Anthony Bolton: Why I’m returning to running money – in China

In getting us out of the financial crisis we have just been through, many western governments have effectively mortgaged the future.

The combination of governments having to repair their balance sheets, consumers rebuilding saving ratios and constraints on credit growth due to the weak state of the banking sector will result in slower growth than before the crisis – particularly in the US, UK and Europe.

This will become apparent once the strong recovery phase we are now in runs its course – probably by some time next year.

Because of this, the faster growth being seen in economies such as China’s will appear relatively attractive and I believe
that a lot of money will continue to flow into the region from investors in the developed world.

Jim O’Neill, head of global economic research at Goldman Sachs, has said: “What is going on in China remains, quite simply, the most remarkable and important economic story of our, and possibly our children’s, generation.” I totally agree.

The situation in China today is very similar to that in Taiwan or South Korea during their fast growth phases 20 or so years ago – and in Japan before that.

However, growth is occurring on an even bigger scale because of the enormous size of the Chinese population.

Just as consumers in the west start to rebuild their savings rates, consumers in China are likely to start running down their very high savings.

Many areas of the economy are in the steepest part of their development curve as consumer incomes reach a level where increasing numbers of people can aspire to own homes, cars and household goods.

Because of the scale of what is happening, and the effectiveness of a centrally-
run economy that other emerging markets do not enjoy, the world may never see anything like this again.

All of this is why I am deferring my retirement and returning to running money. I have become increasingly convinced by the investment opportunities available in China today.

I recently spent three months based in Fidelity’s Hong Kong office and this rekindled my interest in the region – and China in particular.

After a few weeks there, I said to my wife that the exciting opportunities available in China, and my belief that the market could go a lot higher over the next few years, made me wish I was still managing money.

Rather to my surprise, she said that as I only had one life I should consider running a fund again while I still had the opportunity. I spent the next few weeks discussing the idea with my family and senior colleagues before deciding to give it a go.

No-one should imagine the ride will be smooth. China is an emerging market and the volatility of its stock markets will remain higher than in developed markets.

Although it would have been wonderful to have started a new fund at the beginning of this year when all stock markets were in the “bargain basement” category, I believe China is still fairly valued today rather than expensive.

We are only one year into the new Chinese bull market and I think it has the potential to go on for several more years.

Next year, I expect most world markets to consolidate. China will not be immune but this year
it has already experienced a longer retrenchment
than many other markets.

Could a bubble form in Chinese equities? I do not know, but many of the conditions necessary are there and a number of strategists are predicting one.

An experienced Asian observer has said: “As everyone knows, a bubble is a market that rises rapidly in which one is
not invested; if one is invested, then it is a bull market.”

I have a lot of sympathy with this view and I believe that, like bull markets, bubbles normally continue for several years.

I have been visiting China over the last five years, normally making two visits a year to see Chinese companies.

When I ran the Fidelity Special Situations Fund, I put up to 5 per cent of it into Chinese stocks between 2005 and 2007.

More broadly, Fidelity has been investing in China for more than 16 years and has three portfolio managers, as well as five analysts and three dedicated traders. We are certainly not new to the country.

I hope my experience and perspective will add to this already well-resourced team.

I will bring my successful Special Situations investment approach to Chinese stocks as well as running a fund that will benefit from China’s very attractive secular growth.

For an investor like me, the opportunity is simply too great to pass up. My retirement can wait a while yet.

Anthony Bolton is president, investments, at Fidelity International.
This is his last FT Money column, as he will launch his China fund in 2010.
Under his management,
the Fidelity Special Situations fund was the top performer in its sector from its launch in 1979 until he stepped down at the end of 2007.
He then took a full-time
role overseeing Fidelity’s investment process.