Year of the Snake: will China thrive or will Trump’s tariffs bite?
Investment trust managers comment on China’s prospects.
After a challenging few years following the Covid crisis, problems in the property sector and weak economic growth, the past 12 months have seen a revival in the performance of China-focused investment trusts. But the world’s second largest economy still faces challenges, including the prospect of tariffs following Donald Trump’s re-election.
We asked the investment trust managers with the greatest exposure to China for their views on what investors can expect from the region this year and beyond.
“For long-term investors, Asia remains a region with many attractions.”
Abbas Barkhordar, Manager of the Schroder AsiaPacific Fund
Are China’s problems now resolved?
Qian Zhang, Investment Specialist at Baillie Gifford China Growth, said: “There have been clear signs of a policy pivot from Beijing since last September, with a coordinated pro-growth push from both monetary and fiscal sides. While not a ‘big bazooka’ type of stimulus, in our opinion these measures focus on tackling the two most important pain points for the Chinese economy: the property drag and local governments’ debt burden. This should support growth and sentiment relative to a low baseline, providing a floor to asset valuations.”
Ian Hargreaves, Co-Manager of Invesco Asia Trust, said: “The scale of last year’s surprise stimulus package and its endorsement by senior officials not only sparked an immediate rebound in Chinese equities, but crucially suggests renewed determination from officials to support the economy and stabilise asset prices. Restoring market confidence is back on policymakers’ agenda, which could help improve fundamentals.
“Whilst this is positive, we will not know how effective these stimulus measures will be until after they are implemented. Policy announcements so far have been focused on lifting financial pressure off over-indebted local governments, but this has fallen short of market expectations. We expect further stimulus measures, but history tells us authorities are likely to tread carefully, being wary of encouraging speculation, leverage and unnecessary financial risks.”
Abbas Barkhordar, Manager of the Schroder AsiaPacific Fund, said: “Consumer confidence remains very depressed due to a weak property market and uncertain prospects for consumer income. Externally, certain industries have faced greater restrictions on trade and investment. This has led GDP growth to slow, inflation to fall to near zero and the outlook for company earnings to deteriorate.
“Many of the structural concerns facing the market – demographics, excess housing inventory, stricter regulation, barriers to trade – remain, but there is some hope that the government’s announcement of co-ordinated monetary and fiscal stimulus in September last year will lead to an improvement in growth and confidence in 2025. The undemanding valuations of the Chinese and Hong Kong markets suggest there is scope for a positive surprise should policy improve.”
Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Stabilising property prices remains a key factor for unlocking China’s potential, and there are some positive signs after the latest policy announcements. Market data has improved for the last two months, with both new and existing house prices in ‘tier one’ cities improving, but more support may be required to sustain momentum.
“Market headwinds will no doubt continue to grab the headlines, but some perspective is required. Despite contributing 17% to global GDP, China’s representation in the MSCI AC World Index remains just 3.4%. Today, investors can access that opportunity at close to record low valuations, with Chinese equities trading at a 55% discount to US equities and a 25% discount to emerging market equities excluding China.
“Crucially, what really drives superior investment returns are great companies executing well in growing industries where they have strong competitive advantages. In China, innovation continues to thrive, and many companies with the right products and services are increasing market penetration, maintaining or gaining pricing power, and growing market share – often both at home and abroad. In many industries, tough conditions are widening the gap between winners and others, underlining the importance of active portfolio management.”
Rebecca Jiang, Portfolio Manager of JPMorgan China Growth & Income, said: “We foresee more initiatives from both central and local governments to tackle the structural impediments to economic growth. We believe the Chinese authorities’ new-found but apparently strong commitment to use its balance sheet to solve the economy’s problems sends a strong signal to the market that it is still prioritising economic stabilisation and growth and is willing to explore further ways to achieve these objectives.”
“Asian equities currently offer double-digit earnings growth potential, with reasonable valuation levels across much of the universe. However, the asset class continues to trade at a significant discount to global equities, particularly the US market, and the implementation of China’s stimulus measures could be a turning point in 2025.”
Ian Hargreaves, Co-Manager of Invesco Asia Trust
What makes you optimistic about the year ahead – and beyond?
Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Evolving consumption patterns are reshaping industries such as travel, sportswear and cosmetics to name a few, with domestic brands improving market share.
“Consumer sectors were among the worst performing last year, but valuations now offer some of the most compelling opportunities. In e-commerce, the largest platforms continue to leverage their strong market positions and better cost control to improve earnings growth. In terms of individual stocks, PDD remains among my preferred holdings, with valuations not reflecting continued strong trends domestically or the potential for its retail platform Temu overseas.
“Technology is helping innovative companies to improve services and consolidate large fragmented markets. Companies like Tuhu Car in auto services and Full Truck Alliance in freight transport are using digital platforms to improve customer experience, lower the cost of their services, increase efficiency and standardise services, thereby strengthening their market dominance.”
Rebecca Jiang, Portfolio Manager of JPMorgan China Growth & Income, said: “We remain optimistic about the outlook for the Chinese market. Firstly, valuations are still attractive. Although they recovered in September and October 2024, they are still at relatively low levels compared to market history. For example, the price to book of the index is still below its level during the global financial crisis in 2009.
“Secondly, corporate reforms focused on improving capital allocation and shareholder returns are likely to have a positive impact on the market. Many cash generative companies are now more willing to distribute cash to shareholders either through dividends or share buybacks. Developments in this direction have been greatly welcomed by domestic and international investors, as they view dividends to be a more predictable source of return. Whilst many cash-rich businesses are already increasing payout ratios and undertaking share buybacks, there is still considerable scope for many to do even more, which should have a further beneficial impact on valuations over time.”
Qian Zhang, Investment Specialist at Baillie Gifford China Growth, said: “Our on-the-ground research is painting a clear picture: Chinese companies are becoming increasingly competitive at a global scale. They are transforming from producers of cheap, low-quality goods to leaders in a number of globally critical industries. We can point to many examples in the portfolio from white goods producer Midea, to battery giant CATL, to the world’s largest electric vehicle maker BYD.
“Despite a weak domestic consumption environment, companies like Pinduoduo (e-commerce) are quickly gaining market share as consumers increasingly look for ‘value for money’ options. Western semiconductor restrictions have also forced a new collaboration mechanism among Chinese semiconductor companies and some domestic leaders are starting to emerge.”
Abbas Barkhordar, Manager of the Schroder AsiaPacific Fund, said: “For long-term investors, Asia remains a region with many attractions.
“Among all the excitement around AI, for example, investors often overlook that semiconductor manufacturing is now heavily concentrated in a few key Asian companies. These companies make high returns from the booming global demand for advanced chips yet often trade at much less demanding valuations than tech stocks in developed markets.”
Ian Hargreaves, Co-Manager of Invesco Asia Trust, said: “Asian equities currently offer double-digit earnings growth potential, with reasonable valuation levels across much of the universe. However, the asset class continues to trade at a significant discount to global equities, particularly the US market, and the implementation of China’s stimulus measures could be a turning point in 2025.”
What are the biggest risks to your investment outlook, now that Trump is in power?
Ian Hargreaves, Co-Manager of Invesco Asia Trust, said: “Tariffs are a concern, but Donald Trump is known to be transactional, and the tariff agenda is about US reindustrialisation – to incentivise foreign companies, including Chinese companies, to move production to America. If markets feel there is a floor under US-China relations with Donald Trump in the White House, then that could be supportive of sentiment.
“Geopolitical risks are hard to analyse and price effectively, but we are alert to what the market appears to be pricing in, as well as the potential for other governments to respond with stimulus of their own, and for corporates to take measures such as cutting costs and diverting business away from the US to other markets. For example, China could further boost its economy, targeting specific sectors, to try and offset any negative impact from tariffs. We prefer looking at the potential impact of the US election on a case-by-case basis, and so far, have not made any changes to the portfolio. As active investors, we need to navigate these complexities carefully and be open to capitalising on mispricing opportunities.”
Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Geopolitical risk remains a concern, particularly around US tariffs on Chinese goods, but both investors and companies are well aware of these risks. Chinese companies have diversified supply chains, leveraged tariff exclusions, and adapted by manufacturing in alternative locations to mitigate their impact. In fact, I’m finding opportunities in more cases where the market may be underestimating the resilience of Chinese companies in the face of these challenges.
“For example, there are sectors where Chinese players hold a competitive edge or switching suppliers remains difficult, where firms could effectively pass on higher costs to customers. On a broader scale, China’s reduced reliance on US exports, alongside the government’s pivot to domestic demand-led growth and recent fiscal policy measures, should help mitigate the economic impact of these external challenges to some extent. In any case, the vast majority of revenues generated by the companies in Fidelity China Special Situations come from the domestic Chinese market, where elevated household savings provide potential buying power to support a recovery.”
Abbas Barkhordar, Manager of Schroder AsiaPacific Fund, said: “Asian markets have underperformed developed markets since the election of President Trump late last year, reflecting concerns about the impact of his policies on Asian economies and companies. Although there are potential headwinds from higher tariffs and US interest rates, it should be remembered that the first Trump presidency coincided with strongly positive returns for Asian stocks, as higher US growth benefitted the region’s exporters, despite more restrictive trade policies. There is clearly still a great deal of uncertainty about what the actual policies of the Trump administration will be in his second term, and the impact that these will have on Asia, which is of course a risk to the investment outlook. However, as before, any policy changes are likely to also create some winners across the region, not just losers.”
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