What can a kung fu show tell you about investing in robotics? How to find hidden champions in China small caps - a sector largely overlooked by investors? And should geopolitics be viewed as the primary investment driver when it comes to essential raw materials?
In this episode of The Investor’s Guide to Asia, fund manager Dale Nicholls talks through opportunities that analysts Teddy Gao, Reggie Pan, and Sam Heithersay helped him identify in emerging Chinese manufacturers, robotics, and the rare earth mining sector, and how they translated into portfolios.
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China robotics: investing amid uncertainty
China’s technology sector is one of the most talked‑about investment themes in the world – especially its advanced robotics. Structural drivers are clear: an ageing population, strong policy support, and rapid advances in artificial intelligence all point to significant long‑term potential. Yet the sector’s fast ascent has also underscored the risks of a fledgling sector running ahead of fundamentals in the short term.
From a portfolio construction perspective, Nicholls distinguishes between different parts of the value chain of this emerging technology. While exposure to robot developers is necessary to capture upside, there is high uncertainty in this segment mainly due to immature business models. As a result, position sizes tend to be small. By contrast, he sees more reliable opportunities in the supply chain, particularly component manufacturers with established market share in industrial robotics. These companies already possess proven technology and competitive advantages that may translate into future humanoid robotics applications, which offers a more robust risk‑reward profile at this stage of industry development.
Nicholls says the breadth and depth of Fidelity analysts’ research work has helped him capture good opportunities in this sector. He and analyst Reggie Pan spend a lot of time visiting the companies in question. Most of them are private, with limited information available to the public, so it’s crucial to sit down with the management teams to understand their approach, says Nicholls.
Pan also conducts in-depth research on robotics technologies, including the development of the foundation model, which is a large-scale artificial intelligence system that acts as a ‘brain’ for robots. Nicholls adds that while Chinese robot makers are already good at balance and motion control, the ‘brain’ - which allows robots to plan movements, co-ordinate with each other, and adapt to new situations - could be a differentiator over the medium term.
China small caps: an overlooked sector
Chinese small-cap equities is an area often bypassed by investors due to perceptions of higher risk and limited information. The asset class has evolved significantly in the past few years, with an increasing number of companies in new-economy sectors, such as advanced manufacturing and biotech, providing opportunities to gain exposure to China’s domestic growth. However, these companies tend to receive less analyst coverage, resulting in information gaps and market mispricing.
Nicholls argues that this market rewards deep fundamental research. While smaller companies can change quickly and outcomes are less predictable, the potential upside can be significant when competitive advantages are underestimated. This is particularly evident in industrial sectors, where years of investment in research and development are now translating into tangible gains in market share and pricing power, he says.
Opportunities that he’s worked on with analyst Teddy Gao span a wide range of industries, from precision components used in aerospace and data centres, to emerging technologies such as smart glasses. Many of these end markets are still relatively small, but fast growth provides a clear pathway for companies to scale over time.
Nicholls outlines several criteria he uses to assess whether a small company can transition into a larger, more durable business. These include the long-term size and structure of the end market, the sustainability of the company’s competitive edge, and the quality of management. Management execution is particularly important. Regular engagement with management teams and evidence of consistent delivery are essential to build conviction.
“You can have a great business, but you need a management team that sees the opportunity, has a strategy to really go after the opportunity, and then execute,” he says.
Rare earths: beyond the geopolitics
As geopolitical tensions run high, a sector drawing a lot of attention is rare earths - essential to renewables, aerospace, and defence manufacturing, but one where the supply chain is tightly controlled by China. As a result, western governments are trying to build rare-earth supply chains beyond their borders. Sam Heithersay, who spent years analysing the sector, says the efforts to break China’s dominance face deeper structural barriers than many investors recognise, which provides a natural advantage for incumbents that already have established mining and refining operations and entrenched relationships with customers.
Nicholls believes government intervention will continue to increase through funding support, policy mechanisms, and efforts to diversify supply chains. In addition to rare earths incumbents, he also looks at the projects that are yet to come to market but are likely to benefit from further support coming to the sector.
However, geopolitics should be viewed as context rather than the primary investment drive, says Nicholls. The core investment framework that he focuses on is still rooted in fundamentals: supply‑demand balance, regulatory environments, management teams, and project execution. Opportunities exist across the value chain, from upstream mining projects to downstream processing, with larger allocations typically made downstream where the connection to customers is established.
