Terry Smith: I'm Sceptical on China

Emerging market equity investor Terry Smith has a low exposure to China equities as he is worried over the effect of China policy outcome and its local retail businesses

Karen Kwok 21 April, 2016 | 2:08PM

Emerging market investor Terry Smith has expressed worries over Chinese government policy and its effect on retail businesses, leading to an underweight position in his Fundsmith Emerging Equities Trust (FEET).

Although the emerging markets trust lost 11% in 2015, Smith remains confident it will outperform Fundsmith Equity over 10 years

“We are still sceptical about the policy outcomes implemented by the Chinese government,” Smith said at a panel hosted by Frostrow Capital this week, adding that he thought many businesses in China were “not very well run”. However, Smith said that he has been looking to increase his allocation to China in his portfolio, especially in the travel sector.

The trust currently has only 4% positioned in China, which means the major economy does not feature in the top five holdings of countries in the portfolio. Instead the fund’s largest exposure is to India at 31%, followed by the Philippines, South Africa, Nigeria and Indonesia.

India stock Marico (531642), a consumer products manufacturer is the largest weighting in the trust at 2.9%.

According to Smith, his conviction is due to the millions of emerging middle class consumers created through the process of industrialisation and urbanisation in India. India also has the “largest repository of high quality companies in emerging markets”, Smith argues.

Fundsmith Emerging Equities trust was formed in 2014, and its short track record means it is not rated by Morningstar analysts currently. Although the trust lost 11% in 2015, Smith remains confident it will outperform his Bronze Rated Fundsmith Equity fund over 10 years. The trust is up 2.6% year to date.

"Online Travel is the Future" in China

Despite being dubious over China’s political set-up, Smith said China’s flourishing online travel business was an attractive investment opportunity. Outbound tourism spending in China continues to soar, thanks to cheaper travelling costs in a low inflation environment.

“I will be shocked if I don’t see Chinese online travel businesses continuing to grow thanks to the international travel of Chinese consumers in the coming decade,” Smith said.

The latest data from World Travel Tourism and Council data revealed that outbound tourism expenditure from China reached $215 billion in 2015, favourably impacting longer haul destinations such as Europe and Oceania.

Smith named one online travel business in China, Ctrip (CTRP) which he saw potential growth in the coming years.

Ctrip.com International Ltd is the largest online travel agency in China, with around 54% revenue market share in fiscal 2014. The company generates about 79% of sales by serving as a consolidator for hotel reservations and air ticketing transactions. The rest of Ctrip's revenue comes from package tours and corporate travel.

More than 80% of its sales come through websites and mobile platforms, while the rest comes from call centres. The company was founded in 1999 and listed on the Nasdaq in December 2003. The stock is currently rated a fair valued stock by Morningstar analyst. The Ctrip shares were up 1% year to date.

Ctrip has actively invested in the whole online travel supply chain in recent years, including hotel chains, travel agencies, and leisure travel providers, according to Morningstar analyst Marie Sun.

The company announced strong fourth-quarter results, with total net revenue up 50% year on year, in line with the upper level of previous guidance.

Sun assumed that Ctrip’s revenue growth in the first quarter of 2016 will be 31%.

“In an economic downturn, Ctrip usually has higher bargaining power over travel suppliers, which helps to partly offset any slump in travel volume,” Sun added.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Ctrip.com International Ltd ADR26.32 USD4.16
Fundsmith Emerging Equities Trust1,140.00 GBX1.33
Fundsmith Equity R Acc3.70 GBP-0.11
Marico Ltd343.00 INR-1.35-

About Author

Karen Kwok

Karen Kwok  is Editorial Assistant for Morningstar UK