Investors are right to be concerned about China’s medium-term future, according to Anthony Bolton, the manager of the Fidelity China Special Situations trust.
Bolton says he does not want to belittle investors’ concerns about the country’s one-child policy and the low number of young people growing up to support the economy.
According to Bolton, the authorities will most likely have to offer the middle class greater freedom, not just greater wealth, which would require major political reform.
On the economy, he says he is concerned in the medium term about sharp rises in the real estate market in Hong Kong in particular, and about Hong Kong’s ultra-loose monetary policy, which is pegged to America’s.
He admits that if the country’s high inflation takes off more than he expects, it might pose political problems for the authorities.
However, in the short term Bolton says the authorities have the policy tools to manage the country’s economic pressures, including the monetary policy to balance inflation and growth.
“It’s unlikely the Chinese are going to do anything radical (with monetary policy]. It’s unlikely they’re going to stop the economy in a big way in a year where they will have policy changes,” he says.
He adds the economy still looks to be moving away from an excessive emphasis on exports and more towards domestic consumption.
“A lot of people worry about the demographics of China in the medium term, and I don’t want to belittle that, but the urbanisation process is more important to driving consumption,” he says.
However, Bolton observes investors need to remain agile in pursuing domestic consumption themes in China.
“The urbanisation process is more important to driving consumption”
He has taken stakes in suppliers to domestic consumer companies, rather than the companies themselves, whose share prices look high in Bolton’s opinion.
Overall, Bolton says the problem is not so much with finding good company management in mainland China, as with finding stock prices which look attractive.
So far, he has focused primarily on Hong Kong and American-listed businesses, rather than Chinese mainland shares, which he says have typically been valued less attractively.
However, he says he will be looking more intensively at Chinese mainland A shares this year following falls last year.
Fidelity has also received an indication from the Chinese authorities that it may receive a permit to invest in mainland China.
On a company level, Bolton says he places shares into two broad buckets: businesses which are growing less strongly, but are relatively cheap, and firms which are growing more strongly, but have fuller valuations.
He says he would have been less willing to buy the latter type of company when he was investing in Europe, but that he has to make allowances for differences in the Chinese market.