As posted on Citiwire:
Fidelity legend Anthony Bolton says the historic events this week signify the final phase of the bear market where we will see a fall in commodities and more hedge fund blow-ups.
Bolton, who warned of the pending collapse of banks in his final months at the helm of the Fidelity Special Situations fund at the end of Protected content , said: ‘This is a week when children will be asking “mummy and daddy, were you there?” It will be remembered for a while. But I feel we are entering the final phase of the bear market. It started with the downturn in financials, then consumer cyclicals and the next stage was the industrial companies.
‘The last stage will see the commodities affected. I felt that until commodities got broken the bear market could not end.'
Commodities have suffered a severe bout of selling in the last few months in tandem with the sharp decline in oil prices, but Bolton still feels there is some way for them to fall before their valuations are justified. ‘Commodities are still over-owned,’ Bolton said.
Bolton acknowledged the role played by hedge funds in the crisis. He criticised the growing interest in hedge funds, while questioning the growing interest in these vehicles in the market.
‘A lot of consultants over the last five years have fallen in love with hedge funds and they have sucked in a huge amount of money. A lot of good hedge funds are now closed and while a lot of talent has come into the hedge fund industry it is not always so good.
‘I think alpha is going to be much harder to come by and prime brokers won’t get the same level of leverage now. I expect there to be more blow ups in the hedge fund world.’
Bolton made the distinction between the previous bull market during the technology, telecommunications and media (TMT) boom and the one experienced before the credit crisis hit markets last year. ‘The TMT boom was all about valuations but the one we have recently experienced was all about return on capital and earnings expectations.’
Despite the recent turbulence in markets, Bolton believes people remain misguided on earnings expectations. ‘We are still in a phase where earnings expectations are too high and that has to change.’
He expects the next bull market to be led by the most oversold areas of the market – financials and consumer cyclicals rather than the commodities-related plays which led the last bull market.
Bolton believes it is essential to hold banks with a low level of debt on the balance sheet. ‘This year and next year it is essential to own well financed companies. Those companies which have a lot of debt will find it very difficult to renew their arrangements.’
Bolton also said China is developing into an interesting investment case, although he admitted the credit crunch has proved that the fortunes of emerging markets are closely linked to those of developed markets.
‘The last few months have shown that the belief emerging markets can decouple from western markets is a myth. I think it will take some emerging markets longer than developed markets to recover from this crisis.’