Abrdn China (ACIC ) may have missed out on the artificial intelligence (AI) hype but it is staging a turnaround and believes that the Chinese consumer will be at the ‘heart of the recovery’ for both the world’s second-largest economy and the trust.

Interim results for the six months to the end of April showed an uptick in fortunes for the £197m investment company that was created by the merger of Aberdeen Emerging Markets and Aberdeen New Thai in 2021.

The fund delivered a net asset value (NAV) total return of 14% over the six months, with the shares up 11.5% over the same period. Although the figures lagged the 16.7% return from the MSCI China All Shares index, they are a considerable improvement on full-year figures when the NAV tumbled 37% as China faltered under onerous zero-Covid policies.

The fund was buoyed by a strong showing in Chinese markets at the start of the year as the government announced a shock reopening of the economy and a climb-down on restrictions, but then tracked lower as the economic recovery started to falter.

Low exposure to AI-related stocks was also a drag on performance as investors ‘chased short-term hot themes, including those relating to ChatGPT, wider AI opportunities, and state-owned enterprise reforms, rotating out of previous winners in the process’, said manager Nicholas Yeo.

‘April saw the AI hype dissipate somewhat as investors refocused on fundamentals,’ he explained.

The biggest source of underperformance was consumer discretionary holdings, with Yeo flagging China’s largest retailer JD.com, whose performance was ‘unhelpful based on market concerns over rising competition in e-commerce’.

‘This may weigh on the stock over the near term, but we remain positive on the company’s long-term competitiveness,’ he said.

Confirming his conviction to consumer stocks, Yeo initiated a position in PDD, owner of popular shopping app Pinduoduo, which he said is ‘gaining market share within China’s e-commerce sector’, and added to e-commerce giant Alibaba based on its ‘attractive valuation, easing regulatory pressures, and an improving outlook thanks to the earlier than expected reopening of the economy’.

Yeo believes the consumer is ‘at the heart of the recovery’. ‘After a very long period of widespread lockdowns, there is considerable pent-up consumer demand,’ he said.

‘Furthermore, elevated household savings should provide a powerful tailwind for consumer spending. As jobs and income prospects improve, we expect consumers to spend their savings across different sectors, including tourism, travel, healthcare, and property.’

Further reasons for optimism come from the policy environment in China. While most Western economies are battling high inflation with interest rate hikes, Chinese inflation is benign.

Yeo said this has given policymakers ‘freedom to introduce accommodative monetary and fiscal policies to support economic growth’.

‘Policy guidance is therefore likely to remain supportive,’ he said. ‘With growth in many developed Western economies set to slow as higher interest rates bite, China represents a real counter-cyclical opportunity.’

Despite these opportunities, valuations is China are still low and quality companies are ‘still discounted by the market but their prospects have improved significantly’.

‘We believe the market will recognise this valuation discrepancy over time,’ added Yeo.