(This report, incorporating Fidelity’s star fund manager Anthony Bolton’s outlook on global equity markets and the Chinese stock market, was published in DNA edition dated November 23, 2010.)
A year ago, Fidelity’s star fund manager Anthony Bolton was ready to retire after a distinguished career as wealth creator extraordinaire, returning an annualised 20 per cent for 28 years running. “But then I had this mad idea that I would do something completely different,” he recalled in Hong Kong on Monday. That pursuit of a ‘mad idea’ led him to head a fund focussed on China, a country that he reckons is “probably the most interesting investment opportunity of the decade.” And in the seven months since his 625-million-pound closed-end Fidelity China Special Situations Fund was launched, Bolton has even topped his ‘Midas touch’ record, returning 27 per cent, with help some astute multi-bagger stock-picks.
Bolton says there are three things that excite him about China: China’s position in a low-growth world, the changing drivers of its growth, and the fact that the market in China is less well-researched than markets in the developed West.
“In my view, the developed world is in a below-par growth environment for the next few years,” he says. And although growth in China too will come down – to about 7-8 per cent – “that’s still going to look really attractive in a low-growth world.” Going forward, China’s growth drivers won’t be exports or low-value manufacturing, which are “yesterday’s stories”, but consumption, services and high-value manufacturing. This transition won’t be without challenges, he notes, but it will be accomplished, given that authorities have set their minds to it.
“What really excites me a stock-picker is to find a market in China that isn’t so well researched,” says Bolton. “It’s very refreshing to find medium and small-size companies that have not been researched much. That is almost impossible to find in the West.”
Investing in China is not without challenges, and Bolton too say she faces a few. The first is of language: he doesn’t speak Chinese, but then, he notes, about two-thirds of his meetings with Chinese companies have been conducted in English. At the other meetings, his research team in Hong Kong helps out with translations. “But even at these translated interactions, I find that I can pick up nuances – in the way the management talk about their business – that perhaps our analysts, despite the detailed knowledge of companies, may not pick up because they haven’t seen as many companies as I have over 40 years,” says Bolton.
Corporate governance issues are also a challenge, notes Bolton – and “certainly it’s much more variable than I’ve been used to in the West.” Some of this, he says is “immaturity: some companies don’t understand what it means to have outside shareholders.” Working out the quality of the management – and “whether what they tell us reflects reality” – is one of his key tasks, he adds.
Bolton concedes that there are others with a distinctly bearish outlook on China, but isn’t discomfited by that. “I’m not saying it’s all plain sailing in China, but if everyone agreed with me and shared my outlook, I’d be more concerned,” he says. His own understanding of the China market has become a bit more nuanced in recent months, even though his core views remain the same. And he admits to sometimes reading it wrong. “For instance, I thought that over this summer and autumn, the Chinese economy would slow down even more and that we’d see a loosening up of measures. In fact, we’ve seen the opposite.”
As for the world beyond China, Bolton reiterates something he’s been saying for a while now: that the world is in a multi-year bull market. “We’re now in the second phase, which will be very different from the first, which saw a sharp rebound,” he adds. In the second phase, in a low-growth world, he believes that investors are going to be “turned on by and pay up for” companies or countries or regions that can grow in a low-growth environment. “I expect them to pay up for growth, and I expect that growth to get quite overvalued.”
Not being an economist, he’s wary of making calls on the economy, but in his estimation, a double-dip is unlikely, although growth in the developed economies will be much lower going forward. “I’ve never seen a time when the outlook for the developed world looks so poor and the relative position of the emerging world looks so good.” That, to him, means we’ll continue to see an intensification of the story that’s already started playing out: of capital flows from the developed world into the emerging markets.
In Bolton’s estimation, those hot money flows aren’t likely to reverse anytime soon. “I don’t know how it will end, but it seems to me that we have all the conditions for things to get overdone,” he adds. Hot money always changes direction eventually, and someday, the flows will go elsewhere. “But it looks pretty set to me for the next year or two.”