to mid-2013, see graph above.
‘Our fund has considerably higher exposure to new economy companies than the China index and other China equity funds, which is an important reason why we have outperformed, as we mainly invest in companies with decent growth,’ Ma says.
Unsurprisingly, consumer discretionary stocks sit at the heart of his consumer fund which has 25% allocated here, versus’ the index’s 5.3%. Other large sector positions include consumer staples (7% overweight) and health care (3.3% overweight).
State-owned stocks (SOEs) are not entirely off the table and account for 17.5% of the fund, compared with a 51% index weighting. While SOEs tend to suit the remit of Ma’s $500 million Fidelity Funds – Greater China fund, which holds several high profile ones such as the China Construction Bank and the Industrial & Commercial Bank, there is crossover for the Consumer fund, he says.
‘The role of reform will be an interesting one, as the profitability of a lot of state-owned companies has come down considerably over the past 10 years. Encouragingly, there are a number of businesses which have come out and said they would like to reform, such as SinoPac.’
Ma says Bank SinoPac could become an interesting investment even for a consumer-centric investor such as himself if it makes the most of reforms and restructures accordingly.
‘This is simply one example, but I am certainly looking more closely at the state-owned stocks to see which could be the big winners and this takes me outside the consumer sector.’
This article originally appeared in the October issue of Citywire Global magazine