Why we see real opportunity for active investors in China now

Global markets have been hit by extreme volatility since President Trump’s “Liberation Day” announcement of higher tariffs, and the escalation of the trade war with China. This remains a fluid situation, with markets trading around headlines - keeping volatility elevated.

Policy flexibility

More broadly, the key risk is that continued tensions could ultimately trigger a global recession, harming both the US and Chinese economies. However, China has a degree of policy flexibility and improving internal growth drivers that may help cushion the impact. The government has recently rolled out new measures to support domestic consumption and I believe there are likely more to come. At the same time, the property market is beginning to show signs of stabilisation, having been a drag on the economy for years. 

The tariffs announcement has derailed a nascent recovery in China’s equity markets. However, we do believe that some perspective is required. MSCI China’s exposure to the US is around 3% in terms of revenues, so this market dislocation does seem exaggerated. Against this backdrop, Chinese equities are still trading at a very wide discount to the US and other major markets.

Long-term growth potential

The trade friction itself in many ways reflects the rising competitiveness of Chinese companies across a range of sectors. In many industries we see the vast majority of players rely on similar supply chains, which will be extremely difficult to replicate, and so a key part of my analysis centers around questions of price elasticity. Essentially, the impact to volumes when inevitable price hikes occur.

The Fidelity China Special Situations trust remains heavily invested in domestically driven sectors such as healthcare, consumer staples, and segments of industrials, which can remain broadly resilient, supported by local demand and policy tailwinds. While near-term volatility is likely, especially in discretionary and supply chain-linked sectors, I believe the long-term fundamentals remain intact for quality names with robust balance sheets and strategic positioning in domestic growth themes. We have identified a variety of businesses that fit these characteristics, such as  Tsingtao Brewery which has strong competitive advantages from its branding and also holds a healthy market share, giving it pricing power and opportunity for premiumisation.

In contrast, export-oriented industries such as technology hardware and machinery face the most direct pressure, with revenue impacts, given the uncertainty, and potential margin compression on lower utilisation levels as tariff costs ripple through supply chains. However, firms with diversified production footprints or strong market positioning may weather the impact more effectively over time.

Continued innovation

On the ground, innovation continues to thrive across sectors, reflecting companies’ commitment to building a competitive edge. Earlier this year, Chinese start-up DeepSeek’s cost-effective AI model stunned the industry and highlighted China’s innovative capabilities.

High-end manufacturing and domestic consumption are central to the government's long-term plan to reduce reliance on investment and property for driving growth. While overseas investors may focus on the impact on China from de-globalisation and "near-shoring" of industry, we believe that we may see a domestic boost. One consequence of these 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.

We have taken a keen interest in Anta Sports Products which is well positioned to benefit as one of the world's largest sports equipment companies by revenue and third-largest manufacturer of sporting goods. It aspires to become an established international brand and over the last 10 years it has seen steady market share growth from 7% in 2013 to 18% in 2023. This has been achieved by its strategy to develop different brands to satisfy different demands. Its multi brands have enabled more operating flexibility to better adapt to China’s highly dynamic market, avoiding single brand risk.

Meanwhile, there have been increases in China’s R&D, and the highest level of patent filings in the world at nearly 50% of all global filings. In the Electric Vehicle (EV) sector, China is now dominating the market, having high penetration in their domestic market which has helped power them to a position of global leader.

A moment of real opportunity

In this uncertain environment, our team of analysts and I are staying closely connected to companies through active engagement with management and industry experts, helping to validate assumptions and spot opportunities. 
A rise in volatility, while unsettling, can be a time of real opportunity for active investors, as stock prices and company fundamentals often become disconnected. History suggests that these periods of stress offer long-term investors some of the best opportunities to generate excess returns.

Looking across companies and markets, I believe that Chinese companies have the resilience and the capability to navigate a challenging and evolving macro environment.