November 30, 2011

Fidelity's Bolton Sees No China Crash and Blames Bear Commentators For Market Slump

By Ian Fraser  (via QFINANCE)

Things are not going too well for star fund manager Anthony Bolton. His Fidelity China Special Situations fund, launched with much fanfare 18 months ago, has turned in a dire performance in the past six months, a period which Bolton admitted has “severely tested” his optimism about the Middle Kingdom.

Having seen its net asset value climb by 15% in its first year, the fund has shed 34% in the past 12 months, making it the worst performer of six China-focused funds tracked by the Association of Investment Companies. In results published on November 14, the Fidelity fund reported that, in the six months to September 30, its net asset value had shrunk by 28.9%, a sharper decline than the 24.5% fall in benchmark MSCI China index. Writing in the fund's interim report Bolton apologized.
"I am sorry to report that the combination of the very difficult stock market background, the [fund's] exposure to the more volatile medium and smaller capitalization Chinese stocks and the company's gearing has produced some very poor performance figures."

He said Chinese equity values had taken a battering, and blamed the growing chorus from commentators who are forecasting a “hard landing” for China's economy, as well as mounting fears about a property crash. Bolton also admitted that he had erred in imagining that China’s stock market would be immune to troubles in the West.
"Asian markets in general have fared less well than developed markets as investors have reduced risk and I have been wrong so far in my expectation that China's stock market could decouple from the West."

Following a spate of major frauds and corporate governance failures at Chinese listed companies, Bolton also said the fund has been forced to retain the services of five different corporate investigation firms (or "spooks") to probe investment targets.

Trading on Bolton’s reputation as manager of the highly successful Fidelity Special Situations fund, the Boston-based asset management group raised £430 million, mainly from UK retail investors for its China fund, in April 2010.

Spilling over

Bolton said that the final few weeks of September 2011, when global markets fell as a result of the eurozone sovereign debt crisis and because of growing acceptance that developed nations will have a double dip recession, had been bloody. He said:
"a brutal period for Asian markets - as difficult a time to be running money as I can remember. My optimism on markets generally and China specifically has been severely tested ... Over and over again I have asked myself whether I should revise my [optimism] in light of the deteriorating position in Europe and potentially also in the U.S., but I have concluded that the world is not in such a bad position as many think."

However Bolton remains convinced that, in the medium- to long-term, rising domestic demand will lift his chosen portfolio. "The rise of the Chinese middle class is something all investors should have exposure to," he told reporters on a conference call (via Citywire). In the interim statement of the fund, which is structured as a listed investment trust, Bolton described himself as an "optimistic contrarian" and argued that the surge in negative sentiment about China had created investment opportunities.
"Valuations are very attractive versus history and Hong Kong directors' purchases of shares are the second highest they've been in the last 11 years. Everywhere risk is off. Markets normally move to prove the majority wrong. I believe a strong market recovery is likely over the next few months."

Bolton predicted that falling commodity prices should curb Chinese inflation and ensure that the country does not overheat. He thinks China's GDP may still grow by 8% in 2012, while accepting that growth may be as low as 5% and 6% in the event of a sharper slowdown in developed markets next year

Areas of concern?

On the topic of Chinese banks' bad debts, Bolton acknowledged there are "real issues" due to lending via local government finance vehicles during the credit bubble. He said at least 20% of this debt is probably underwater, but he also said the consequences would not be felt until 2013-14 and that the Beijing government has "ample resources" to solve this problem, and that debts could be rolled over. Bolton said the area that concerns him most in the short-term is China's residential property market:

"The supply/demand relationship looks very unattractive. The government has been criticized in the past for letting the upward movement in property prices get out of hand, and I think it wants to see prices fall. This is now taking place. Unless policy changes, I expect a difficult 12-18 months but without substantial debt being held against property (unlike in the developed world) and with good long-term supply/demand dynamics I am more optimistic longer term. This is completely different from the American sub-prime crisis."

Bolton ended on an optimistic note, saying that the period between now and November 2012 will be the "defining moment for Chinese investment", during which he believes investors may realize that the Chinese economy is not about to collapse and that the period of tightening is over. However others including the investment bank Goldman Sachs, are much less bullish about Chinese equities.

Further Reading:
China Stocks Still The Place To Be Despite Recent Slump
All Things China on EconMatters

About The Author - Ian Fraser is a journalist who writes for QFINANCE, a free online resource for finance professionals, academics and students. (EconMatters author archive here)


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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