Fidelity’s Asia Pacific equity manager Dale Nicholls has revealed what sectors he thinks investors should be turning to in 2014 and what sector he is avoiding at all cost.
As China begins its New Year under the maxim of the ‘Year of the Horse’, the Citywire AA-rated manager, who runs the $800 million Fidelity Pacific fund, sets out which thoroughbred and which outsider he has picked to drive his returns this year.
Over the past five years the Fidelity Funds Pacific has posted returns of 157.3%, placing it third out of 139 funds in Asia Pacific including Japan sector, while its MSCI AC Asia Pacific TR benchmark has risen 80.6% in USD terms.
Thoroughbred: IT sector
‘In horse racing terminology the Chinese IT sector would now be classified as a firm favourite under somewhat of an injury cloud,’ said Nicholls.
‘The fact that many of these are US ADRs has put doubts in investor’s minds following last week’s SEC ruling. However, I think there are many legal complexities and high level discussions behind the scenes that will go on over the next couple of years to dampen the noise around this news.'
'Despite this, the strong structural growth drivers behind these companies remain intact. There is a genuine shift from the Chinese consumer moving their spending habits online, internet penetration is still well below that of developed markets and the move to online mobile is ongoing.
'Like most favourites, valuations were beginning to look a little stretched, but I think that selecting IT companies that have a track record in growing their earnings should prove rewarding. There are some well managed companies which are able to monetise their services and have solid business models including Soufun, China’s largest real estate website, and Bitauto, China’s leading used car classifieds website.’
Out to pasture: avoid banks
‘Ongoing regulatory risks and rising ‘bad’ debt levels means I am avoiding banks. They look cheap, but in my experience the early days of a credit cycle is generally not the best time to own banks. I think we still have quite a way to go here and would not be surprised if we hear negative news that non-performing loans come in higher than many expect'
‘Banks will also need to shoulder some of the burden for the wealth management products they have sold which are unable to meet promised returns. In addition we have the specter of deregulation which is likely to put pressure on returns for the sector. Given all these risks I would rather look elsewhere for my investments.’
Outside bet: state-owned enterprises (SOE)
‘Much has been made about recent reforms and how this will level the playing field between SOEs and private companies. The assumption is that private companies have been given a freer rein to grow and to eat in to the market share of the SOEs.'
‘While I am a firm believer that the “new China” is where you need to be positioned, I think the general disregard for all SOEs is creating opportunities to buy some good companies with high barriers to entry who can benefit from reforms.'
‘For instance, a move for more market-orientated pricing mechanisms means that SOEs who were previously restricted in their pricing by government policy should be able to raise prices. This should benefit the railway industry, including companies such as Guangshen Railway, which has not been able to raise passenger prices since the mid-1990s.’