The never-easy question of whether to invest in China has been brought into renewed focus by the impending merger of Abrdn China Investment Company and Fidelity China Special Situations, two of the four UK-quoted investment trusts devoted to that country.
The other two are Baillie Gifford China Growth Trust and JP Morgan China Growth & Income. Fidelity, already by far the biggest of the quartet with net assets of over £1 billion, will dominate even more once it absorbs Abrdn China Investment’s £270 million portfolio.
Abrdn shareholders will have to decide if they should take as much as a third of their holding in cash, in what will be formulated as a so-called Guernsey scheme of reconstruction involving a voluntary liquidation of Abrdn China Investment. Its assets then will be transferred to Fidelity China Special Situations in return for that trust’s shares. They will be exchanged according to their relative asset values under a set formula, subject to agreement by regulators and both trusts’ holders. Abrdn China Investment investors speaking for more than 70 per cent of the shares have blessed the deal, so on that side approval is a formality.
Helen Green, Abrdn China Investment’s chairwoman, admits that the trust management has been wrestling with a concentrated share register, a lack of liquidity and a stubbornly high discount to net asset value. They thought they had solved the problem two years ago when the trust took over a stablemate, Abrdn New Thai, but they still had three institutions with more than two thirds of the shares. As the board essentially had run out of ideas as far as liquidity was concerned, it went to Fidelity.
The four China trusts’ shares have been sliding since early 2021, when Beijing began cracking down on its fast-growth internet companies, putting pressure on Ant, Alibaba and Tencent, all favourites of the UK trusts. That, combined with the Ukraine war, worsening relations with the United States and China’s economic slowdown, has dissuaded western investors from putting money into what was always regarded as a risky proposition.
Abrdn China Investment investors may be tempted to take as much cash as possible and put it somewhere less stressful and it is a fair assumption that some of them asked for that option to be inserted. Yet they may look back ruefully on 2024 as the moment that China turned a corner.
Bizarrely, the world’s second largest country by gross domestic product is still seen in many investment circles as an emerging market, for good measure one that is gripped by deflation. Consumer prices have been falling for the past four months, a process that accelerated in January to the fastest annual rate in 15 years. Windows in the fashionable shopping streets of Beijing and Shanghai are emblazoned with discounts. Food is becoming cheaper, too.
Yet China’s multi-decade investments in research and development, its investments in next-generation infrastructure, large engineering cohort and widespread, growing middle class add up to a strong foundation that should bring a turnaround in a wide range of industries before long, with a nudge or two from the government.
Dale Nicholls, Fidelity China Special Situations’ investment manager for the past ten years, has bet heavily on consumer shares reviving first, with an eye on an accumulation of strong household savings through the pandemic and beyond. The Year of the Dragon new year celebrations that started at the weekend could be the spark, as millions of Chinese went home in what was believed to have been the planet’s largest-ever human mass migration.
Nicholls has gone for shares in Miniso, a Guangzhou-based retailer that sells kitchenware, toys, stationery and cosmetics and has signed a deal with Marvel. Another of his favourites is Luk Fook Holdings, the Hong Kong gold and platinum retail and manufacturing jeweller.
Abrdn China Investment investors should benefit from the switch to Fidelity, as Nicholls has returned 138.5 per cent over the past decade compared with Abrdn China Investment’s 10.5 per cent in the same period. There is a considerable overlap between the two trusts’ portfolios and he can be expected to skew the Abrdn fund’s holdings ever further towards retail. Today’s depressed prices may look cheap in a year or two.
Fidelity China Special Situations shares yield 4 per cent, compared with Abrdn China Investment Company’s 0.8 per cent, though that may turn off investors who see China as primarily a growth play.
Advice Hold
Why Worth tapping into Fidelity’s know-how for a China recovery
Ultimate Products
It’s never a smart look for a company, especially one dealing in consumer goods, to be too dependent on one product, but that is what Ultimate Products allowed to happen last year while cashing in on the public’s scramble for air fryers. It was never going to last. Once everyone who wanted one of the new cookers had got hold of one, they were not going to need to buy another air fryer for several years.
In a trading statement for the half-year to the end of January, Andrew Gossage, the chief executive, tried to dismiss the 4 per cent sales decline in the latest period as a statistical blip, saying it had been caused largely by “strong prior-year comparatives”. In other words, the business didn’t sell as many air fryers as it had done a year ago.
That really should not have made such a difference to a company that, on the face of it, is well-diversified, selling a range of items from Salter scales to Beldray buckets, from irons to ladders to Progress cookware to Kleeneze detergent. These are the sort of low-profile necessities that walk into homes at a steady rate (as air fryers will do now that the initial novelty is wearing off). Nearly four out of five British households own at least one Ultimate product.
While Gossage and Simon Showman, one of the company’s founders, together own just under 30 per cent of Ultimate’s shares, there are several institutions on board, led by Schroder Investment Management, with 12.55 per cent. None of which should deter a bidder, whether from Britain or overseas.
As the company has weathered the cost of living crisis in reasonable shape, with revenue and profits growing steadily, the shares should progress as the economic fog clears. Consensus market expectations for the financial year to the end of July are for an adjusted £21.6 million in earnings before deductions, with the shares set for a price-earnings ratio of 9.3. A likely dividend of about 7.5p would equate to a 5.2 per cent yield. In the hope that there are not too many skeletons rattling around in those adjustments, that looks good value.
Advice Buy
Why Should benefit from economic recovery
