Bolton's optimism on China "severely tested" as NAV falls 29%

Legendary investor Anthony Bolton has said his optimism on China has been "severely tested" after the sell-off in September hammered share prices, while his trust saw its NAV fall 29% over the last six months.

Bolton, running the Fidelity China Special Situations trust, said the last few weeks of September were "as difficult a time to be running money as I can remember," and had tested his view on China.

"My optimism on markets generally and China specifically has been severely tested. I will argue below why I remain optimistic although many take a much more cautious view.

"Over and over again I have asked myself whether I should revise my view in light of the deteriorating position in Europe and potentially also in the US, but I have concluded the world is not in such a bad position as many think.

"It may still end up there at some stage over the next year or so but I believe the balance of probabilities is against such an outcome."

While the trust's NAV was down 29% in the six months to end of September, the benchmark MSCI China index was down 24.5% over the same period. Net assets stand at £489.5m, down 28.4% from six months ago.

Bolton said the trust had underperformed because of its focus on small and medium sized businesses which were more affected by the recent sell-off, as well as because of its gearing, which stood at 24.4% at the end of September.

"I am sorry to report that the combination of the very difficult stock market background, the company's exposure to the more volatile medium and smaller capitalisation Chinese stocks, and the company's gearing has produced some very poor performance figures," he said.

Bolton added the negative view of a growing number of commmentators that China will see a hard landing has wrong-footed him so far, with the impact of problems overseas in Europe and the US hurting share prices in China more than he expected.

He said: "The number of commentators looking for a hard landing in China has increased over the last few months. This ,together with negative views about the property market and the unofficial lending market, has led to Chinese shares performing worse than those in other markets.

"Asian markets in general have fared less well than developed markets as investors have reduced risk and I have been wrong so far in my expectation that China's stock market could decouple from the West."

Despite the results, Bolton said with sentiment now at rock bottom, a strong market recovery over the next few months is likely.

"At the beginning of October sentiment became about as negative as I have seen it," he said.

"However, valuations are very attractive versus history and Hong Kong directors' purchases of shares are the second highest they have been in the last 11 years (only higher in 2008). Everywhere risk is off.

"Markets normally move to prove the majority wrong. I believe a strong market recovery likely over the next few months."

He added the next 12 months should be a defining moment for China when investors realise the economy is not about to collapse and the tightening period is over.

Meanwhile, commenting on the situation in Europe, Bolton said he never had much confidence in the euro, but added it will not be crunch time for the single currency for several years.

"I have never been a fan of the euro and today we are fully exposed to all the risks of that misguided experiment. Ultimately the politicians will have to decide between political union or breakup, but I believe this is still a few years away.

"In the short term, it remains to be seen whether the latest package is enough to calm markets. That said, even with a cloud hanging over Europe, it does not mean a major recession is inevitable and the idea that it is imminent for the whole of Europe is, I believe, wrong," he said.

"My strongest view is that with a black cloud looming over Europe for several years to come, investors in those markets will look elsewhere for growth."

This morning shares in the London-listed trust were down 0.7% or 0.55p, to 77.45p.