Q&A: Anthony Bolton on China

Fidelity's Anthony Bolton on taking his contrarian approach to the Chinese market...

Bolton is returning to fund management to run Fidelity’s China Special Situations investment trust, however he is no stranger to investing in the region.

Towards the end of his time running the group’s flagship Special Situations fund, he had around 5% in Chinese stocks.

Speaking alongside First State’s Angus Tulloch at wealth manager Saunderson House’s China debate last month, Bolton outlined why he feels compelled to return to running money.

Why are you interested in China?

My belief is the world we are going back to in the West, is not the same as the world before the economic crisis. We will be entering a lower growth environment particularly in the US and Europe. I think this year is quite a key watershed for markets. It will stop being about the recovery and instead people will ask what next?
I think we are in a multi-year bull market but we have not had any decent consolidation. I think the leaders will change from some cyclical, lower-quality shares, such as industrials and materials, and more towards growth.
Growth will be relatively better in emerging markets. Growth on average there will be good compared to history and real growth in emerging markets like China will look even better. This will lead to more investment from the developed world into emerging markets.

Why invest now?

China is the world’s third-biggest economy and it may have overtaken Japan last year. The stock market is currently the ninth biggest and in my lifetime I think it could become the second biggest. China has been growing by 10% compound for nearly 30 years and in the last 10 years its growth has been equal to two UKs or seven Indias. There will not be continuous growth and there will be hiccups but in the long term it is very exciting.
The other aspect is analysis of S-Curves. There seems to be a sweet-spot in the development of emerging markets. When GDP per head reaches $4,000 per head, between there and $10,000 per head, there seems to be the strongest growth particularly in the domestic economy. We saw this with Taiwan and Korea 20-30 years ago and Japan before that.
We have never seen an economy the size of China enter this S-Curve but over the next 10 years that will be pretty important for the growth of the domestic economy.

Where do you see the opportunities?
In terms of stockpicking opportunities and how my style will work, I think part of the opportunities will come from the fact China is underdeveloped. When I have looked at markets over the years such as the UK and Continental Europe in particular, it is when a market moves from an under- to a very over-researched area you get stockpicking opportunities. Relative to the developed markets, the Chinese markets are still very underdeveloped.

What about valuations?
Valuations are not only a strong driver of returns in emerging markets, they are an even stronger driver than in developed markets like the West. This will work for China where valuations will be one of the biggest drivers of returns. 
I wish China had the valuations I saw when I first looked at Europe but sadly this is not the case.
Valuations are in line with the long-term average. This is not a place where the big stocks are very cheap, but outside the leaders there are opportunities for a stockpicker like myself.   

What about IPOs?
In Europe, there was also a big growth in IPOs. In China, I think we will see a lot of IPOs,  particularly in the service sector. I have always had a long term bias away from manu-acturing and more towards service businesses and there will be many more of these businesses to invest in China in the future.
Would you go against the tide of Government policy in China?
I will be using my normal contrarian style and have a value bias to the fund. When I was running our European funds investing in Emerging Europe I had a slightly more GARP approach. I think for part of the new fund I will follow that. Policy is one of the key issues in China. You can have a great business and if policy changes overnight you can have no business. I would not bet against that. If policy has gone against the business the best thing is to cut it. If something really important has changed you might have to reassess your investment.

Is there a China bubble?
Today I do not think there is. As I see it, bubbles take several years to happen and I think the bear market cleared the slate.
We started again in November 2008 so we are a year and quarter into this bull market – not long enough for a bubble.
I do not think the valuations are excessively high. If there is a bubble it is more likely to be in the A-shares than the H-shares as that is where higher valuations are.
There is a lot more development and money coming into markets like China. At some stage there may be a bubble but we will get lots of warning.