Tag Archives: asset bubble

An Investment Guru in China

18 Nov

Over the 28 years in which Anthony Bolton managed money for Fidelity, he delivered average annual returns of 19.5%. In April of this year the 60 year old investment legend came out of retirement and is betting his reputation on a China Special Situations fund. Since opening, the fund is up 27%. What’s more, he’s put GBP2.5m of his own money in the pot.

Why take such a reputational risk? Here’s the answer in Bolton’s own words:

“People have said to me: ‘Anthony, if it is a success, so what? But if it is a failure, you are going to ruin your record,’” “But in terms of what’s important to me, my reputation is not at the top of my list. I think this is one of the most interesting things I have done in my whole career in investment. You don’t want to get to the end of your life and say, ‘Why did I not have a go at that?’”

One has to admire that deep sense of curiosity. It’s surely that type of character that contributed to his record over the proceeding 28 years.

The first link below will take you to a 45 minute interview with Mr. Bolton, where he discusses his experiences. The interview covers many topics including his broad investment thesis, specific stock ideas, macro risks, as well as Chinese business management. The second link is to register for a live webcast on 1 December in which Anthony Bolton will update his investors on the fund’s performance, as well as his thoughts on the Chinese markets. Beneath the links, I note the major points from Bolton’s interview.

I find it enlightening to listen to a ‘guru’ such as Bolton. Even if one’s not invested in China, this interview contains much investing wisdom. I specifically enjoyed seeing the application of tested investing principals in a fresh market – there’s nothing mystical about Chinese markets – it seems one can make (or lose) money in the same way as in developed markets.

The interview:
https://www.fidelity.co.uk/investor/research-funds/investment-trusts/china-video-update.page

Register for the webcast: http://mediazone.brighttalk.com/event/Fidelity/125c0e943c-4426-intro

General Thesis:

· China is set to enjoy higher growth than the rest of the globe over the coming decade. Bolton talks of 8-10% growth per annum, versus around 2% in most developed markets

· A growing middle class is leading to a more consumer lead economy

· Chinese small and mid cap stocks are mostly under-covered by the street

Is there an asset bubble in China?

· There is a bubble in big city residential real estate

o This will lead to bad debts, but a lot of the prices / valuations are already accounting for this. In addition, a lot of the banks and local authorities have access to central government funds, which are deep.

· There is no bubble in the stock market

· Long-term general real estate outlook is good

Which investment themes are you playing?

· Consumer is a large play, though the definition of consumer is large and includes retailers, wines/spirits, autos, media, net, financials, and hotels.

· Agriculture is not a big play (though he does hold a large fertilizer name)

· 60% of the fund is in companies with market caps below $5bn

· 25% is below $1bn market cap

· There are 2 main groups of companies:

o Growth – <20x current year’s earnings (minus net cash). The valuations are usually at a premium to developed market peers, though growth is 20-30% annually. In these stocks he’s looking for business models that he’s seen work in Europe.

o Value – Trading at a discount, usually small and midcap. They are still growing at 10-15%!

· A lot of these companies have cash

· Time Horizon is not that different from US/EU companies. Roughly 18 months.

Other interesting points

· Management is getting much better

· Concerned there might be an informational disadvantage in holding A-Shares. Need more knowledge to increase the A-share portion of the portfolio

Long term concerns

· As the middle class get more mature, they will want more freedoms. How the government reacts will be crucial.

 

In the interview Bolton mentions 3 companies he holds and why he likes them. In my next blog entry I will take a closer look at those 3 holdings.

Zai Jian

 

 

http://mediazone.brighttalk.com/event/Fidelity/125c0e943c-4426-intro

Over the 28 years in which Anthony Bolton managed money for Fidelity, he delivered average annual returns of 19.5%. In April of this year the 60 year old investment legend came out of retirement and is betting his reputation on a China Special Situations fund. Since opening the fund is up 27%. What’s more, he’s put GBP2.5m of his own money in the pot.

 

The first link below will take you to a 45 minute interview with Mr. Bolton, where he discusses his experiences. The interview covers many topics including his broad investment thesis, specific stock ideas, macro risks, as well as Chinese business management. The second link is to register to a live webcast of Anthony Bolton updating investors on the fund’s performance on the 1 December.

 

I find it enlightening to listen to a ‘guru’ such as Bolton. Even if one’s not invested in China, this interview contains much investing wisdom. I specifically enjoyed seeing the application of tested investing principals in a fresh market – there’s nothing mystical about Chinese markets – it seems one can make (or lose) money in the same way as in developed markets.

 

The interview: https://www.fidelity.co.uk/investor/research-funds/investment-trusts/china-video-update.page

 

Register for the webcast: http://mediazone.brighttalk.com/event/Fidelity/125c0e943c-4426-intro

 

General Thesis:

· China is set to enjoy higher growth than the rest of the globe over the coming decade. Bolton talks of 8-10% growth per annum, versus around 2% in most developed markets

· A growing middle class is leading to a more consumer lead economy

· Chinese small and mid cap stocks are mostly under-covered b the street

 

Is there an asset bubble in China?

· There is a bubble in big city residential real estate

o This will lead to bad debts, but a lot of the prices / valuations are already accounting for this. In addition, a lot of the banks and local authorities have access to central government funds, which are deep.

· There is no bubble in the stock market

· Long-term general real estate outlook is good

Which investment themes are you playing?

· Consumer is a large play, though the definition of consumer is large from retailers, wines/spirits, autos, media, net, financials, and hotels.

· Agriculture is not a big play (though he does hold a large fertilizer name)

· 60% of the fund is in companies with market caps below $5bn

· 25% is below $1bn market cap

· There are 2 main groups of companies:

o Growth – <20x current year’s earnings (minus net cash). The valuations are usually a premium to develop market peers, though growth is 20-30% annually. In these stocks he’s looking for business models that he’s seen work in Europe.

o Value – Trading at a discount, usually small and midcap. They are still growing at 10-15%!

· A lot of these companies have cash

· Time Horizon is not that different from US/EU companies. Roughly 18 months.

· Other interesting points

· Management is getting much better

· Concerned there might be an informational disadvantage in holding A-Shares. Need more knowledge to increase the A-share portion of the portfolio.

 

Long term concerns

· As the middle class get more mature, they will want more freedoms. How the government reacts will be crucial.

 

He specifically mentions 3 companies he holds and likes. In my next blog entry I will write some notes on these, and take a closer look.

 

Zai Jian

 

 

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Chinese moot reigning in lending

23 Aug

Chinese banks received a draft ruling that would require them to deduct existing subordinated and hybrid debt sold by other lenders from supplementary capital.  In addition, the new rules would limit the amount of hybrid and subordinated debt held by a single bank to 15% of core capital (and 20% for all banks in total).

The banks have been given until the 25 August to provide their feedback on the issue to the China Banking Regulatory Commission.

The upshot maybe to increase minimum capital adequacy ratios by reducing lending, or increasing capital by selling more shares to the market.  In fact, the regulator has asked small banks to increase their CAR to 12% (from 10%).

Chinese stocks have stuttered as investors are concerned that such a move would curtail loan growth. A significant portion of Chinese growth has been driven by increased lending and stimulus spending, in an attempt to plug the export hole.

In my opinion the commission is correct in focusing on ‘main-street’ and crafting a path of more sustainable growth, ensuring that asset bubbles are contained, and non-performing loans are kept to a minimum.  In this case the stock market should clearly play second fiddle.

Time for a little prudence in real estate names

10 Aug

Shanghai closed down for a 4th consecutive trading day – the longest negative trend in 2009.  The index is down 6.4% from its peak a few days ago on the 4th August.

The biggest losers were real estate and energy companies, as investors became concerned that loan growth would slow, and reduce power demand (see https://ravendragon.wordpress.com/2009/08/09/electricity-consumption-vs-gdp-growth/) and building.

As discussed in previous posts, first-half lending in China grew 300% yoy to a massive CNY7.3bn.  Too much liquidity opens the risks of an asset bubble.  In my opinion investors are correct to be prudent at this stage, and wait to see how the government continues fine-tuning monetary policy and flows before expecting upside in real estate and related names.

In addition, I would not characterize the market as a bubble, and feel the Government is correct in its ‘fine tuning’ policies and attempts to calm lending in 2H09 – i.e. this should prevent a bubble from fermenting

[Note-  the the Hang Seng ended on an 11 month high, with mainland banks recouping some of their recent loses on expecatations of earnings upgrades by analysts].

Lending targets curtailed

29 Jul

Just 3 days ago (26 July) we discussed expectations for pinpointed measures to prevent over lending.

Two of China’s largest banks have set limits of 2009 lending:

1.Industrial and Commercial Bank of China- ICBC (SEHK: 1398) plans to issue new loans of CNY1 trillion over 2009 – to date the bank is 83% towards that target.

2. China Construction Bank – CCB (SEHK: 0939) has set a CNY900bn limit, and is already 79% of the way there.

I see these as sensible measures towards helping sure up the quality of the banks’ loan books.  From a maco perspective it is one more incremental step towards preventing an asset bubble.