Why the fire horse may herald the year of the China investor

To be fair, investors in Chinese equities enjoyed last year too, with the AIC’s China sector up 39% in 2025. China’s stock market has been relatively flat since the start of the year – but analysts are hopeful it can post further gains over the rest of 2026.

One factor is growing anxiety about valuations on the US stock market, particularly for large technology companies that have soared amid the speculation about the boom in artificial intelligence. With prices now looking stretched, global investors are on the hunt for opportunities elsewhere, enabling them to take some profits from North America and to diversify.

China could be one of those opportunities. Despite last year’s strong gains, the market still looks relatively undervalued – the MSCI China Index ended the year on valuations that reflected a 40% discount compared to developed market equities. There are also signs that investors are ready to take advantage, with significant increases in flows of money into Chinese equities, particularly via the Hong Kong market.

Moreover, Chinese companies look resilient, despite the challenges posed by international trade tensions and the country’s ongoing confrontations with President Trump.

“Corporate earnings have shown clear signs of recovery,” pointed out recent analysis from Invesco. “We believe earnings per share levels have likely bottomed and are poised to improve further, while return on equity, and earnings before interest and taxes have reversed previous declines.”

Add in the longer-term rationale for investing in China – that it is the world’s second biggest economy with powerful demographic drivers, an exciting innovation and technology sector, and a pro-growth government – and the case looks even more compelling.

All the more so given that most investors in the UK remain underexposed to China’s growth prospects. Research suggests Chinese equities account for less than 3% of the typical Briton’s portfolio. Some home bias, leading to large holdings in UK equities, is understandable, as is feeling more comfortable with developed markets in the West. But to ignore China altogether, or to hold only a couple of percentage points of exposure in the country, is potentially to miss an opportunity.

Naturally, investors will look for the benefit of professional expertise to help them put this right. In which case, one of the three investment trusts specialising in the country – Baillie Gifford China Growth, Fidelity China Special Situations and JPMorgan China Growth & Income – could be a good option. All have posted significant returns off the back of last year’s stock market strength.

There are open-ended fund options too, of course, but investment trusts bring certain advantages when investing in emerging economies. The stock markets of such countries are often illiquid and volatile, so the structure of a closed-ended trust can be a good way to deal with those issues.

Investment trust managers also tend to have more freedom to go beyond market benchmarks in search of interesting opportunities, which can also be valuable in diverse markets such as China.

There are no guarantees – and China won’t suit all investors – but strategists think the world’s second-biggest economy is increasingly well placed to stand up to the Trump administration, particularly as the technology gap begins to narrow. In which case, President Trump may well back away from further confrontation, providing further support for the Chinese stock market, just as the country is due to release its 15th five-year plan for sustainable, efficient and balanced economic growth.