Patience and resilience key for China’s equity markets in the Year of the Snake

As people around the world get ready to celebrate the Chinese New Year, Fidelity China Special Situations Trust portfolio manager Dale Nicholls shares his latest views on the risks and opportunities facing investors in the region. With the Year of the Snake symbolising resilience, transformation and strategic thinking, he highlights why there are still reasons to believe in Chinese equities in the year ahead.  

Much like the Snake’s patient and calculated nature, today’s market environment in China calls for a disciplined approach to identifying opportunities given that a broad-based market recovery could still take time to unfold. This is coming through in earnings revisions that vary greatly between sectors and companies - in both positive and negative directions - which provides good conditions for selecting stocks based on each individual company's performance. On the whole, we believe risk-reward remains attractive, with compelling equity valuations reflecting much of the fear around well-known macro and geopolitical factors. 

Geopolitical risk clearly remains a concern, particularly around US tariffs on Chinese goods, but both investors and companies are aware of this. Chinese companies have diversified supply chains, leveraged tariff exclusions, and adapted by manufacturing in alternative locations to mitigate their impact. In fact, we are finding opportunities from more cases where we think the market may be underestimating the resilience of Chinese companies in the face of these challenges.  

On a broader scale, China’s reduced reliance on US exports, alongside the government’s pivot to domestic demand-led growth and recent fiscal policy measures, should help mitigate the economic impact of these external challenges to some extent. Some slack in domestic demand remains, but recent stimulus has signalled a strong commitment from the government to address these issues and elevated household savings provide potential buying power to support a recovery.  

Stabilising property prices remains a key factor for unlocking domestic demand and there are some positive signs after the latest policy announcements. The real estate market data has improved for the last two months, with both new and existing homes prices in larger cities improving month over month and declining at a slower year-on-year rate. But more support may be required to sustain momentum. 

Long-term growth potential 

While headwinds will no doubt continue to grab the headlines, some perspective is required. Considerable potential for long-term growth in China’s equity market remains as capitalisation aligns more closely with the country’s economic size. Despite contributing 17% of global GDP, China’s representation in the MSCI AC World Index is just 3.4%. Today, investors can access that opportunity at close to record low valuations, with Chinese equities trading at a 55% discount to US equities and a 25% discount to emerging market equities excluding China (based on 1 year forward Price-to-Earnings estimates). 

It’s also important to remember that what really drives superior investment returns are great companies executing well in growing industries where they have strong competitive advantages. In China, innovation continues to thrive. Many companies with the right products and services are maintaining or gaining pricing power and growing market share, often both at home and abroad. In many industries, tough conditions are widening the gap between winners and others, emphasising the importance of active portfolio management. 

Strategy insights 

At a sector level, consumer areas were among the worst performers last year, but valuations now offer some of the most compelling opportunities. In e-commerce, the largest platforms continue to leverage natural network effects, their strong market position and improved cost control to improve earnings growth. For example, online retailer PDD remains a preferred holding, with valuations not reflecting continued strong trends domestically as well the potential for TEMU overseas.  

Evolving consumption patterns are re-shaping a range of industries, including travel, sportswear, and cosmetics few, with significant investment opportunities emerging from these shifting dynamics. Domestic Chinese brands such as Mao Geping in the premium cosmetics space are gaining market share due to their unique value proposition and strong branding. 

Technology is also helping innovative companies improve services and consolidate large fragmented markets. Companies like Tuhu Car in auto services and Full Truck Alliance in freight transport are using digital platforms to improve customer experience, lower the cost of services and increase efficiency, thereby strengthening its market dominance. 

Significant innovation can be seen in industrials too. Many Chinese firms have achieved scale in advanced manufacturing, supplying critical materials and components to growing industries like renewable energy, electric vehicles and life sciences. 

In healthcare, an increased focus on R&D over sales and promotion is driving the development of new drugs and medical devices. Medlive Technology is an example of a company benefiting from this trend by connecting pharmaceutical and medical device companies with doctors through its digital platform, providing targeted marketing and access to medical information, clinical guidelines and diagnostic tools. 

Increasing shareholder returns 

Lastly, I’m spending a lot more time discussing shareholder returns with companies. We’re seeing a strong trend in companies more focused on returning cash through both higher dividends and buybacks, supported by favourable government policies but more importantly by improved governance and financial management at the companies themselves, something which I think is not fully appreciated by investors.  

These are just some of the trends shaping China’s economy and markets, and reflect the transformation symbolised by the Snake. But this lunar new year should also remind us that discipline and a long-term perspective is important for capturing value in this dynamic and evolving market. 

Important information 

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. 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. Overseas investments are subject to currency fluctuations. Fidelity China Special Situations PLC can use financial 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. This trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This Investment Trust invests in emerging markets which can be more volatile than other more developed markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. 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. 

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