An e-mail from a reader asks me if I can separate my “beef” with the marketing and costs of Anthony Bolton’s China fund from its actual performance. Might it be, he says, that it offers a genuine investment opportunity?
Regular readers will know that I didn’t think this to be the case back in March when the fund launched. And the truth is that I don’t now, either. Sure, it has done pretty well so far – the share price is up over 20% since launch. But a large part of that reflects not a rise in the value of the company’s assets, but a rise in the number of people who want to hold the shares: they currently trade at an 8% premium to the net asset value of the underlying portfolio.
I’m not mad about that – it simply means that if you buy the shares now and something goes wrong, you’ll lose even more money than you would if there was no premium. Let’s not forget that, in a falling market, investment trusts tend to trade at major discounts to their net asset values. And that this can happen very suddenly. So if I held the fund (which I don’t), there is no way I’d be buying right now. Instead, the fund’s popularity – along with the fact that Fidelity is now to launch more shares in an effort to push the premium down – would simply give me one more reason to sell.
If I did want exposure to China or Asia in general, I would go with something along the lines of the Pacific Assets Trust, shares in which are trading at a 5% discount to its net asset value and the management of which has recently been taken over by the highly rated team at First State.
But I’m not going to do that either. Why? Because, crazy as it might sound to the consensus, I’d rather have my money in the West.
I said last week that the liquidity wave was enough to make it worth taking a punt on any old financial asset. But in the longer term, it doesn’t seem that easy to me to make a good case for investing in Asia.
It might well be the case that Asian economies continue to beat ours hands down; but even if they do, that doesn’t necessarily mean that their markets will do well. There are endless studies to show that, as Lombard Odier’s Paul Mason put it last year: “there is no correlation between economic growth and either earnings per share growth or equity market total returns”.
What’s more, “faster-growing economies do not produce better returns than slower growing economies”. Why? Simple. Fast-growing companies and countries over-invest, and investors both overpay for growth and assume it will continue forever, when it never does.
What matters for long-term returns is the price you pay on day one, which rather suggests that the cheap dividend-paying blue chips of the West, despite the slow growth in their home markets, might make better long-term holds than China, which, as Mizuho’s Jonathan Allum points out, is just a bit too “achingly modish” among fund managers for comfort. Sure, China’s market appears to have tracked its economy over the last few years. But, given that this is as much about the wall of liquidity created by both US money-printing and domestic stimulus programmes as anything else, who’s to say that it will continue?
Perhaps it is more coincidence than correlation. Let’s not forget that, in the early part of the decade, China was home to one of the world’s best economies, but also one of the world’s worst stock markets. Nor that China is running consumer price inflation of 4.4% and has a central bank set on tightening policy. Neither of these things has historically been particularly good for equity markets.
There is something else that worries me about Asian markets – the chance that quantitative easing might sort-of-work. It clearly isn’t going to do much for household spending in the US (by pushing up food and energy prices it makes things worse for most people) but Ruffer’s Henry Maxey notes that it might do something for corporate spending, “the key to any recovery”. By taking deflation – the thing companies fear most – out of the equation, it might encourage them to borrow the very cheap money they are being offered and invest.
Say this happened, and say that everyone then saw economic prospects improving, the dollar stabilising and the threat of ongoing QE retreating. All that might pull liquidity out of emerging markets, bringing its boom to an abrupt end.
It’s a tricky call, but Maxey brings his worry to my kind of conclusion. What you need, he says, is to hold not emerging market equities but a market that “is less crowded than even the Delhi Commonwealth games” that generally “enjoys a stronger dollar and adequate nominal global GDP growth”; and that won’t lose out if our “urge to turn against emerging markets proves premature”.
So, what is this perfect investment? Japan.
• This article was first published in the Financial Times.