Fidelity’s Anthony Bolton has moved to reassure investors now is the perfect time to be in the Chinese markets, as hedge funds withdraw from the region and short-sellers move in.

Bolton (pictured) was addressing investors in his £510m Fidelity China Special Situations investment trust after the trust's annual general meeting this week.  

He said short-selling in Hong Kong is at historic levels, recently hitting a 10-year high, while Asian hedge funds' exposure to China is at a low point.

"People are generally cautious and are taking money out of China which, as a contrarian, I see as positive," he said.

Bolton also pointed to local, private investors in Asia who tend to have only a small proportion of their portfolios invested in bonds and equities, with the majority held in cash on deposit.

"It is this money that will drive the market when the market turns," the manager said. "People are not positioned for markets to go up, which is usually when they do go up."

The veteran investors said equity valuations in China are exceptional at present, with low price to earnings ratios on the MSCI China index and the local Shanghai A-shares market presenting buying opportunities. 

“Valuations are really supportive at the moment – the valuation case for China is as good as I have seen it.”

He added in terms of forward earnings, China is “off the scale” and very attractive relative to its 30-year history.

Meanwhile, at the macro level, Bolton expects Chinese inflation to fall below 2% this year, and predicts a very positive environment for inflation over the next six to eight months. There is clear scope for the authorities to undertake further policy easing, he suggested.

At the AGM, Bolton told shareholders the trust’s gearing as well as its small- and mid-cap exposure had hit performance, which he admitted was “disappointing”.

Those who have remained invested in the trust have had a torrid time since launch, and in the last year - amid sharp declines in equity markets - the portfolio saw its NAV fall 18.5% (to 31 March 2012).

If markets do turn in his favour, his strategy should ensure he sees more upside than those invested in the larger-cap stocks, while gearing could also provide an extra kicker if equities rise.