The year of the fire horse: can Chinese equities continue their stellar gains?

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “The Chinese stock market shot the lights out in 2025 and China hit its economic growth target of 5%. That was despite the headwinds from Trump’s tariffs and a troubled domestic housing market. Chinese companies include some of the biggest and most innovative in the world. The economy certainly has its challenges, but policymakers are taking steps to boost economic activity and fund managers are optimistic.”

The AIC asked the managers of the investment trusts with exposure to China about the prospects for the coming year. Their comments are collated below.

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Despite a year of strong returns and some normalisation in values, Chinese companies still trade at a meaningful discount to global peers. That leaves plenty of value in the market for highly selective, bottom-up stock picking.

“We also see improved corporate governance and capital discipline. Engagement with companies has intensified, and 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 our shareholders and reinforces the quality of returns, so we expect to continue our record of consistently rising payouts.”

John Citron, Manager of JPMorgan Emerging Markets Growth & Income, said: “China’s recent stock market strength is increasingly supported by structural and policy-related factors. One key shift is how Chinese companies are behaving: rather than chasing growth at any cost, many are now focusing more on rewarding shareholders. Spending on dividends and share buybacks has more than doubled over the past decade, making the market more attractive to investors looking for returns as well as growth.

“Investor sentiment has also been helped by new government policies. These include lower interest rates and targeted measures to stabilise the property market. US trade policy has also accelerated domestic investment as manufacturers localise supply chains previously dependent on US imports, reinforcing China’s push towards advanced manufacturing and technology self-sufficiency.”

Isaac Thong, Lead Manager of Aberdeen Asian Income Fund, said: “China’s performance last year, like in most markets, was driven by a rerating in valuations. Looking ahead, we expect this year’s performance to be more reliant on earnings growth. After many years of belt tightening, China is starting from a low earnings base, which means we are optimistic that earnings growth will materialise in a number of sectors this year. This should support positive market performance and we are well positioned in financials, internet stocks and consumer companies which we expect to benefit.”

Abbas Barkhordar, Manager of Schroder AsiaPacific Fund, said: “The Chinese market was a strong performer in 2025, driven by both external and domestic factors. On the external front, net exports were surprisingly resilient in the face of the rollercoaster path of US tariffs. Domestically, sentiment was positive on the development of home-grown AI models by Chinese tech companies, and their increasing spend on data centres.

“However, other sectors of the economy fared less well, with consumer spending still weighed down by a declining residential property market and an uncertain outlook for the labour market. Much of the stock market performance in 2025 was more a result of an upwards rerating in valuation multiples rather than higher expected earnings. For the positive performance to continue, earnings growth will need to be a bigger driver, which likely requires greater policy support as well as a more stable external environment.”

Fiona Yang, Manager of Invesco Asia Dragon Trust, said: “China’s ‘DeepSeek moment’ acted as a catalyst for a broad revaluation of the country’s AI sector. While this has helped lift the market from deeply discounted valuation levels, the rebound has been uneven. Not all sectors or companies have benefited equally, underscoring the two‑speed nature of China’s economic recovery. Headline government growth targets have been met, largely thanks to strong growth in exports, tech and advanced manufacturing which offset slower growth, or even contraction, in property, consumption and household incomes.”

Key risks

Abbas Barkhordar, Manager of Schroder AsiaPacific Fund, said: “The Chinese economy remains reliant on investment and exports for growth, with consumer confidence remaining weak and leading to a high level of cautionary household savings. Should investment falter, or trade restrictions pressure exports, there will need to be greater policy support to maintain economic growth – in particular, policies to encourage consumers to spend more.

“One important driver of investment has been into data centres, not least to power the exponentially growing demand for AI models and applications. Should there be a reversal of sentiment towards AI, this would be a headwind for economic growth, and also stock market performance given the increasing weight and importance of the technology sector in China.”

John Citron, Manager of JPMorgan Emerging Markets Growth & Income, said: “Trade policy remains a major uncertainty. Although a broad framework agreement has been reached, tensions with the US are likely to continue throughout President Trump’s term, with the emerging markets outlook posing an ongoing risk to China’s economic outlook.

“That said, some of these geopolitical pressures could have unexpected upsides – particularly for China’s domestic technology sector which continues to make rapid advancements as it works fast to become self-sufficient. As the DeepSeek moment showed last year, it may be a mistake to assume China cannot replicate Western developments in technology.”

Fiona Yang, Manager of Invesco Asia Dragon Trust, said: “Policymakers in Beijing have become more explicit in emphasising the need to boost domestic consumption. The 15th Five‑Year Plan included the goal of increasing household consumption as a share of GDP, and positioning domestic demand as the primary engine of growth. More recently, we’ve read reports that the borrowing limits on property developers known as the ‘three red lines’, have been scrapped, bringing an end to rules that enforced aggressive deleveraging in China’s property market.

“Some scepticism is warranted; surveys of consumer confidence continue to paint a pessimistic picture, but the feeling on the ground is markedly different. We recently visited Shanghai and found the streets to be vibrant, with plenty of people out spending. Consumption habits are evolving, but companies agile enough to adapt are well positioned to benefit. Meanwhile, in Hong Kong, the mood has shifted from gloom to hope. Clear policy support from China has reinforced the view that the region will remain an important global financial hub.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Domestically, conditions remain 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 government action in this area, a recent example being existing home repurchase initiatives announced by the Shanghai government.”

US-China relations

Isaac Thong, Lead Manager of Aberdeen Asian Income Fund, said: “Tariff tensions between the US and China have eased recently, although they remain inherently unpredictable. We hope conditions will stay calm in the run-up to the April presidential meeting in Beijing. Importantly, China seems to be strengthening relationships with Europe and Canada, which should be seen as a positive development for the country’s global positioning.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “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.

“While external factors remain a potential risk, we are focusing more on areas less exposed to external shocks and more 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.”

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Notes to editors

1. Source: theaic.co.uk / Morningstar. Share price total return in 12 months to 31/01/26.
2. The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 276 members and the industry has total assets of approximately £268 billion.
3. For more information about the AIC and investment trusts, visit the AIC’s website.
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