Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

By 2010, China had become the world’s second largest economy behind the US. Its economic annual growth rate had topped 9% for three successive decades and the emergence of a new richer middle class was opening up a new wave of investment opportunities in the country.

It was against this backdrop that the Fidelity China Special Situations investment trust was launched, with star manager Anthony Bolton at the helm.

From Bolton to Beijing

Having handed over the reins of his UK and European portfolios, including the Fidelity Special Sits portfolio he was so well known for, Bolton turned to the opportunity set available in a country laser-focused on advancing its economy.

At the time, around 10% of China’s GDP came from agriculture, much higher than the low single digits seen in most developed economies. 47% came from industrial production and services accounted for 43%. This starting point and a governmental push towards shifting the balance towards consumption meant Bolton could begin to apply his preference for smaller, younger or overlooked companies that could take part in the economic rebalancing. Innovation was and is key for the country - gaining exposure to innovative companies was key for Bolton.

Fidelity investment director Catherine Yeung told me recently: “When I think about China 10 years ago, when you went to see the factories there was a lot of labour on the assembly line. Now it’s all automated - the innovation really is extreme.”

This mission to unearth tomorrow’s winners, as well as the trust structure’s ability to hold unlisted names meant buying into companies like tech giant Alibaba early on - a company still in the fund today.

A decade on and the objective of identifying innovative and consumer-led growth stories is just as clear. Dale Nicholls took the baton from Bolton in 2014 and has built a portfolio around the same philosophy - Alibaba is joined by the likes of Tencent, Hutchison China Meditech and China Life insurance, all serving a wealthier, tech-savvy consumer.

But Nicholls is still conscious of the shifts still happening in the country, not least in discretionary consumer spending. Nearly 47% of the holdings are exposed to the sector, 19 percentage points higher than the index, with on-the-ground recognition that even now, consumer tastes are evolving.

Catherine Yeung explained: “There’s a Chinese sports apparel company called Li Ning. What they did over the past couple of years was to forge this new strategy called China Li Ning, with sports gear that you can only buy in China. The margins are higher than the main brand and they’ve shown the collection in fashion weeks around the world but the point is they weren’t copying other international brands - they were making something truly Chinese and identified with the consumers.”

Is there any growth left?

Ten years on and the GDP split shows that agriculture has dropped to 7% of GDP, industrial production has fallen to 39% and the service-based economy has risen to 54%.

The theme is certainly playing out but importantly, there is still room for development. Agriculture only accounted for around 1% of the US economy as of 2017, while the service sector contributes over 70% in most developed economies. As China continues to move away from being the world’s toy factory and provides its own consumers with high quality goods and services, this transition will keep playing out. Nicholls’ portfolio of middle-class consumer-first companies could benefit if this remains the case.

Today’s reports of a quarter-on-quarter fall of 9.8% in Chinese GDP might be a blip on that journey, and data does suggest the economy is operating below normal levels, however the first global lockdown in history will pass eventually. Early data suggests the economy did improve at the end of the quarter and consumers are ready to return, if tentatively, to retail outlets and restaurants. Propositions like face-to-face meetings over insurance policies will also resume as fears subside and will bring pent up demand with them, allowing the consumption story to get back on track.

Fidelity China Special Situations has grown by 138.6% in share price terms since launch against a return of 87.4% for the MSCI China index. Please remember past performance is not a reliable indicator of future returns.

More on Fidelity China Special Situations

Five year performance

(%) As at 31 March 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Fidelity China Special Situations PLC -4.5 45.8 23.6 -0.3 -6.5
MSCI China -16.0 37.9 24.0 1.1 -0.9

Past performance is not a reliable indicator of future returns

Source: Morningstar from 31.3.15 to 31.3.20. Price in GBP, income reinvested.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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