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Questor: China’s stock market rout is sinking shares in our trust – but it will pay to hold on

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Shanghai - ALEX PLAVEVSKI/EPA-EFE/Shutterstock
Shanghai - ALEX PLAVEVSKI/EPA-EFE/Shutterstock

Chinese stocks are sinking, dragging down shares in Questor’s pick of the investment trusts focused on the world’s second‑largest economy.

Fidelity China Special Situations has now lost nearly a third of its value since its shares peaked in February as the sell-off accelerated this week. The reason? A series of crackdowns by the Chinese authorities against some of the country’s biggest companies, as well as some of the less well-known areas of its stock market.

Shares in Tencent slumped by 16pc this week after China ordered the technology giant to end exclusive music licensing deals with major record labels. This followed new regulations, announced on Monday, that strengthened the rights of delivery workers. Shares in Meituan, the food delivery company, lost a quarter of their value as a result.

Shares in smaller businesses involved in private tutoring meanwhile crashed after Beijing unveiled an overhaul that will turn them into non-profit organisations and ban foreign ownership.

This flurry of interventions has led to fears of further crackdowns from Beijing and sparked a broader sell-off. The Nasdaq Golden Dragon China index, which consists of the biggest Chinese companies listed in America, has fallen by 12pc over the past four days.

It serves as a stark reminder of the risks that accompany investing in trusts which confine themselves to owning shares from a single country, particularly one whose government is as powerful and unpredictable as China’s.

Alastair George, who holds Fidelity China Special Situations in his 8AM Tactical Growth fund, says the crackdowns have punctured investors’ complacency about China’s technology giants. “I think investors thought they were untouchable because of their fast growth and importance in the development of China’s economy. The Communist Party has amply demonstrated that this is not the case,” he says.

Some of the stocks held by the Fidelity trust’s manager, Dale Nicholls, have been affected directly. Tencent is his largest holding, at 10.9pc of assets at the end of June, although China Online Education is thankfully only a tiny position after a 88pc crash in its share price in 2021 so far. It is not the first time this year that his stocks have had a brush with the Chinese authorities.

Shares in e-commerce group Alibaba, Nicholls’ second-largest holding, have lost 28pc since their February peak, not helped by a $2.8bn (£2bn) anti-monopoly fine. Didi, a taxi company, has more than halved in value since its stock market float last month after China’s internet regulator ordered online stores not to offer its app on the grounds it illegally collected customers’ personal data.

Given these setbacks, the 92pc return enjoyed by readers who took Questor’s advice to buy shares in Fidelity China Special Situations in March 2017 is all the more impressive. The MSCI China, an index of the country’s stocks, has risen by 30pc over the same period.

The discount to the trust’s asset value, which stood at 14pc at the time of our tip, has narrowed significantly, though this week’s premium is more a sign of stock market volatility.

So why, with uncertainty ahead, are we not banking that sizeable gain? Because China remains home to some of the world’s most exciting companies and Nicholls has proved adept at finding them.

Andrew Lister, who holds Fidelity China Special Situations in his Aberdeen Emerging Markets investment trust, is certainly not joining the flight from Chinese stocks. “Foreign investors have a tendency to panic out of these markets when there are negative headlines and I think that’s exactly what you are seeing,” he says.

This means China’s market is likely to remain jittery in the coming weeks, according to George. “Investors are getting nervous because they simply don’t know how far this is going to go before the Chinese authorities are satisfied,” he says.

Lister advises investors to hold their nerve. “The long-term story in China remains an extremely good one, so we would be inclined to buy the dip,” he says. “Generally the best times to invest are when it feels a bit uncomfortable.” Hold on.

Questor says: hold

Ticker: FCSS

Share price at close: 360p

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