Our latest fund review feature, takes us to China as Juliet Schooling Latter, Research Director at Fund Calibre talks all things Chinese New Year, the year of the horse and the intensity, independence and strong leadership that have all had positive and negative impacts on the Chinese equity market over the past four years.
It is out with the snake and in with the fire horse as 17th February marks the Chinese New Year. It is an event which effectively creates two to four weeks of silence across the country (once the fireworks have stopped) to mark the celebrations.
Some interesting traditions surrounding Chinese New Year include that it brings about the world’s largest annual migration, with over 200 million mainland Chinese travelling long distances to reunite with their families.
The fire horse is the most intense, energetic and independent horse in Chinese astrology – symbolising passion, innovation and strong leadership. Intensity, independence and strong leadership have all had positive and negative impacts on the Chinese equity market for the past four years.
However, there have been shoots of optimism since the policy pivot of September 2024, which marked a significant shift towards supporting growth, marked by stimulus measures like interest rate cuts and liquidity injections to counter economic slowdowns and deflationary pressures.
Attempts have been made to revitalise the economy before and while they have had an initial upturn – it has not been long before poor sentiment has taken over. But this time has been different, with the MSCI China rallying some 50% since this point*. There is also a growing focus on domestic consumption, high-tech manufacturing, artificial intelligence and automation.
The MSCI China is now on a forward P/E of 12.8x**, with the adjustment bringing it towards its historical average. However, if you scratch beneath the surface you can still see plenty of opportunities across the market-cap spectrum.
For example, much of the performance in Chinese large-caps has come from the leading tech stocks, while other areas are still offering attractive valuations. This is also the case among mid and small-caps.
That brings me to Fidelity China Special Situations (FCSS). Manager Dale Nicholls celebrates his fifteenth anniversary as lead manager on the trust this year. Dale makes use of the extensive research team at Fidelity to build an equity portfolio that invest across the entire range of companies in China, including some unlisted opportunities.
This gives him exposure to both domestic leaders and a growing range of international businesses in a portfolio of around 180 holdings.
The focus is on companies rather than economies. He believes that the best investments are in those companies that have good long-term prospects: cash-generative businesses that are controlled by a strong management team.
He looks for stocks with these characteristics but, crucially, which are underestimated by the market and are therefore undervalued. He will invest in any size of company where this mispricing appears but tends to have a bias towards small and medium-sized companies.
This segment is generally less well researched by the market and is where Fidelity’s large investment team presence in the region can result in greater potential opportunities.
This is exactly where the opportunity may lie in China from this point onwards. Dale believes areas like property and consumption still look very cheap – citing that the big staples have hardly moved at all in terms of valuation – so they are among the areas that stand out in terms of value.
Dale believes there are two overhangs on the Chinese economy at present. The first is tariffs. However, he believes the Chinese government is prepared for these challenges. Chinese companies are already paying 25% from Trump’s first term while only 3% of the MSCI China’s revenue are courtesy of US exposure (the aforementioned independence of the fire horse!).
The other catalyst he is confident in moving forward is earnings – adding that with the exception of technology, most other sectors have had consistent earnings downgrades in recent times. However, he says there are signs of that turning.
Even within technology, Dale feels investment in AI in China is about 18 months behind the United States, indicating the main driver of US markets could easily feed through to China in the not too distant future.
Dale cites a quartet of areas he has been targeting recently. The first, and biggest of these, is industrials, where Dale says exposure is broad, pointing to the wider market still trying to understand the competitive nature of a number of Chinese industrial companies.
He says R&D spend has compounded at over 20% for the past 15 years. He points to the likes of batteries as an example, with CATL the biggest player in the space with 20,000 engineers and spending $2-3 billion a year on research and development, something he says competitors will struggle to match.
The consumer also offers significant opportunities should confidence return, with names like Xtep International, a leading running business with the biggest share of marathon runners. Another is healthcare and biotech where Innovent Biologics serves as a good example of China’s growing strength in biotech, combining advanced biologics manufacturing with innovative drug development.
Property is perhaps the most interesting of the quartet. Dale prefers private companies but says more state-owned names are coming into the space. There is growing consolidation taking place with winners gaining market share at speed.
As mentioned, there are plenty of strings to FCSS’s bow – with Dale also finding opportunities in A-Shares amid a broader recovery, there is also potential in the unlisted market, such as ByteDance (the, now, minority owner of TikTok).
Dale believes the opportunities across China remain widespread. China is still playing catch-up on tech, but the “DeepSeek moment” has change sentiment. Further down the market-cap, opportunities remain rife and with the government focusing on domestic players there is significant upside for mid, small and unlisted names in the world’s second largest economy – all of whom Dale has plenty of experience of tapping into with great results.
*Source: FE Analytics, total returns in pounds sterling, 11 September 2024 to 6 February 2026
**Source: index factsheet, 31 January 2026
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
Main image: humphrey-m-dYqMMG6LdZs-unsplash
