Harnessing China’s long-term growth potential

Dale Nicholls, portfolio manager of Fidelity China Special Situations PLC, dives into the shifts reshaping China’s equity landscape, revealing how market dislocations and on-the-ground research could unlock compelling opportunities.

China’s economic shift

As the world’s second-largest economy, China is shifting from export-led growth towards an economy driven by domestic consumption. With expanding middle classes, rising incomes and technological innovations driving this change and creating a solid backdrop for companies to thrive, investors seeking an effective globally diversified portfolio may want to consider allocating some of their portfolio to China.

Fidelity China Special Situations PLC provides focused exposure to companies benefiting from this growth opportunity. Shifting consumer spending patterns in areas like travel and sportswear and increasing aspirations in innovation underpin many of the portfolio’s investments alongside burgeoning industries such as e-commerce and healthcare.

Navigating trade tensions and market volatility

Global markets have experienced extreme volatility this year, largely driven by Trump's ‘Liberation Day’ announcement of higher tariffs and the escalation of the trade war with China. However, it is essential to maintain perspective when assessing the impact of trade disputes. MSCI China's exposure to the US is around 3% in terms of revenues, suggesting the current market dislocation appears exaggerated. 

Domestically focused sectors have shown resilience, supported by policy stimulus and local demand recovery. The trade friction underscores the rising competitiveness of Chinese firms, many of which operate within supply chains that are difficult to replicate.

Regulatory landscape: From curbs to support

China’s regulatory environment is cyclical, and recent developments indicate increased support for private enterprise and innovation, marking a significant shift from previous restrictive periods. President Xi’s meetings earlier this year with leading Chinese technology executives signal a more constructive stance towards the sector.

As part of its long-standing ‘self-reliance’ strategy, the government continues to prioritise key areas such as domestic consumption, high-tech manufacturing, artificial intelligence (AI) and advanced industrial automation. This focus has created a more supportive environment for companies operating in these strategic sectors.

Policy changes are also improving corporate governance, with more companies increasing dividends and initiating buybacks. These shareholder-friendly moves contribute to rising investment income and support sustainable returns for equity investors.

Compelling valuations and sector dislocation

Chinese equity valuations remain at compelling levels, both in absolute terms and relative to other global markets. On a forward price-to-earnings basis, the MSCI China Index is trading at around 11-12x, well below historical averages and representing more than a 40% discount to the S&P 500.¹

Looking more closely, there is significant dispersion beneath the surface of the market. Many of the most exciting sectors, particularly consumer discretionary and healthcare, are still trading at multi-year lows despite clear structural tailwinds and earnings momentum. This creates opportunities for selective stock picking in companies with strong fundamentals that have been oversold due to broader market sentiment.

One consequence of the broader macro trends is an increasing preference among Chinese consumers and corporates for Chinese brands and local suppliers, resulting in domestic companies taking ever greater market share in what remains one of the world's largest markets.

Innovation-led growth

Innovation is a key driver of China’s growth. In early 2025, Chinese start-up DeepSeek's cost-effective artificial intelligence (AI) model stunned the industry and highlighted China's innovative capabilities on the global stage. China is ahead of global peers in the development of humanoid robots and AI applications, partly due to its vast user base, which provides developers with a rich source of ideas and diverse demands.

Beyond the buzz around AI, innovation is quietly thriving across all sectors and industries in China, supported by structural strengths such as robust research and development capabilities, a strong base of talent, and abundant data. Many companies with the right products and services are increasing market penetration, maintaining or gaining competitiveness and pricing power, and growing market share both domestically and internationally.

Deep local insight: ‘Feet on the ground’ approach

To find these exciting businesses, Fidelity has deep research capabilities and locally based experts - focusing on those companies with good long-term growth prospects, whose strength has been underestimated by the wider market.

Fidelity’s Chinese-speaking analysts conduct in-person meetings with companies, offering unparalleled insight into a complex and evolving market.

We find that on-the-ground research allows us to unlock deeper insights. Earlier in the year, I joined analyst Reggie Pan for a test flight in a ‘flying car’ to better understand the investment opportunities in the low-altitude economy. Watch the video below to find out the edge that we believe this type of research can provide.

Important information

Past performance is not a reliable indicator of future returns. The value of investments can go down as well as up, so you may get back less than you invest. This trust can use derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Its shares are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can also gain additional exposure to the market, known as gearing, potentially increasing volatility. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.