Equities set for bull-run phase II, says Anthony Bolton
The global equity market is entering phase two of the present bull-run and valuations can still go higher, star UK fund manager Anthony Bolton told a rapt audience in Hong Kong yesterday.
Speaking at the Foreign Correspondent’s Club in the city’s central business district, Bolton unveiled a series of US-based charts to back his view that there are key opportunities for equity investors to cash in on. He suspects the danger zone lies in the second half of 2011.
“In the next stage, what I believe investors will be turned on by and pay up for are companies that can grow in a low-growth environment, all countries, all regions,” he said.
He pointed out that the bull-run from post-Lehman lows has seen the S&P500 rise 81% – which is still moderate in historical terms – and has taken less than two years, meaning it is relatively youthful compared with previous bull-runs.
Meanwhile the US market, as a proxy for global equities, finds itself somewhere in the middle in terms of a 30-year view on price-to-earnings multiples, and equities also appear cheap now relative to bonds.
Plus he noted that while emerging market valuations based on two years’ smooth earnings are higher than in the last 10 years, “they look okay if you go back to the 1990s”.
“So my net on valuations, I think they can go quite a bit higher and I think that is going to be one of the drivers of this next phase of the bull market,” he said.
He also pointed out that hedge funds have around 50% net exposure to Asia ex-Japan. “That is low in my experience relative to history,” he added. “So I think from a sentiment point of view, the background [for equity investing] is okay.
“These [data] support my view. I don’t think we are yet at a dangerous phase in stock markets. Probably by the time we get into the second half of next year, this will be flashing more caution.”
China story
Primarily, though, the assembly had gathered to hear Bolton talk about China. After all, he landed in Hong Kong this spring to manage the Fidelity China Special Situations Fund, a UK-registered fund focused on China and China-related investments. Overall Fidelity’s China team manages $20 billion invested in Chinese securities.
Offering his observations as a self-confessed China “new boy”, Bolton forecast a slowdown in the country’s economic growth to 7-8% next year as Beijing moves to rein in credit growth. But such a rate, he stressed, is still impressive on a relative basis.
His China fund is focused on sectors that he sees as future growth-drivers as identified by Beijing in its latest five-year plan: consumption, services and high-value manufacturing.
Firstly he targets stocks with growth potential of 20-30% per annum over five-to-10 years and a 12-month forward price-to-earnings multiple of less than 20 times (stripping out net cash). “I have to say I am more growthy than I was in funds I used to run in the UK and Europe,” he admitted.
Secondly he targets firms growing not quite so fast but selling at lower valuations than Western counterparts, typically small and medium-size stocks.
Amid suggestions that some of the sectors he targets – including consumer and financials – are already highly valued, Bolton responded: “I think some of them will become very overvalued at some stage in the next few years”.
Mostly Bolton’s China fund is invested in Hong Kong-listed and US-listed Chinese stocks, with just 10% set aside for A-shares through Fidelity’s QFII portion. Typically he finds A-shares more expensive than H-shares, so he has seen no rush to get into the market. The one exception has been financials, with the A-shares of dual-listed stocks often selling at a significant discount.
However, he added: “I think we might even see a time when the Hong Kong-listed shares, because they are sensitive to global money, trade on average at a premium to the A-shares.”
By way of conclusion, Bolton said he sees Hong Kong at the centre of a two-speed world and that major changes should be expected over the next few years.
“I describe it as tectonic plates; Hong Kong with its monetary policy linked to the slow US world when most of its trade is with China and it is becoming the place where the Chinese currency is being internationalised,” he said.
“I think we are in for a really interesting time in Hong Kong over the next couple of years. I expect to see some quite major changes. The stamp duty tax [introduced on November 19 to rein in home values] could be the start of these types of changes, things that have never happened in Hong Kong before could happen in this very unusual world that we live in.”