Anthony Bolton, manager of the £650m Fidelity China Special Situations investment trust, discusses his investment outlook for 2013.
My overall view is that a world of low growth, accompanied by low interest rates and substantial liquidity, should provide a favourable environment for equity investment.
Liquidity is not just a reflection of central bank measures such as QE but is also due to large investor cash balances, which are currently sitting on the sidelines earning very low returns.
We have already seen how this has driven up the prices of bonds across the world and, in 2012, higher yielding equities have also started to benefit.
Chinese market can turn on a sixpence
I believe 2013 will be the year when these tailwinds swing behind equities in general, and that markets will be driven upwards by an expansion of valuation multiples rather than by strong earnings growth or upgrades of earnings forecasts.
I think all financial assets will eventually benefit from this surplus liquidity, particularly in a world where the demand for funds from the corporate sector for investment will remain depressed.
The major challenges for the American, European and Japanese economies are already well known and substantially factored into prices. Relatively low equity valuations and generally poor equity sentiment should help as equities climb their wall of worry.
China is at a very interesting juncture. We are now one year into a slow easing of policy and are starting to see evidence that activity has stabilised after a period of substantial slowdown. Indeed, some areas such as fixed asset investment are expanding again.
An increased supply of credit (although on nothing like the scale of credit expansion after the global financial crisis) is definitely helping. Despite this background, equity valuations generally remain very depressed and sentiment is negative, especially in the domestic ‘A' share market.
However, this is a market that can turn on a sixpence and I would be very surprised if 2013 isn't a much better year after an ‘A' share bear market that has lasted over 3 years.
Of course, China has its own challenges, including a likely significant rise in bad debts at many banks and local finance vehicles, which may also include trust and wealth management products. However, as I have argued previously, I believe China has ample resources at the centre to tackle these issues.
I remain less concerned about these financial challenges; rather, I think the main issues ahead for China are related to the need for longer term social and political change.
On the immediate political front, we have a new president in waiting who has been given considerable individual political power, although he is surrounded for the next five years by a standing committee that is relatively conservative. I think we will need to watch closely what reforms are introduced over the next year to see the true colours of the new regime.
The nature and quality of growth in China is changing. The export and investment driven model is being gradually superseded by a consumption driven one. This means GDP growth in the future will be lower but the quality should be higher.
As ever there are risks. China's deteriorating relationship with its neighbours, especially Japan, is a worry. Friction between North and South Korea remains a possibility. However, despite these risks I continue to think that 2013 could surprise investors on the upside.
Anthony Bolton is the fund manager of the Fidelity China Special Situations trust.
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