Chinese stock market beats expectations

Fidelity International takes a look at how Chinese stocks performed in 2006.

Martha Wang, Manager of the Fidelity Funds China Focus Fund, comments: “Having performed well in 2005, there was speculation that the Chinese stock market may struggle in 2006” begins Wang. “However, the Hang Seng Mainland Composite, Shanghai A-Share and Shanghai B-Share indices all rose strongly in the last year, gaining 52.0%, 91.5% and 95.4% respectively, in local currency terms. Stocks have continued to perform well against a backdrop of strong macro-economic growth and robust corporate earnings.

“Corporate earnings in 2006 also exceeded market expectations. Furthermore, there were a large number of Initial Public Offerings (IPOs), as 139 new companies sought a market listing compared with 94 in 2005. Included in this was the world’s largest IPO from the Industrial and Commercial Bank of China ($19bn) in a first-ever joint A-share and H-share listing in late October. A deal of this nature would have been considered very improbable a year ago.

“Another major driver of equity performance was the strong appreciation of the Renminbi. In 2006, the Renminbi appreciated by 3.1% against the US Dollar ending the year at 7.8 Renminbi to the Dollar.

“In this environment the key sector which performed strongly in 2006 was the financial sector, led by the insurance and real estate sub-sectors, which both experienced strong earnings per share growth and a valuation re-rating. The insurance sector has also benefited from improving investment returns with higher interest spreads.”

Martha Wang concludes: “Looking forward, the government should continue to carefully monitor growth and focus on improving its quality. It is likely that further incremental tightening measures may be applied, especially on land use and bank lending in 2007. These tightening measures are likely to remain moderate rather than drastic, highlighting the government’s gradualist approach.”

Fidelity Funds China Focus Fund

The Fidelity Funds China Focus Fund aims to achieve long-term capital growth through investment in Chinese securities listed in China and Hong Kong, as well as securities in non-Chinese companies that derive a significant portion of earnings from China. The fund returned 67.08% in Sterling terms in 2006 compared with the benchmark (MSCI China) return of 60.41%. Martha Wang took over management of the fund on 25th May 2006.