Anthony Bolton, manager of the Fidelity China Special Situations investment trust portfolio, is positioning his portfolio to capture what he sees as strong present and future consumer spending in the Asian giant, which is starting to reap the rewards of its export drive.

Bolton, one of the UK’s most renowned fund managers who famously decided to move to Hong Kong in March, is bullish on the outlook for consumer-related sectors.

“I have positioned the portfolio to benefit from the structural changes that I believe are taking place in China. The key sectors the portfolio is exposed to include a number of retailers such as department stores and sports goods retailers, electrical goods, shoes and jewellery producers and other areas driven by consumer spending such as wine and spirits, restaurants, hotels, automobiles, telecom and internet,” he said in a briefing note.

“I also have a significant exposure to financial stocks that include banking, insurance, brokers and real estate agents as well as several pharmaceuticals stocks. The portfolio is primarily invested in Chinese stocks listed in Hong Kong and the US and has some exposure to Chinese ‘A’ shares as well as Chinese stocks listed elsewhere,” Bolton continued.

The fund was launched on 19 April; its shares trade at a premium of 5.41 per cent to its net asset value (source: fund factsheet). There have been some concerns that China's red-hot economy will be slowed as the monetary authorities look to impose curbs; on the other hand, the partial relaxation of the yuan-dollar peg is also seen as giving Chinese consumers more buying power.

As the fund’s marketing literature states, Bolton has been at Fidelity for 31 years and built a reputation as a canny stock picker.

Bolton predicts the Chinese market will yield plenty of opportunities to find under-valued, promising firms.

“Many of the companies I have met have tended to be those that have been relatively under-researched, especially in the medium and smaller sized sector. Generally balance sheets are much stronger than I expected with many companies often having net cash positions. Combined with the fact that Chinese authorities like to create ‘champions’, this will provide positive opportunities for investors over the longer term but corporate governance and policy risk are still a concern within some companies,” he said.

“I prefer to invest in two broad categories of companies: those that have the ability to grow significantly over the next 10 years where valuations are generally higher than Western equivalents but often not at a significant premium and medium to small sized companies with reasonable growth potential where valuations are very often below their Western equivalents,” Bolton said.

There are, however, dangers ahead. “There is a risk that the government’s tightening measures could lead to an increase in bad debts at the banks and the downturn in the property market could get worse if restrictions on speculative activity remain in place longer than is necessary. I am also concerned about the large public debt at the local government level. Finally, with the pace of urbanisation, social unrest continues to be an issue to watch,” he said.