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Fidelity's Anthony Bolton Remains Bullish on the China Equity Market
I am increasingly confident that we are near a turning point for the Chinese equity market. I believe shares will begin to respond to further stimulus in the second half of 2012, supported by historically attractive valuations. Above all, I continue to believe that my focus on the growth in domestic consumption is the right investment strategy.
Investors have become increasingly sceptical about the investment case for China, with many global funds having a historically low exposure to the country. Industry-wide fund flows have been negative, both internationally but also domestically within China, and people are clearly not positioned for markets to go up. In my experience, that is precisely when they do.
There are things to worry about, of course, but also good reasons to be positive. Economic growth is slowing but I still expect it to be between 7 and 7.5% this year. I expect more incremental stimulus in the months ahead against a backdrop of falling inflation. With a transfer of political power later this year, changes will be slow and measured but there is plenty of room to stimulate the economy further.
Other positives for me are signs that loan growth is picking up - both money and credit growth are rebounding. Retail sales continue to grow at a healthy mid-teens percentage rate, a trend bolstered by China's relatively low levels of debt. The growth of trade with other Asian countries means China's economy is starting to decouple from the West and, in time, this will lead to a decoupling of investment markets too.
The valuation case for China is as good as I have seen it. Whether you look at the price of shares compared with earnings or asset values, they are at historical lows and cheap by comparison with other markets as well. If history is any guide, the returns from today's relatively undemanding valuations should be rewarding.
I have been asked recently if my strategy has changed as a consequence of my experience in China. I am not complacent but I do not see the need to change my approach. The basics of investing in China are similar to what I was used to in the West although markets are more volatile and investors have a shorter-term view. I believe that provides me with opportunities to focus on the long-term and to take advantage of depressed prices.
I continue to believe that the shift from an investment and export led economy to one focused on domestic consumption is the most important investment theme in China and I am positioned to benefit from it with a bias towards companies in retail, food and beverages, travel, IT, healthcare and finance.
The flip side of the rebalancing of the Chinese economy is that low-value exports are unattractive. The days when China could sell cheap T-shirts to America are over. I am also not attracted by many commodities because I do not expect to see a repeat of the massive infrastructure investment of four years ago.
I continue to see the best opportunities among smaller and medium-sized companies, although this has been unhelpful to me over the past year or so. One reason I prefer these smaller companies is that they are generally run and owned by private entrepreneurs. I think life will become more difficult for larger, state-controlled companies under the new administration. The ability to increase my market exposure through borrowings has also detracted from performance this year but this gearing will magnify gains when the market rises again.
Overall, I remain positive on the investment outlook in China and I believe that money will begin flowing to emerging markets once it is clear that the growth of the Chinese economy has stabilised. The expansion of China's middle class is a long-term theme while the short-term attractions of the Chinese market are underpinned by compelling valuations and renewed economic stimulus.
Anthony Bolton is president, investments at Fidelity Worldwide Investment