China 'bears' are worried about financial companies, worries which Anthony Bolton, outgoing manager of Fidelity China Special Situations (FCSS) investment trust, admits are not unfounded, he thinks most of the financial challenges are containable - if not for ever, then at least for a number of years. He notes that the government has a lot of resources and it is aware of the challenges.
Mr Bolton also continues to invest in privately owned medium and small companies that give exposure to the domestic economy. "The big infrastructure spend days are over, and there is a large focus on growing the domestic economy," he says.
But the Chinese mainland is not necessarily the cheapest place to get exposure. "Local investors in China like small high-growth companies so some of them trade on excessive valuations of 60 to 70 times earnings," he says. "Hong Kong is the opposite: investors like big companies with marketability, so the smaller companies have particularly low valuations. I saw a smaller Hong Kong company a few weeks ago and it has a valuation of about a quarter of that of its main competitor which is listed on a mainland exchange.
Over time I expect mainland investors to be allowed to invest more freely into Hong Kong listed shares, and the opportunity to buy into smaller companies there will be a serious consideration for them. Although Hong Kong listed Chinese medium- and smaller-sized companies sell on much lower valuations than their mainland listed peers I would expect this valuation difference to close, with the Hong Kong shares being re-rated."
See next week's issue for the full interview with Anthony Bolton.
