In spite of a mini resurgence in the last couple of months, China has been one of the worst performing regional markets of recent times. The MSCI China index has returned just 1.54 per cent over a three-year period, compared with gains of more than 30 per cent from the MSCI AC World index. Bolton, former manager of Fidelity Special Sits and current manager of the Fidelity China Special Sits trust, has long argued that Chinese stocks are undervalued, but weakening sentiment has seen the market get cheaper and cheaper.
However, he sees the recent reform package as a possible catalyst for a resurgence, and has become more confident about the future of his trust as a result.
With regard to the Third Plenum, he said: "In its breadth and boldness, it represents probably the most significant reform package in China for about 30 years."
"The Chinese stock market has been one of the worst-performing world markets over the last three years or so and valuations remain at a substantial discount to global and emerging market peers."
"At last, with the publication of the reform programme, we could have a catalyst with the potential to reverse this underperformance."
Performance of indices over 3yrs
Source: FE Analytics
Bolton points out that many investors have watered down their exposure to China as a result of the recent underperformance, but thinks these new reforms should be seen as a reason to reverse this.
"I think for investors who have been underweight China, this could be a trigger for that to change," he said.
The new reform package has seen the MSCI China index rally more than 6 per cent since it was finalised in Beijing on Friday last week. It covers 60 items in 16 areas, the most high profile of which is arguably the removal of the one-child policy.
The ageing population in China and diminishing work force have been highlighted as one of the biggest structural headwinds for investors in recent years – something this new policy will attempt to resolve.
"Although it will take many years for this to have any real effect on the economy, it has great symbolic significance," said Bolton.
Other new reforms include measures to reduce government intervention, giving the market a greater role in areas such as the pricing of resources, the setting of interest rates and currency convertibility.
"These pave the way for private banks and more bond financing and promise to level the playing field between state owned enterprises (SOEs) and private companies by, for example, making SOEs pay out 30 per cent of their earnings in dividends by 2020," explained Bolton.
"The proposed changes will establish more market-orientated state holding companies, reform land rights for farmers, abolish the Hukou registration system in smaller cities and give migrant workers more access to welfare and social security."
"They will streamline government, abolish forced labour for offenders, increase the independence of the judiciary, accelerate new business approvals and capital projects, create new success measures for government officials beyond simple GDP growth, create more open competition for government tenders and rebalance the tax system between local and central government."
The short-termism of local investors has historically led to big momentum swings in the market, which Bolton has used as an opportunity to add to already undervalued stocks. He says the value plays in his current portfolio are likely to benefit if money is allowed to flow more freely in the market place.
"This is great for an investor like me, as it unearths a huge number of opportunities. As more money is allowed to flow, a lot of these anomalies will close," he said.
Some industry commentators have questioned the motives of the government in drawing up these new reforms, arguing that the likelihood of many of them being implemented is highly unlikely.
Bolton says the fact that there are solid plans to establish a new central reform group to oversee all aspects of reform shows that China is serious about bringing about change.
He commented: "As is often the case in China, the full detail and importantly the timetable for these reforms is lacking at this juncture but I would expect more on the economic reforms to come out in the December central economic work conference."
"It would be wrong, I believe, to underestimate the long-term impact of the Third Plenum."
Bolton is able to use derivatives in his Fidelity China Special Situations trust, but his current bullish outlook means that his short-book is relatively thin at the moment.
"I don’t want a lot of shorts in this environment, as I don’t think over the next six months there is a case for a big market correction," he said.
Fidelity China Special Sits is currently more than 20 per cent leveraged, again reflecting Bolton’s optimism. Part of the gearing is a two-year loan, which is set to expire at the beginning of next year.
"I’d suspect this loan will be renewed," he added. Bolton is set to retire as manager of the trust in April of this year, with manager of the $1.4bn FF Pacific fund Dale Nicholls coming in as his replacement.
Nicholls says he expects to keep the 20 per cent gearing at around the same level. He adds that he is likely to increase the trust’s exposure to industrials at the expense of banks.
Fidelity China Special Sits has had a mixed time under Bolton. It started very strongly, but his small to mid cap value bias led to it significantly underperforming during the China sell-off.
Many of his positions have started to rise in recent months, though, and at the time of writing the trust is just a fraction behind its MSCI China benchmark since launch, with returns of 6.52 per cent.
Performance of trust and index since launch
Source: FE Analytics
Hargreaves Lansdown’s Mark Dampier told FE Trustnet last month that the “mindless” criticisms levelled at Bolton for his performance have been too short-termist.
Fidelity China Special Situations IT has ongoing charges of 1.78 per cent, excluding performance fee.
In an article earlier today, FE Trustnet news editor Thomas McMahon discussed whether it’s time for investors to get back into Asian equities as a whole.
