Sell Anthony Bolton’s China Special Situations Fund- the need to have China & India exposure myth

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There will be some folks who tell you that you must (I repeat must) have exposure to China or India as part of a diversified portfolio. The question such folks ask is which? The arguments are well rehearsed: demographics, GDP Growth prospects, transformation of agrarian economies, competitive advantage. There is a plausible long term case for both which i shall discuss at another time. The issue is whether holding such investments now will make you money and the answer is no. As such I suggest that if you hold units in Anthony Bolton’s Fidelity China Special Situations fund you should sell the lot now at 74p.

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I have detailed on these pages on numerous occasions the mounting evidence of how rapid the slowdown in the Chinese economy is. Today we have more data out on steel which adds to the picture and last week we learned that Chinese manufacturing levels were at their lowest for three years. That is historic data and, as I have noted before, official PRC Government statistics cannot be relied upon as they tend to overstate the case. Given the hugely negative ongoing trends it is pretty obvious where that is all heading.

That is the real economy. What is also clear to anyone who has read about China is that there are a large number of speculative financial bubbles (some based on fraud) which will, in due course, implode. Bubbles do not deflate. They implode. Vast numbers of empty office blocks and luxury buy to let apartments have, to date, been supported only by speculative buying not real demand. As the real economy slumps this will feed through to the bubbles which, in turn, will have a negative impact on the real economy. It is a vicious circle.

As I write the Shanghai Composite Index is at 2,059.15, down by approximately one third since Bolton launched his fund in April 2010 so he has outperformed and down by two thirds from its 2007 peak. But it is actually 19% ahead of its financial crisis (2008) lows and only 18% down on a one year view despite the fact that the economy started falling off a cliff five months ago.

The average PE on the China market is now 11.1. Bulls say that by historic standards that is not high. But what they forget is that this is a trailing PE, i.e. a reflection of the past year. Daily the evidence mounts that Chinese companies that were very profitable indeed in 2011 are now running at a loss. This is an across the board phenomena from textiles to steel to ship building to property. Around 40% of the Chinese market is “financials” and when the bubbles start bursting you can see where earnings in that sector will head. As such I would suggest that the forward PE will be far closer to 20 (if not higher) than to ten. There is no earnings visibility at all and thus this market cannot be described as cheap in any way.

Bolton is a skilled stockpicker. His plea to his fund holders at the AGM in July was “Valuations and sentiments are very supportive for Chinese equities … With inflation less of a concern China can continue to stimulate the economy” He promised a recovery by Christmas. I do not believe it.

As Chinese stocks tank there will be far better entry points to that market and to Bolton’s fund. I cannot see how he can deliver absolute gains in a market that is so overpriced. For what it is worth his track record since launch is -24% in 28 months.  As such my advice is to sell all your units in Bolton’s fund (and any other Chinese funds you own). There will be a time to buy back in but that is many months if not years away. You do not have to own anything, and right now there is no reason to own anything Chinese. I pick Bolton’s fund as a high profile case. I trust him and think he will fare better than most but my call would be to sell units in EVERY Chinese fund you own and look to revisit at a more attractive level in late 2013.

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Comments

  1. Ron Worralorra says:

    “Bolton is a skilled stockpicker.”

    Takes one to know one, eh, Tom. Personally I have China exposure but I make my own decisions, I don’t want a bolt-on to do it for me. After he expressed surprise at the level of corruption he met (IIRC he said something like that) I don’t see how people can go on relying on his past record, as he’s now working in an area which he admits he is unprepared for.

  2. Ron Worralorra

    Bolton’s track record before he ventured into China was good. We might agree on that.

    Going it alone in China investments is very brave unless you are on the ground to do DD yourself. Not sure I’d bet 5,000 Albanian Lekke on the average set of accounts from a PRC PLC being 100% watertight. But your bravery deserves reward and so I wish you all the best of luck.

    Personally I do see an 18 month trainwreck ahead. Just think it is safer to duck out now and come back in 2014

    Thanks for the feedback

    Tom Winnifrith

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