Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merren Trogs Money, the podcast in which people who know the markets explain the markets. I'm Maren Sum's that Web. This week I'm speaking with Dale Nichols, portfolio manager of the Fidelity China Special Situations Trust. As we have discussed many times this year already on this show, the spell around American exceptionalism
appears to have broken. Investors are looking elsewhere for places to park their money, and one of those places looks like China. So we thought it'd be a good idea to get on a China expert, which Dale is, get his insights on what he's saying on the ground, see what he makes for the various policy measures in place, think tariffs, and what companies he thinks have the greatest upside potential. Dale. Welcome to Merren Dorogs Money.
Thanks Brian, great to be here.
Okay, China is such a big topic as almost impossible to know where to start. I suppose that the first thing says that very few people are really invested in China in any significant way. It's a very small part of the World Index. It's percentage of the World Index in general. Nowhere near matches its share of GDP. So what, we're about twenty percent of global GDP and what three percent of the indices?
Yeah around there.
Yeah, So that's a huge mismatch. And most people will look at that and say, well, that makes a lot of sense because China is more or less uninvestable for an institutional investor and retail investors to tear clear of it. And if you look at the news over the last week, you think to yourself, well, that kind of makes sense.
So politically, you've got China in the US now really involved in a fairly nasty row over trade, everyone accusing everyone else of violating, seriously violating, said China absolutely violating, totally violating, says Trump. And then you had the US Defense Secretary out the other day saying that China poses is real, that it could be imminent. You look at the polls and you see that, depending on who you listen to, between thirty five and forty percent of Americans
class China as an enemy. And so you look at that and you think, well, for starters, given that political background, ignoring everything else, given that political background, when earth would I put money into China. So let's start there. How bad do you see that political conflict moment?
Yeah, if we're talking about the political element, I think you're focusing more on the geopolitical side. And there's no question that you know, this friction that we've seen between China and the US is going to be with us for a long time. It's sort of a natural part I think of sort of China's rise. So I think that's, you know, that something we're going to have to have to deal with. I do feel that people have sort of becoming more comfortable with that.
So let's just go right back when you say it's a natural part of China's rise, what do you mean that that economic challenge to the US will naturally cause geopligical conflict.
Absolutely. What's often missed in a discussion where we talk about China's competitiveness is the element of scale. You know, obviously a huge population, a lot of companies leveraging that domestic population, taking that scale off shore, so the companies are extremely competitive. It's obviously not just scale we're going
to talk about china competitiveness. We shouldn't also ignore the fact that companies in China have basically to compound at R and d spend at about twenty percent for the last decade, So I think that's that's a big part of the story. But I do feel that the scale element is often understated. No, we shouldn't be surprised. I think that China is so competitive in evs when they're producing sixty per seventy percent of the world's evs, and obviously the share of the supply chain, you know, more
up upstream is even higher. So you know, I think that's that's sort of an important backdrop to keep in mind.
Yeah, and we'll come back to all that kind of thing. I just want to keep it for the first bet right heavily high level. Exactly. It does it concern you that the Americans American administration is now talking in clear terms of you know, conflict and threat and enemy and all these words that, added to the endless tariff difficulties make it make it feel like a you know, stim that it has been a non confrontational relationship for the last twenty years, but now it really does feel kind of dirty.
Yeah, But I think at the same time, there's a recognition of just how interconnected the systems are. Having scored percent come out and say there's not going to be decoupling. There's a recognition of just how interwoven the economies are. China's producing thirty percent of the world's goods. You know. It's it's you can't just decouple. The impact is too great.
So I expect there's going to be friction, There's going to be you know, high level of competition, but I think at the same time as a recognition that both both are going to develop.
And where do you see these trade talks ending out? Then where do you think we'll settle?
We'll see on how you know, I would expect you know, I would expect you know, you're probably going to see cart levels towards Chine if I had to guess, probably around the thirty percent level, but it'll probably vary. Bisector. Yeah, I wouldn't be surprised if I had. If I was a betting man, i'd I'd say that's probably where you know things end up.
You are a betting man.
Those fund management is right, right, But I do think it's again it's you know, it's important to keep things in context. First of all, you know, I invest in companies. I'm sort of evaluating things, you know, at the stock level. I do feel, you know, from a market's perspective and as a bottom up sock picker, it often gets overstated. If you look at if you look at US sales as a percentage of total revenues of MSCI China, we're talking at about three percent, So you know, it's not
huge exposure in terms of the companies. The domestic market is just it's just you know, so much, so much more important to the company. Obviously, you know, with tariffs, there's going to be a greater economic impact. You know, the export sector is still significant, but I do feel
it's often you know, sort of overstated. I think it's also you know, important to keep in mind that you know, Chinese companies have obviously dealt with tariffs before they come through one point zero and the first sort of you know, the tariffs that are implemented, China you know, continued to gain global market share through that. So I think, you know, and again this is a reflected mind discussions with companies as well. The ones that do have exposures to the
US are pretty well prepared. And you know, as someone who looks beyond China as an investor as well, if there's a you know, if there's a group of companies that I would sort of rely on for adaptability, resilience, et cetera, would probably be the Chinese group of companies to come through this. Another thing that you know is I think perhaps underappreciated and a lot of sectors, the whole supply chain is is is Chinese is Chinese companies.
So you know, in those cases when we talk to companies, no one worried about market share loss, you know, through terrorists. The discussion all comes down to what happens around price elysicity, What happens to volumes when prices go up thirty forty percent. That's this type of discussion, and obviously, you know there a lot of them are thinking about, you know, if they were to you know, you know, invest in us,
what would that involve. And it's a tough decision for them because a lot of a lot of the time there is no supply chain, so they're starting a very low level. It's going to take years, and you know, there's a good chance the political environment might be different by the time that capacity comes online. So that's sort of the that's sort of the you know, the discussions that we're having the companies at the company.
Level, and outside that the macro background involving the terriffts, et cetera. The macro situation in China, we read a lot about the dunning, a high debt level, the aging population and income and wealth inequality, property downturn, property downtime being the big one, of course, but all those elements areas a problem, are they for the listed companies in China?
Sure? Obviously the economic backdrop is important. Again, I think it's important to keep things in context. You know, we're still talking about five percent growth in a global context. It's not that it's not that bad, and I think it's you know, looking forward, it's fair to assume that, you know, the consumption part of that grows faster. So you know, it's not you know, it's not a it's
not a it's not a particularly bad environment. You touched on property, you know, it's definitely been a significant drag for the economy over over the past few years. You know, my senses that where we're definitely past the worst part of that adjustment. I'm particularly focused on, you know, the property market is definitely not going back to the head
of years of you know, of huge growth. I'm very focused on what's happening at property prices because I think that's a key factor behind the mindset of the consumer. And you know, the consumer has definitely underspent through COVID. Post COVID, we've had a significant increase in deposits, tumber confidence is low, so you know, I'm very focused on that.
But actions have been taken. You know, you need to keep in mind that there was a period of significant property tightening that's mostly unwound now, but there's still there's still you know, things like christ caps and that sort of thing in certain areas. So you've seen significant action to support the property sector, but I expect there's there's definitely more to come. I do feel, you know, particularly from September last year, as a greater recognition amongst policymakers
of just what a drag that has been. And we're
starting to see signs of stabilization. So, you know, looking at that price element, if you look at first tier cities in I think six of the last eight months, you've had price increases, not the loss, and there's signs of stabilization in the primary market there as well, So you know, I think it's you know, we're sort of on track at some point, but you're on your prices to improve, and once that stabilization continues, you have to think that there's there's more potential for you know, that
very sort of low levels of consumption to to start to improve.
Okay, so this this is the sorry carry on.
And I was just going to finish the point on property. I mean, as I said, that's been a major drag. The peak of the drag is probably this year as well. And again it will still be a drag I expect, but it will be less than it has been has been in the past. So you know, I think it is a pretty good case for things to to slowly improve.
And you know, again we get the sense of the government is very much focused on on driving that you know, they're looking at the potential drag that that traffs can be and I think, you know, there's there's you can rest assured that there's going to be there's going to be more coming.
Although we have heard, for we do here a year after year after year that the Chinese government is very very focused on shifting the Chinese economy away from being a pure export driven model towards being more of a consumer model, and we do hear this constantly and we don't necessarily see it happening. There's an awful lot of wish for thinking and not necessarily the big macro move that everyone is after.
True, I mean, we haven't seen the sort of you know, post COVID stimulus that you've seen in a lot of the West. But you know, again, the sense we have from listening to the policy makers is an increasing awareness of the need to do more, and I think we see we will see more to come. And again I think that property element is important. And the fact that we're seeing things start to say but stabilize, I think is is a good positive sign.
Let's talk then a bit about the market. I mean, the long term performance of the Chinese starle market. If you look at MSc China is pretty awful, really and you've had a slightly better year this year, but nonetheless
not great. And partly the things that we've been talking about, the macro stuff, but also the fact that you've got a very large section of the market that is state owned enterprises, that you have relatively low margins, that you have a sense that an awful lot of Chinese companies are more focused on market share than profits, that possibly their operations can be more driven by state ambition than by corporate ambition, and those are some of the elements
that maybe have led it to underperform and still be remarkably cheap, but cheap relative to global markets. Cheap practice for US, the.
State owned portion of the market has has declined. Yeah, so there's been a real market change in the makeup of the market over the past five to ten years. That so proportion has definitely fallen. You know, it's no longer market that is completely dominated by energy, banks and telcos.
The private sectors can become a much bigger part of the market but important the biggest driver of the economy as well, the driver of growth, biggest driver of employment, etc. And you know, it's worth noting we've had the creation of of whole new sectors. If you look at what's happened in the auto space with the evs, you know that we've touched on this is obviously mostly driven by
by private companies. So that's where the majority of the focus is for us, and we don't ignore the sos, particularly when the obviously evaluation is a is a big factor. So you know, there can be good opportunities we did in the SOS, but gain if we're looking out sort of five to ten years, it's the private companies that are going to be are going to be driving and.
Driving the growth, okay, and what might close up? Who's going to come into this market? Who will the buyers be? Now? Are you seeing shift in the institutional mindset? That's the institutional investors are looking at their allocations and saying, well, way,
we're exposed to the US. We've got this giant economy over there, We've slightly been alerted to by the teriff argument, and maybe it's time to go above two three percent in China because of course, an awful lot of institution investors and global funds, they are underweight even the index allocation to.
China, aren't they absolutely Well, first of all, you know, you would hope it's the domestics, So you know, you have the big domestic institutions that are you know, clearly investing in the market. But you would hope that you know, the individuals you can come back to the market. We've seen an increase in the number of brokerage accounts and that sort of thing last year or so, so hopefully that would be a driver you know, on on the you know, the more international stage. As we've talked about,
we're starting from a very low point. I think, you know, sort of commentary out of the US that you know, we're not to coupling. I think there's a recognition that China is investable. If we think about where weights are, you know, there's good potential you know, for that to move up. You know, we talked about that discount relative to the US and what's driven that if you think about things like, you know, policy certainty and things like that.
You know, obviously, you know, we've been through a very volatile period in terms of policy, you know, coming out from the US. You know, China is on the fifth year of its fourteen five year plan, so they're pretty you know, there's a fair bit of certainty about you know, so generally where policy is going, you know, over time, if they're not to coupling, hopefully there's a recognition of that stability that can start to bring and what is a pretty still a pretty significant discount back.
Yeah, let's talk then about the kind of companies that you're looking for. I mean, if it's obvious to say that the Chinese market should be something of a stock picker's paradise, right, that it's not necessarily a market that the passive investors should go for again, because you might get poked with a whole portfolio full of of sees et cetera. So, if you are an active manager going into this market, do you that, I'm slightly assuming you end up with a bias to med and small cap companies?
How do you choose?
Where do you look ow do the work? Yeah, yeah, absolutely, I completely agree with you that. You know, it's as a bottom up stock picker, you've got, you know, a huge range of toysture. You've got massive change on the ground, the winners and looters losers are being a being sort of separated all the time as a process of consolidation that's happening. And yet you know, you have this market that's driven by macro headlines, geo political headlines, et cetera.
So a little them up stock picker, it's you know, it's very good. You know, we spread the net very wide in terms of what we're looking for, but you know, I do tend to focus on those areas of the economy that we know are going to be bigger parts if you're looking out sort of five to ten years. I talked about, you know, the consumer. I think that particularly just in sort of the mass area, that's it's
I think the investment set up is really strong. You know, you've got companies that have been sold over over the concerns the consumer has been weak. But as I've mentioned, we've got a consumer that has underspent for many years. As a result of that, they've got very strong balance sheets and stimulus is coming. And I've trust that with perhaps other markets in the West where you may have a consumer that's more extended and austerity is coming. So I think, you know, the setup for the consumer is
is actually quite good. Would you know. I focus on areas like some of the staples areas you look at, you know, you talked about increased competition, the lig an area, like beer, and I think competitive intensity has definitely come down natural premialization. They're getting pricing. They've done a lot in terms of rationalizing factories and things like that, and
that capital return story is very live and well. Sports where you've got look at that spend per capita on sportswear in China, it's a fraction of what we see in the West.
Well, let me ask you before before you move on to anything else about the luxury goods sector in China, and that one of the things we've been reading about a lot recently, and the decline of interest in Chinese consumer is in the big Western luxury brands and they are shift back to more more of a sense of domestic luxury.
You're seeing that, yeah, I mean, if you're talking true luxury, I mean this is a space globally that's dominated by the European. Yeah. So you know, if you were to focus on luxury in China, there's not many ways to play it. I'd say, you know, this strongest luxury brand in China is probably Malti as the top by Jo Brandy. So you know, it's not a it's not a big
space if you focus purely on luxury. Obviously there's there's there's some upper market brands, but you know, the real opportunity I think is much more in mass nice market.
Okay, And what about the and I suppose when we look at China at the moment, we tend to see innovation, don't we. We see the biggest producers of the evs. We see this extraordinary progress in in AI, the catchy, the unexpected catch up, and we see the huge leadership in solar panels and renewable energy. And also of course they're a much faster shifted to using nuclear energy than
the rest of us. So we see this this this ongoing innovation and the whole idea that even a few years ago, people would be writing about how China with China was all very well, but really they're just copying and that story is over stunning innovation in China.
Now absolutely true. Yeah, absolutely, it's something that we see daily. I talk about how companies are investing and you're seeing that coming through it just you know, improving competitiveness, which is teating into priss and plow for companies, you know. So yeah, I mean that's definitely a big trend. I have a pretty big, big bet in the trust in industrials, and there's still there's still you know, room for that
to play out. If you look at an area like robotics, up until a few years years ago, the top four players were all far you know, the top sort of the big four. Now two of those are now local, but there's still room to make to make share gains.
Domestical what are those local what are those local robotics.
Companies, companies like Stern and in events. You know, companies that are that are pushing up into into that robotic space. A lot of them, like an Inmates, is doing some of the other components as well. You know, there's definitely room to room to grow there. That whole ev chain that we talked about is very exciting.
They've got this great shift to high quality growth. One of the problems that people have felt with that with stock markets over the last four or five years, last decade, maybe is it an awful lot of the growth takes place off market before companies list. Right, So the real growth, the real innovation, the real excitement is in private markets, not public Do you feel that in China as well, that maybe the listed stocks don't necessarily represent the extent
of the innovation in the economy. It's hard to get real access.
Yeah, no, it's a very fair point that, you know, I mean, globally, companies are coming to market later. You've got some huge private companies. Luckily for us, we're quite active in the private space as well.
How it's a the trust of privates, so.
It's just over ten percent.
What else is in that how do you find those? I mean that's even harder, right, finding finding a good listed stock in thousands of listed companies is hard enough, but going out and looking for private companies on the ground in China, how do you do that?
Releverage our public team, So as our public team is you know, sort of obviously focused on you know, the public listeness doocs, but you know they can, you know, they can look at the larger private companies as well. But we have people that are purely focused on private as well, and it's an area that we've expanded out. The majority of potential opportunities that we're finding now is proprietary.
So years back were probably more reliant on the banks, but you know, these days, you know, it's very much the proprietary opportunity that we're that we're seeing, you know, by tents we added to you know, in the secondary market last year we think at a single digit type of valuation and that's where the international business losing money. So you know, the TikTok part of the story is actually a drag on earners and very much we feel
not factored into into the overall story. And you know, again I feel it's probably another area where the US exposure is somewhat overstated. I mean it's not insignificant. They've got one hundred and seventy million or so users in the US, which is about half of pation. But you know TikTok has have a two billion users.
And how do you exit a position like that? I mean, you're hoping that the IPO market will come back and you will be able to exit that in the public markets.
Yeah, IPO will be the main form of exit. You know, there could be potential trade sales and that sort of thing in the future, but you know, you've got to assume that that, you know, IPO is going to be the main, you know, the main way to exit these positions.
Well, a lot of the things that you've been talking about, it sounds like they might give some hope to those worrying about how countries such as China will cope with their demographic disasters or somedly like them disasters. I mean, China is one of the first places to start think in actual falls in population, right, which is quite a thing.
So you see that unfolding, I mean it is extraordinary and that you know, we've never really I was writing the other day about how the world is through effectively peak humanity at the moment, we may already have hit it. Given out how incorrect most forecasts of fertility are, we may already be at peak humanity, which is an extraordinary thing for us for anyway our living and for the first time ever positively topping out of the global population.
And you can see it in action in some European countries. You can see it in action in Japan, and you're beginning to see it in action in China.
What happens?
How does this work? I mean, no one knows that works, right, because we haven't seen it before. But lots of the innovations that you've been discussing feel like they would feed very well into a declining population or certainly a heavily aging and declining population.
Yeah, I mean it's a challenge. And as you say, it's not just China. Obviously, Europe, Japan, you know, clearly clearly have these challenges. I don't feel like it's you know, something that sort of you know, really changes the outlook for a lot of stocks. If we're sort of looking out about to ten years, you know, in a big one for a lot of companies, and there are things that China can do obviously, you know, it's the potential, you know, raising of the retirement age. There's still the
urbanization story in China. There's still you know, something that's definitely going to play out. You know, you would have heard the potential for things like Houko reform, the household registration reform still got you know, two hundred and eighty million or so workers that aren't afforded the same rights as others. So still a lot of room to you know, address these challenges, and I think that can be you know, definitely supports for consumption as well.
One of the things that is really required for a big expansion of the consumer economy, and China is in a bigger welfare state.
Right.
One of the reasons why it's very hard for being able to spend and feel confident in spending, particularly in a declining population environment, is the lack of a real safety net. So hotly you want to save as much as you can if no one else is going to take care of you. So surely that the the biggest step forward to creating a consumer economy would be the creation of a genuine, more all encompassing welfare state.
Yeah, I think all encompassing is the right word. It's it's there, but it needs to be you know, there's room for it to be bolstered. And the things that we've talked about about potential reform in the household registration and that sort of thing, you know, it can be boost to that. And I think you've got to assume that those types of things are on the radar and thinking about you can support the out look of the consumer going forward.
Okay, what would make you feel less optimistic about the Chinese market? We've talked about all the reasons to be optimistic about long term returns and the things that are exciting particularly particularly innovation, etc. But what would make you worry? Make you think ically, you know, maybe this is more of a more of a trade and a long term investment, which was is how a lot of people do see.
The market, right. I think, you know what would make me more negative? Obviously, you know what happens with property as are set is key, so you know it's sort of aging. Commitment to you know, continue to drive that recovery would be a concern. I think also if we saw you know, a ramp up in domestic regulation, that would be that would be a concern obviously. You know, we went through a period where we did see that
you know, pretty pretty significant ramp up in domestic regulation. Uh. You know, we feel we're definitely you know, the focus is much very clearly now on growth. But for whatever reason we saw, i'd say regulation, you know, move strongly in the other direction, that would be definitely be a concern for us.
On the flip side, what would make you want to shout from rooftops, everyone get your money and now.
It would just be a continuation of a sort of steady recovery. No, I don't think I'd be that bullship. You know, we sort of had you know, sort of huge stimulus you know, infrastructure type packages of the past, but you know, just sort of you know, increasing support for the consumer, gradually roving consumer sentiment. And if we're sort of you know, able to draw on some of those savings and things and things gradually gradually recover, that
would be great. Obviously, a more stable global environment mm hmm, that would do it for everybody that would It would be nice to have.
Pill tell us this, tell us the story of the most exciting stock you've added recently.
I would say it's in my top ten. But if you look at like a company like her Side, you know, Lied, they're extremely competitive in that space. And you know, obviously you know, a very strong like a position in China, but you know, going going off shore making sort of you know big big wins globally as well, and you know, I just it's hard to see how that competitive position, you know, reverses and you know, let's face it, I mean,
Autonomous is really just getting going. So we're sort of at the starting point.
Last question, then, Belle, what are you reading at the moment?
Is not investment related. It's a book called The Line Tracker's Guide to Lives and the author, Boyd Barty, if you've heard him talk, is a fantastic storyteller and they've heard many of his of his stories, but hadn't read the book yet, so I'm sort of working through that. I highly recommend it. There's some great stories and I think probably lessons for life in there as well.
Brilliant. Thank you very much and thanks for joining us today. That was fascinating.
Thanks Marek, great to chat.
Thanks for listening to this week's Marin Talks Money. If you like our show, rate review and subscribe, wherever you listen to podcasts and keep sending questions or comments to Marryn Money at Bloomberg dot net. You can also follow me and John on Twitter or x I'm at marins w and John is John Underscore Stepic. This episode was hosted by Me Maren Sunset Web. It was produced by Someersardian and sound designed by Blake Maple's and special thanks to Dale Nichols