Anthony Bolton is making a big bet on investing in China.

You may never have heard the name before, but Bolton was one of the U.K.’s investing wizards. For 28 years, he racked up returns of 19.5% annualized. Since he had a long and superb track record and managed money for Fidelity, people called him “the Peter Lynch of Britain.” Lynch is a name you probably know. He also ran a Fidelity fund, Magellan, for many years, to spectacular success. (After he called it quits, he also co-wrote a couple of books that are now investing classics, One Up on Wall Street and Beating the Street.)

But I digress. The point is that Bolton is a heavyweight in the crowded field of investors — or was. He hung up his gloves in 2007. Nice timing, as it turned out. But now he is back in the ring, running a new fund called Fidelity China Special Situations Fund. (FCSS on the London exchange — check it out. Also, should you enjoy studying great investors, as I do: The best book about Bolton is Investing with Anthony Bolton by Jonathan Davis.)

So Bolton, Fidelity’s top-ranked manager, is taking his act to China.

I think this is noteworthy because Bolton sees something that I’ve also been writing a lot about lately: the rise of China’s consumers. “China is at a sweet spot in emerging markets,” he says, “where significant amounts of people can for the first time can afford cars, apartments and other goods… The driver of China’s growth is changing to domestic consumption.”

I agree. And I think such changes are happening much faster — and in a much bigger way — than the general market seems to believe. Andy Rothman, of the Asia specialist CLSA, predicts consumers will drive more than half of China’s economic growth this year. Investment in infrastructure will trail behind. Exports, Rothman believes, will contribute zero growth. The key point is that hundreds of millions of people will be joining China’s middle class over the next five years.

So Bolton’s loaded up on Chinese consumer stocks.

I also find some of China’s basic consumer stocks very appealing. The market consensus seems to be that China is going to blow up. There is a housing bubble there. And there are legitimate worries about its banking system and the losses lurking in dicey loan books. It seems most observers think this will spell disaster for China, as it did for the U.S. — with a market crash and a deep recession.

Market prices reflect these worries, however. The low prices compensate investors well for taking risks today. But that’s not all. Suspicions of fraud also hover around the edges of newly minted China shares, as I wrote about in last month’s letter. This cloud depresses stock prices, too. An investor can lower the fraud risk by being very picky and doing a little extra due diligence. A few rotten apples don’t spoil the whole bushel.

[Ed. Note: So, how can you play China’s rising consumer class? The PowerShares Golden Dragon Halter USX China ETF (NYSE: PGJ) could be a good start – the fund offers one of the biggest exposures to Chinese consumer discretionary stocks while maintaining one of the lowest exposures to financials.]

Sincerely,
Chris Mayer
Penny Sleuth

August 25, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. He also is a contributor to the Daily Reckoning. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas.

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