Chinese equities remain out of favour with many global investors, but Fidelity China Special Situations sees a stronger case developing at company level.
Concerns over domestic growth, the property sector and geopolitics continue to weigh on sentiment. Global allocations to China also remain well below benchmark levels. At the same time, valuations have fallen significantly, with the market trading at around 10 times forward earnings, below its historical average and at a substantial discount to some developed markets. That combination creates potential for returns to be driven by both earnings growth and a recovery in valuations, although the wider economic backdrop remains mixed.
China is currently operating as a two-speed economy. Exports are supporting growth, particularly in technology-related industries, while domestic consumption remains subdued. Capital investment is also beginning to improve in areas linked to artificial intelligence, creating another potential source of demand.
Consumer confidence remains one of the main constraints on domestic growth. Household balance sheets are relatively healthy, but consumers continue to save more and borrow less. Improving employment conditions could help, while greater stability in the property market may also support confidence.
The property adjustment has already been substantial. Housing starts have fallen by around 80% from their peak, significantly reducing new supply. Government measures have lowered financing costs, but the reduction in construction may prove more important over time as supply and demand move towards a better balance.
A strong recovery in house prices is not essential. Greater stability could be enough to improve confidence and support a gradual recovery in spending.
The more significant opportunity may sit at company level. Chinese businesses have continued to invest heavily in research and development, manufacturing expertise and supply chains. That spending has put pressure on margins in some cases, but it has also supported innovation and helped businesses strengthen their competitive positions.
Companies serving China’s large domestic market can build production volumes, manufacturing expertise and supply chain networks that can be difficult to replicate. Those capabilities are increasingly supporting international expansion and market share gains.
Chinese companies were previously significant issuers of new shares, but share buybacks have increased while dividend payments have continued to grow. Corporate governance reforms are also placing greater emphasis on shareholder returns.
Electrification remains a key area of interest. CATL has built a leading position in battery manufacturing through technology, scale and continued investment in innovation. Electric vehicles remain an important source of demand, but energy storage is becoming increasingly relevant as electricity demand rises and renewable generation expands. Longer term, electrification could extend further into commercial vehicles, industrial equipment and robotics.
Artificial intelligence provides another potential growth area. While much of the current focus is on large language models, robotics could become increasingly important. China has established capabilities across manufacturing, supply chains, AI model development and real-world data collection. The commercial opportunity is still developing, but existing industrial strengths could support future expansion.
The portfolio is also finding opportunities in areas where market sentiment remains weak. China Resources Land is one example. The company has gained market share as weaker property developers have left the sector, while its investment property portfolio continues to provide recurring income. The continued development of China’s real estate investment trust market could also improve the company’s ability to recycle assets and allocate capital more efficiently.
Fidelity China Special Situations PLC (LON:FCSS), the UK’s largest China Investment Trust, capitalises on Fidelity’s extensive, locally-based analyst team to find attractive opportunities in a market too big to ignore.
