Betting on the Chinese Consumer

Anthony Bolton is making a big bet on the Chinese consumer.

You may never have heard the name before, but Bolton was one of the UK’s investing wizards. For 28 years, he racked up returns of 19.5% annualized. Since he had a long and superb track record and managed money for Fidelity, people called him “the Peter Lynch of Britain.” Lynch is a name you probably know. He also ran a Fidelity fund, Magellan, for many years, to spectacular success. (After he called it quits, he also co-wrote a couple of books that are now investing classics, One Up on Wall Street and Beating the Street.)

But I digress. The point is that Bolton is a heavyweight in the crowded field of investors – or was. He hung up his gloves in 2007. Nice timing, as it turned out. But now he is back in the ring, running a new fund called Fidelity China Special Situations Fund. (FCSS on the London exchange – check it out. Also, should you enjoy studying great investors, as I do: The best book about Bolton is Investing with Anthony Bolton by Jonathan Davis.)

So Bolton, Fidelity’s top-ranked manager, is taking his act to China.

I think this is noteworthy because Bolton sees something that I’ve also been writing a lot about lately: the rise of China’s consumers. “China is at a sweet spot in emerging markets,” he says, “where significant amounts of people can for the first time…afford cars, apartments and other goods… The driver of China’s growth is changing to domestic consumption.”

I agree. And I think such changes are happening much faster – and in a much bigger way – than the general market seems to believe. Andy Rothman, of the Asia specialist CLSA, predicts consumers will drive more than half of China’s economic growth this year. Investment in infrastructure will trail behind. Exports, Rothman believes, will contribute zero growth. The key point is that hundreds of millions of people will be joining China’s middle class over the next five years.

So Bolton’s loaded up on Chinese consumer stocks.

I also find some of China’s basic consumer stocks very appealing. The market consensus seems to be that China is going to blow up. There is a housing bubble there. And there are legitimate worries about its banking system and the losses lurking in dicey loan books. It seems most observers think this will spell disaster for China, as it did for the US – with a market crash and a deep recession.

Market prices reflect these worries, however. The low prices compensate investors well for taking risks today. But that’s not all. Suspicions of fraud also hover around the edges of newly minted China shares, as I wrote about in last month’s letter. This cloud depresses stock prices, too. An investor can lower the fraud risk by being very picky and doing a little extra due diligence. A few rotten apples don’t spoil the whole bushel.


Chris Mayer
for The Daily Reckoning

The Daily Reckoning