As the world welcomes the Chinese New Year, Fidelity China Special Situations Trust (LON:FCSS) portfolio manager Dale Nicholls shares insights into the opportunities and risks shaping China’s equity market. With resilience, transformation, and strategy at the heart of the Year of the Snake, investors have compelling reasons to stay engaged in Chinese equities despite short-term challenges.
The current market landscape in China demands patience and precision. A broad recovery may take time, but the disparity in earnings revisions across sectors creates opportunities for disciplined stock selection. While geopolitical risks, particularly US tariffs, remain a concern, Chinese companies have adapted by diversifying supply chains and leveraging tariff exclusions. Investors should take note—many companies are proving more resilient than the market assumes.
China’s shift toward domestic demand-led growth, coupled with recent fiscal measures, helps mitigate external economic pressures. Though domestic demand still shows some slack, elevated household savings and government stimulus signal potential for recovery. Stabilising property prices are another crucial factor, with recent data indicating improvement in major cities. However, sustained policy support may be necessary to maintain momentum.
Despite short-term headwinds, China’s equity market holds vast long-term growth potential. While China contributes 17% of global GDP, its representation in the MSCI AC World Index remains just 3.4%. Today, investors can access Chinese equities at historically low valuations, with significant discounts compared to US and emerging markets. Growth is being driven by companies with strong competitive advantages in thriving industries, where innovation and pricing power remain key differentiators.
Consumer sectors, which struggled last year, now present some of the most attractive valuations. E-commerce platforms continue to improve earnings through cost control and market dominance, with PDD standing out for both its domestic strength and its overseas expansion through TEMU. Shifting consumer habits are also creating opportunities in travel, sportswear, and cosmetics, where premium domestic brands like Mao Geping are gaining ground.
Technological advancements are transforming traditional industries. Companies like Tuhu Car and Full Truck Alliance are leveraging digital platforms to enhance efficiency and consolidate fragmented markets. Meanwhile, Chinese firms are achieving scale in advanced manufacturing, playing a key role in renewable energy, electric vehicles, and life sciences. The healthcare sector is also seeing significant progress, with companies like Medlive Technology driving innovation in medical research and digital health services.
A rising focus on shareholder returns is another encouraging trend. More companies are prioritising dividend increases and share buybacks, supported by improved governance and favourable policies. This growing commitment to returning capital to investors remains underappreciated by the market but strengthens the investment case for China.
As the Year of the Snake unfolds, discipline and a long-term perspective will be essential for capturing value in China’s dynamic market. The transformation underway presents compelling investment opportunities, reaffirming the country’s potential for sustained growth.
