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Video: Fidelity fund manager on how China is recovering from coronavirus

Fidelity’s Dale Nicholls tells Emma Wall that the Chinese economy is returning to growth, as lockdown restrictions are lifted.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Fidelity fund manager Dale Nicholls is optimistic on the Chinese economy
  • The services sector is lagging other areas in recovery
  • Nicholls says that the volatility has accelerated some investment trends


Transcript

Emma: Hi I'm Emma Wall and I'm here today with Fidelity's Dale Nicholls to talk about investing in China and Asia through the coronavirus. Hi Dale.

Dale: Hi Emma, how are you?

Emma: I'm good thanks. First off where are you talking to us from today?

Dale: I'm talking from Singapore I kind of got caught here so to speak and I've been trying to make my way back to Hong Kong but it's really not easy to travel now as you know. You’re looking at basically two weeks in quarantine anywhere you go and you've got to make sure you've got access to everything you need. We're all working from home so I'm sort of here at the moment looking to get back to Hong Kong.

Emma: That kind of insight into your personal circumstance I imagine is mirrored across the region. How has it been investing in particular in China since the beginning of the year?

Dale: Yeah I mean it's been a it's been a wild ride. Obviously it's been quite interesting. Obviously China has actually done quite well if you look on a global basis, and particularly at the Asian market. And I think it seems the market is really reacting to really how countries are managing the virus.

It's quite interesting so the markets I think definitely want to see new cases level out and ideally come down. We've achieved that through most of Asia, probably India and Indonesia outside of other ones that are ever increasing but generally the countries here have it under control. China probably being the best example.

You are seeing some flare-ups but I think people definitely have the view that China has things very much under control. So now the focus is really on the recovery. So we're doing calls with companies constantly getting a sense of the rate of recovery and really trying to analyse who comes out stronger on the other side - and there's actually some pretty big differences across different industries, even different regions.

We found that definitely the manufacturing side came back the fastest. So very early on, end of March, the companies had most of their workers back, they were up and going, ready to get things back and we're already back at sort of 80-90% utilisation, most of them are back to full utilisation now.

So that recovery I think was deliberate and came back pretty quickly. You know we can talk about that because I actually have a little bit of concern for some of the manufacturing companies as to whether they're fully aware of the ‘demand truck’ that's about to hit them from overseas (the ones that have overseas exposure).

And then the other thing to watch is services, and that's been slower, as you would expect, depending on the industry. So restaurants. Our sense in speaking to companies is that if you're looking on a same store sales base you're back to down c.10-20% depending on the company. If you look at an example might be Young China obviously they're one of the biggest owners of restaurants in the country they were at sort of down c.20% at the end of March and down to minus 10% at the end of April.

I recently had a call with a company which was the first I had heard were back to flat, but they were, they had kind of a hot format so I expected them to come back pretty quickly anyway.

On the regional aspect that's a factor as well. Generally the closer you are to Beijing the stricter lockdown has been and the slower the recovery has been. I think you know for some areas, like Beijing, there's no way you can sit in restaurants the numbers, that sort of thing.

But generally our sense is that things are recovering week to week. Things are definitely recovering and the sense from companies is they're very keen, very keen to get back and get on with things. There are some you know pockets where things showing we’re going back to similar trends, so looking at some of the auto dealers definitely premium is definitely doing better than mass. I guess we shouldn't be surprised that there’s some built up demand there that's clearly coming back.

Emma: I was going to say, on the manufacturing point, I think it's a really interesting one, not just for China, but this pandemic has reminded us quite how interconnected the world is. Again, it's not just China we've seen huge waves of European manufacturing and industry as well, you can start to recover yourself as a nation, but if a particular sector of your economy is dependent on demand from outside, really we're waiting for everyone to get better - and I mean that bit from a health and an economic standpoint - before we can all recover.

Dale: Yeah I agree. It's a really it's an interesting point, we talked about the way markets have recovered. To me it's been a little bit surprising in that I would have expected markets to look forward and you've seen the example of countries that have been able to get it under control. Generally markets are forward-looking and would apply those similar principles to other markets but they're still very focused on each, I find each individual country’s process of dealing with it. Which may be which may be right because we are seeing some differences in how countries are handling things but I did feel like the playbook is kind of there for recovery and it's not easy to get there.

We're going through this period that obviously we're ahead of you in the way we've dealt with it but, I think the example has kind of been set for how to how to manage things.

Emma: You touched a bit on the services sector there which obviously is a large part of China's economy. I think tourism is what is about 10% - one would assume that would be kind of behind the curve - just simply because social distancing needs to be abandoned in order for it to work fully as a sector. Are you seeing beginning seeing green shoots within services though?

Dale: Yeah you are. You mentioned, travel, and I'm still, as you know, quite bullish on the travel thematic. I think it will still play out over time but the Government is still very focused on social distancing - there's still caution there. So that's probably been the area that's lagged the most.

You've seen the numbers, as I said, are recovering week to week but if you look at hotel occupancy we're still probably down 40-50% if not higher. I've seen some other numbers and it's still quite low, but recovering. We just recently obviously had the main Labor Day holiday. And the general sense was that I think people were generally pretty happy with those numbers. You need to be a little bit wary because it was it was one extra day this year so it's been hard to do totally direct comparisons but things are clearly moving in the right direction.

But if you're doing travel it's all domestic. Obviously when we look at companies like Sea Trip (which I'm still again very bullish on in the long term) there's no international travel at all. That will be really the last area to come back, but domestic, as I said, week by week is slowly improving.

Emma: What about any cultural or social permanent shifts that you think might come out of this and may even create investment opportunities - as much as kind of can change the investment case? In developed markets we're talking a lot about remote working and whether actually that ever goes back to the way it was. Obviously there’s a lot more in China which can't be done remotely but are you seeing themes that may well play out as a permanent shift?

Dale: Yeah, and that's obviously the type of thing that we're talking about, trying to analyse and trying to really understand the longer-term trends coming out the other side.

In general, I think it's fair to say I think a lot of the trends that were happening anyway are being accelerated. So, as you know, in the trust that sort of thematic is obviously consumption but also the shift online is a big thing that was already happening faster in China. The senses those things have been just accelerated, and obviously e-commerce is one thing but services as well.

We did calls with some of the education providers last week and that shift online is definitely happening. So you know the likes of ByteDance obviously one of biggest one of these players in short form video, their business is doing seemingly well. Or gaming, we talked to Tencent as well, very strong numbers.

So in a sense is a lot of those things that were happening anyway are just being accelerated. Which is okay for the trust - we've got, I think, 40% probably of the holdings have exposure to those types of areas so there's a lot of potential beneficiaries.

But the general sense is that a lot of the trends we're seeing anyway get accelerated for things like remote work and that sort of thing. I think that's definitely a factor. How that impacts things demand for things like office space is an interesting one that we tackling. We’re trying to understand because you know there’s obviously, I think you just seen people working from home more, but at the same time the whole idea of sharing offices and things like that which was which was a negative in terms of office space have the potential to reverse as well.

So those types of trends, we're trying to analyse and get our heads around but definitely the shift online overall is just accelerating.

Emma: And what about urbanisation? Because we've talked about that in the past about the general trend of urbanisation in China. Do you think that what's happening now will be will impact that even in the short term because cases, of course for obvious reasons, have been higher in cities.

Dale: Right, I don't think so. I think that trend is very well-entrenched - it's something we've seen as economies developed globally. It may slow things down somewhat but I can't see it really derailing that trend which is obviously a strong growth driver for the country.

Emma: And where do we go from here? You're already one step ahead of where we are in Europe in terms of relaxing of restrictions and beginning to see economic and commerce recovery. What does the year hold? As much as anyone can look into a crystal ball at the moment.

Dale: I mean to be honest it feels like more of the same – and that's also the sense I get from talking to my colleagues on the ground in China, they’re generally feeling more upbeat but it's a gradual recovery. Feelings are that there maybe really more of the same, a gradual recovery.

I think from the government's perspective there’s a fair bit of caution and you've seen again some relatively small flare-ups but they were very quick to act on those so I think there's going to be a fair bit of caution there so I think it will be a gradual recovery.

We’re watching closely what the government does as well. So we've got obviously some really big government meetings coming up at the end of the year and I think you'll see another push on the stimulus front. Obviously there's a lot that they can do on the monetary side given that what they've done relative to other governments globally it is really not that significant so there's a fair bit of potential room to move. I think you'll see more fractions on that front. Both in infrastructure (this is obviously on the fiscal side) but also in terms of consumption, so that's an area to watch.

The general sense is a sense of recovery. I think for a lot of the companies that have global exposure they're looking at how the recovery plays out in other countries.

Obviously for the Trust I'm very much focused on the domestic opportunity so it's less of an issue for most of the companies that I'm invested in - but I know the ones that do have global exposure are watching closely how other countries and economies come back.

Emma: Dale, thank you very much.

Dale: Thanks Emma.


This video and any comment on individual companies is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments and their income can fall as well as rise in value and you could get back less than you invest. Investing in emerging markets is higher risk. Yields are variable and are not a reliable indicator of future income. Past performance is not a guide to the future. Please read the key investor information before investing for more details of the risks and charges.

The views in this video are those of Dale Nicholls and may not be shared by Hargreaves Lansdown.

Views correct as at 19 May 2020.



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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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