Year of the Horse: Endurance and opportunity in China Equities

As we enter the Year of the Horse, Dale Nicholls, portfolio manager, of Fidelity China Special Situations Trust assesses the risks and opportunities facing investors across China’s markets. With the Year of the Fire Horse symbolising energy, ambition and endurance - he examines why an improving macro backdrop and supportive policy stance are strengthening the near-term outlook.

The Year of the Horse is traditionally associated with energy, ambition and endurance. In Chinese culture, the Horse symbolises momentum built through sustained effort rather than short bursts of speed. As Fidelity China Special Situations PLC looks ahead to the Year of the Horse in early 2026, this symbolism provides a useful lens through which to reflect on developments across China’s equity market during 2025 and consider how the Trust is positioned as the next phase of the cycle unfolds.

After several challenging years, Chinese equities delivered a meaningful recovery through 2025. That rebound, however, was far from uniform. Performance was driven primarily by valuation re-ratings and became increasingly concentrated in high-beta and momentum-driven segments such as technology and AI. Despite improved sentiment around China's innovation, its companies’ long-term competitiveness and role as a key driver of global productivity growth are yet to be fully appreciated. Meanwhile, widening dispersion between sectors and stocks continues to create selective opportunities, particularly where fundamentals and share prices have diverged. In this environment, focusing on individual stocks and fundamentals rather than the macroeconomic trends continues to matter. For the Trust, this has reinforced a focus on competitive positioning and exposure to durable growth themes, rather than short-term momentum.

China macro and policy backdrop: stabilisation with clearer direction

By and large, developments through 2025 and into early 2026 point to a more constructive backdrop for Chinese equities, supported by a mix of supportive policy signals despite ongoing headwinds. The 15th Five-Year Plan proposal approved in late 2025 reaffirmed policymakers’ commitment to steady and sustainable growth, with an emphasis on technological self-sufficiency, industrial upgrading and improving living standards. In pursuit of these objectives, policy support remains broadly accommodative with authorities continuing to rely on targeted fiscal easing and flexible monetary tools rather than large-scale stimulus.

The external environment has also become more stable. Recent high-level engagement between China and the US, including agreements to extend tariff truces and re-establish regular communication channels, has helped reduce tail risks. While geopolitical uncertainty has not disappeared, these developments improve visibility for companies and investors alike.

Domestically, conditions remain more mixed. Consumer confidence is still subdued amid ongoing weakness in the property sector. As a result, household spending has yet to regain momentum, even amid relatively healthy balance sheets and elevated savings levels. Housing price stabilisation remains vital in restoring consumer confidence and supporting a more sustained improvement in domestic consumption. We are seeing more signs of government action in this area, the most recent example being existing home repurchase initiatives announced by the Shanghai government. 

Portfolio positioning: focused exposure to structural winners

Looking ahead to the Year of the Horse, it is important to consider the starting point for sentiment. Twelve to eighteen months ago, valuations were at extremely depressed levels amid concerns around China’s “investability”. Against this backdrop, Fidelity China Special Situations PLC remains focused on areas less exposed to external shocks and closely aligned with China’s long-term strategic priorities. We continue to identify companies with scalable growth potential, sustainable competitive advantages and strong management execution.

One area of focus is consumer-related industries, where expectations and valuations remain depressed, opportunities are emerging from shifting consumption patterns. Domestic champions with strong brands and efficient distribution are gaining market share in select categories such as travel, jewellery and sportswear, where long-term under-penetration trends continue to play out. Holdings such as Anta Sportswear, demonstrating resilience through brand strength, product innovation and ability to adapt to evolving consumer preferences, are likely to continue driving earnings growth. We believe it will continue its strong record of acquisition with its recently announced investment in the Puma brand.

Industrials and technology-led areas remain another key opportunity for the Trust, reflecting China’s growing competitiveness across advanced manufacturing, automation, robotics and AI-related infrastructure. The success of DeepSeek should not be viewed as an isolated event in our view, but an positive outcome of sustained R&D investment and a broader technological innovation trend in China. Holdings like Zhongji Innolight illustrate China’s progress in AI infrastructure. As a leading supplier of optical interconnect solutions for data centres, the company is benefiting from strong demand for high-speed optical modules as AI-driven capacity expands, underpinned by deep customer relationships and sustained R&D investment.

As innovation across China’s technology ecosystem continues to broaden, Chinese companies have achieved scale in supplying critical components and materials to sectors such as renewable energy and electric vehicles. Minth Group provides exposure to automotive exterior metal trim and global EV adoption. Its strengths in aluminium and advanced plastics, combined with a vertically integrated manufacturing model, position the company to serve both traditional and new energy vehicles, particularly in overseas markets where demand for lighter battery and chassis structures is increasing.

Another growing trend of our holdings has been improved corporate governance and capital discipline. Engagement with companies around shareholder returns has intensified, and progress has been tangible. Higher dividends and share buybacks are becoming more common, supported by favourable policy signals but, more importantly, by stronger balance sheets and improved financial management. This has contributed to rising investment income for the Trust and reinforces the quality of returns - we expect to continue our ongoing record on consistently rising payouts.

Past performance is not a reliable indicator of future returns.
^{Source: Morningstar as at 31.01.2026, bid-bid, net income reinvested.
©2026 Morningstar Inc. All rights reserved. The MSCI China (N) Index is a comparative index of the investment trust.}

Valuations remain a supportive backdrop. Following the recovery in 2025, Chinese equities have partially normalised but continue to trade at a meaningful discount to global peers. In an environment where sentiment can shift quickly, dispersion between winners and losers is increasing, reinforcing the importance of a disciplined approach which is driven by an investment approach that focuses on individual stocks and fundamentals rather than the macroeconomic trends.