Following heightened tariff-related volatility, Dale Nicholls, portfolio manager of Fidelity China Special Situations PLC (LON:FCSS), assesses the evolving Chinese equity market and outlines why current market dislocations may present compelling opportunities for discerning long-term investors. With Chinese equities trading at significant discounts, he argues that market uncertainty can often create the most opportune entry points for those focused on fundamentals .
Global markets have experienced extreme fluctuations since President Trump’s “Liberation Day” announcement of higher tariffs and the escalation of the US–China trade war. Although a temporary truce provided respite, renewed tensions could spark a global downturn, impacting both economies. However, the actual exposure of the broader Chinese market to US revenues is modest—MSCI China derives only around 3 per cent of its revenues from the US—suggesting the latest sell-off may be overstated. Many Chinese companies have already diversified production footprints or strengthened domestic demand channels to mitigate such shocks .
Regulatory Landscape: From Curbs to Support
Investors often misread the cyclicality of China’s regulatory environment. Recent high-level meetings between President Xi Jinping and senior executives from leading technology firms signal a more constructive tone towards private enterprise and innovation. As part of its “self-reliance” strategy, the government is prioritising domestic consumption, high-tech manufacturing, artificial intelligence and advanced industrial automation. Parallel efforts to bolster corporate governance—through rising dividends and share buy-backs—have already supported an uninterrupted record of growing payouts across the market .
Compelling Valuations and Sector Dislocation
Chinese equity valuations remain attractive, both in absolute terms and relative to developed markets. On a forward price-to-earnings basis, the MSCI China Index trades at approximately 11–12 times earnings, more than 40 per cent below the S&P 500. Yet beneath this headline discount lies considerable dispersion: sectors such as consumer discretionary and healthcare are trading at multi-year lows despite robust structural tailwinds and positive earnings momentum. This split creates fertile ground for selective stock picking in high-quality businesses that have been oversold amid broader market pessimism .
Moreover, domestic companies are capturing increasing market share as Chinese consumers and corporates favour home-grown brands and suppliers. Anta Sports Products, for example, has grown its share of China’s sporting goods market from 7 per cent in 2013 to 21 per cent in 2023 by diversifying brands to meet varied consumer segments and adapting swiftly to shifting demand patterns .
Domestic Focus and Quality Selection
The trust remains heavily invested in domestically driven sectors—healthcare, consumer staples and certain industrial segments—that are less vulnerable to external shocks and align closely with China’s long-term strategic initiatives. The investment process is rooted in rigorous bottom-up research, emphasising competitive positioning, management quality and business resilience. Such fundamental analysis proves especially valuable during periods of elevated macro uncertainty, when market sentiment often diverges from corporate performance. Portfolio risk is managed through active diversification across sectors, market capitalisations and business models, with dynamic adjustments to net gearing and exposures as opportunities arise .
Innovation-Led Growth
Looking ahead, the team is most excited by companies executing well within expanding industries, possessing durable competitive advantages and trading at sensible valuations. Earlier this year, Chinese start-up DeepSeek’s cost-effective AI model stunned the sector, underlining China’s burgeoning innovative capabilities on the global stage. Beyond artificial intelligence, innovation is quietly advancing across all industries, supported by deep research and development capabilities, a strong talent pipeline and vast proprietary data sets .
The portfolio is positioned to benefit from this innovation-led growth across multiple domains. In AI and digital infrastructure, Alibaba, Kingsoft and Tencent are expanding cloud services, while platforms such as Tuhu Car and ByteDance are monetising through data-led service integration. In consumer markets, Xtep International and Chicmax leverage product innovation, digital marketing and brand segmentation to capture market share. Within the electric vehicle supply chain and autonomous driving, Hesai advances intelligent sensing, and Pony.ai offers lower-cost robotaxis compared to its US rival, Waymo. In healthcare and biotech, China Hutchmed and Innovent Biologics combine advanced manufacturing with novel drug development, and industrial players such as Shenzhen Inovance Technology and Weichai Power drive automation and eco-efficiency upgrades .
Looking Beyond Volatility
Periods of market stress and dislocation have historically offered long-term investors some of the best opportunities to build wealth. While volatility can be unsettling, it often creates dislocations where stock prices detach from underlying fundamentals. Across sectors, companies continue executing strategies and adapting to challenges, presenting attractive entry points for active investors focused on enduring business quality and long-term growth potential .
Company Overview
Fidelity China Special Situations PLC is a UK-listed investment trust that seeks long-term capital growth by investing primarily in companies benefiting from China’s innovative and domestic growth drivers. The trust employs an active, research-driven approach to identify quality businesses across sectors, leveraging Fidelity’s global investment resources and China expertise.
