Selective stock picking continues to uncover opportunities in China

China’s equity markets have stabilised after a rebound, though volatility remains high amid ongoing geopolitical uncertainty. Fidelity China Special Situations PLC portfolio manager Dale Nicholls highlights that while challenges remain - from property to geopolitics - the broader economic backdrop is more stable than many assume. With innovation accelerating and valuations still low, China continues to offer a growing opportunity for selective investors.

A stabilising macro backdrop

China’s economy continues to navigate a complex backdrop of slower growth, property sector weakness and heightened geopolitical tensions. Yet beneath the headlines, macro conditions are proving more resilient than commonly perceived.

Policy direction has become clearer. Long term economic planning has increased predictability, giving businesses and investors greater visibility on priorities and objectives. While risks remain, they are better understood and, in many cases, already reflected in market valuations.

This greater policy clarity is particularly relevant in a more uncertain global environment. Compared with the shifting fiscal and political dynamics facing many developed economies, China’s policy framework appears relatively consistent. This level of clarity can help support investor confidence.

Energy is one area where external risks still matter. Higher oil prices and ongoing conflict in Iran add to near term uncertainty, particularly for energy intensive industries. That said, China has steadily diversified its energy mix over time, accelerating development of renewable energies, reducing vulnerability to external shocks and improving resilience.

Property woes weigh on confidence

Stabilisation in property prices would mark an important turning point. Housing remains closely linked to household wealth and confidence, and any improvement could help unlock pent up demand.

Over the past few years, challenges in the property sector have continued to weigh on sentiment. Excess supply and falling prices have dampened consumer confidence, encouraging households to prioritise savings over spending. However, policymakers have signalled a willingness to act where needed, favouring targeted measures over broad stimulus.

Property, however, does not define the entire economic outlook. Consumption remains a key pillar and long-term growth driver of the economy and continues to be an important policy focus. That said, consumption sentiment has been weak in recent years, partly reflecting the drag from the property market. This has weighed on consumer-related equities, pushing valuations to relatively low levels and, in our view, leaving the potential of many companies underappreciated.

Looking ahead, there are early signs of improvement. Margin recovery, supported by ongoing cost discipline, alongside a bottoming out in certain cyclical consumption segments, could provide a more supportive backdrop.

For investors, this disconnect between sentiment and fundamentals can create opportunity, particularly where businesses are positioned to benefit from even a modest improvement in confidence.

Innovation gathers pace

A key strength of China’s economy is the pace of innovation. Investment in research and development has expanded across many industries, supporting greater competitiveness and helping companies move up the value chain.

China’s large domestic market plays an important role. Scale allows companies to develop, test and commercialise new technologies efficiently, supporting progress in areas such as advanced manufacturing, automation and robotics.

The battery supply chain is one area where China is building competitive strength, supported by sustained investment and industrial scale. Elsewhere, automation and robotics are becoming increasingly important as companies focus on productivity and efficiency gains.

Taken together, these trends suggest a shift towards higher quality growth, driven by technology, skills and improved capital discipline rather than simple expansion.

Uneven market performance

China’s equity market has seen a bumpy path. Periods of recovery have been followed by setbacks, reflecting shifts in policy expectations, trade developments and global events.

Recent geopolitical developments have also influenced performance. The conflict in Iran has supported materials and commodity-related stocks, while other areas of the market have lagged. At the same time, parts of the market linked to AI, data centres and power infrastructure have continued to perform well, highlighting growing divergence between sectors.

This divergence is important. Dispersion between sectors and stocks is widening, placing greater emphasis on individual companies and their ability to deliver.

Selectivity is therefore essential. Risks remain in some areas, particularly among certain state-owned businesses where shareholder interests may not always take priority. That said, standards are improving. Dividends and share buybacks are becoming more common, indicating better alignment between companies and investors.

Valuations remain supportive

Despite the recovery seen over the past year, valuations remain low by historical standards and relative to many other markets. That discount reflects ongoing uncertainty, but it provides a cushion against downside risk.

Earnings will be a key driver from here. There are signs that earnings expectations are stabilising. If companies can deliver against forecasts, confidence could improve further.

Several factors could help sentiment over time, including greater stability in the property market, a calmer geopolitical environment or progress on trade relations. While none are guaranteed, investors do not need all of these to materialise for opportunities to emerge.

For long term investors, the combination of policy stability, structural growth and attractive valuations presents a compelling case. Near term volatility may persist, but we believe the drivers of sustainable long-term returns are increasingly supportive.