Fidelity Emerging Markets (FEML ) has increased exposure to Chinese consumers in recognition that the tide has finally turned since the government stepped up stimulus measures to restore confidence.

Co-manager Chris Tennant told Citywire he was increasingly optimistic about the consumer and consumer technology sectors given how depressed sentiment had been, the huge excess of savings built up and the government’s efforts to prop up the property market.

Reflecting that, he and lead fund manager Nick Price have gradually reduced their short positions, which receive profits from share price falls, and taken ‘long’ positions in several consumer companies listed in either Hong Kong or China.

During September, the weighting to Chinese and Hong Kong stocks was increased from 18.1% to 25.1% through a mixture of existing names and new positions. Exposure to South African multinational Naspers, which has a large holding in Tencent, was also lifted, from 6.6% to 7.8%.

New holdings include sports equipment company Anta Sports, replacing its lower quality and cheaper peer Li Ning, and leading online travel agent Trip.com, which captures one of the few remaining growth stories in China.

‘We’re optimistic about the consumer sector given how depressed sentiment has been and the excess consumer savings,’ said Tennant (pictured below at a Citywire event in June). ‘There was a crisis of confidence but we think the Chinese government is determined to fix that.’

However, he was not positive about all Chinese sectors, with several ongoing short positions in the industrials sector, such as electric vehicle makers, which suffer from high competitive intensity and overcapacity, undifferentiated products, high cash burn and large debts. 

Tennant was also negative on financials, with banks being squeezed by the government’s decision to allow consumers to refinance their mortgages at lower rates.

The £566m trust delivered strong results for the year to 30 June, with underlying returns of 18.7% well ahead of the MSCI Emerging Markets index’s 13.2%, while the shares leaped 22.6%.

This helped reduce some of the impact of the Russia writedowns in 2022 after the invasion of Ukraine and the imposition of Western sanctions. Even so, the latest figures show net asset value has fallen 11% and the shares declined 15% in the three years since the board appointed Fidelity to replace Genesis Investment Management. 

Shorts and mid-caps

Tennant said the portfolio’s 70 short positions recorded their best 12-month period, adding 4% to performance, which is impressive given ‘shorts’ are limited to a maximum 1% of net assets.

While Fidelity cannot disclose live positions, it said the top performer in the short book was a declining Asian utility that is pivoting unsuccessfully into unrelated business areas. The share price halved in June following poor earnings and after its major shareholder faced margin calls.

Saudia Arabian water utility company Alkhorayef Water & Power Technologies, a mid-cap stock, was one of the top-performing long positions, as increasing investment in infrastructure in line with the growing population boosted the shares.

The trust also received $4m (£3m) from the sale of the remainder of its holding in Russian online financial services provider TCS Group in a secondary market transaction organised by a US investment bank, marking the second sale after Detsky Mir in 2022. The remaining Russian assets were valued at zero at period end given the sanctions but have a carrying cost of $90.9m.

Positive outlook

More broadly, Tennant said the upcoming decade would see a more buoyant backdrop for commodity prices, supported by the growth of AI and digitisation, following a period of weakness in line with China’s softened property market.

The fund managers expressed this positivity with exposure to copper, gold and tin miners in Brazil, South Africa, Indonesia and Peru, such as mid-cap copper miner Minsur.

Since the financial year-end, underlying returns have slipped 2.5% and the shares have lost 3.3% to trail the index’s 3.3% gain, despite the huge rebound in Chinese share prices after the government announced its stimulus measures in September.

By contrast, shares in stablemate Fidelity China Special Situations (FCSS ) have risen 7.8%. 

At 14%, the share price discount is slightly wider than its peer group’s 13%, having recently widened from 11.9% despite a 15% tender offer, ongoing share buybacks and the introduction of a performance-triggered tender for 2026.