China Rally Will Continue But Prepare for Volatility, says Fidelity

Last summer volatility in the Chinese stock market spilled over into global stocks. This year, the market has been more encouraging - will the rally last?

Emma Wall 1 September, 2016 | 2:06PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Catherine Yeung, Investment Director for Fidelity.

Hi, Catherine.

Catherine Yeung: Hi, Emma.

Wall: So, this time last year we were seeing a lot of volatility in Asian markets, specifically the Hang Seng and the Shanghai. We've just had the one-year anniversary of Black Monday which caused contagion in the European markets and in the U.S. But fast forward to this year and markets in this region are looking a lot more sanguine, aren't they?

Yeung: They are ex the Chinese markets. So, we have seen a shift from developed markets to emerging markets probably mainly due to the valuations in terms of emerging markets looking very, very attractive. China specifically, I mean, investors really still need to remember – in fact, not just China, across Asia, these markets are still cyclical, they're young, they're ever evolving.

Wall: But they are up this year, aren't they? I mean, I think China market is up about 15% over the last year and the Hong Kong market is up about 10%. If you compare that to a couple of years ago where we were seeing losses from this region, can we expect things to be volatile but positive going forward?

Yeung: I would expect further volatility. Let's say to the end of the year China is likely to continue to stage a catchup because versus emerging markets versus developed markets it really has been underperforming. When we look at the market itself, a lot more volatile than the economy. So, the economy is likely to muddle its way through.

We still have some concerns about the financial system and the reforms recapitalization of the banks that has to come through at some point. But in terms of the rest of the economy, manufacturing is sort of not picking up dramatically but seeing some forms of recovery. The property market, which is the backbone of China, is doing well and we see, of course, the consumers whilst consumption has slowed a bit, we are still seeing very attractive consumption levels versus developed markets.

Wall: And how does that feed down into sector opportunities? If you're saying then there are some concerns economic-wise but of course the consumer is strong?

Yeung: Well, so the consumer names are still very, very attractive in terms of the long-term opportunities. And if you have a market share, high barriers of entry, really understand your customer can deviate or diversify across your customer base then that puts you really in a good position in terms of future margins and revenue growth. However, not all, for example, the state-owned enterprises sort of dogs, if you will. You have some incredible opportunities where you are seeing reforms being put through.

The leaders of industry such as steel, who are still producing, they're still seeing an uptick in margins. So, at the end of the day when investors are looking at Chinese names, it's all about the margin of safety.

Wall: Catherine, thank you very much.

Yeung: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar