Against a backdrop of increased uncertainty and volatility, the potential for stock prices to become disconnected from underlying fundamentals can create attractive opportunities for long-term, active investors in China.
Global markets have been hit by extreme volatility since President Trump’s “Liberation Day” announcement of higher tariffs, and the escalation of the trade war with China. This remains a fluid situation, with markets trading around headlines - keeping volatility elevated.
Policy flexibility
More broadly, the key risk is that continued tensions could ultimately trigger a global recession, harming both the US and Chinese economies. However, China has a degree of policy flexibility and improving internal growth drivers that may help cushion the impact. The government has recently rolled out new measures to support domestic consumption and I believe there are likely more to come. At the same time, the property market is beginning to show signs of stabilisation, having been a drag on the economy for years.
The tariffs announcement has derailed a nascent recovery in China’s equity markets. However, we do believe that some perspective is required. MSCI China’s exposure to the US is around 3% in terms of revenues, so this market dislocation does seem exaggerated. Against this backdrop, Chinese equities are still trading at a very wide discount to the US and other major markets.
Continued innovation
On the ground, innovation continues to thrive across sectors, reflecting companies’ commitment to building a competitive edge. Earlier this year, Chinese start-up DeepSeek’s cost-effective artificial intelligence (AI) model stunned the industry and highlighted China’s innovative capabilities.
High-end manufacturing and domestic consumption are central to the government's long-term plan to reduce reliance on investment and property for driving growth. While overseas investors may focus on the impact on China from de-globalisation and "near-shoring" of industry, we believe that we may see a domestic boost. One consequence of these broader macro trends is an increasing preference among Chinese consumers and corporates for Chinese brands and local suppliers, resulting in domestic companies taking ever greater market share in what remains one of the world’s largest markets.
Meanwhile, there have been increases in China’s Research & Development, and the highest level of patent filings in the world at nearly 50% of all global filings. In the electric vehicle (EV) sector, China is now dominating the market, having high penetration in their domestic market which has helped power them to a position of global leader.
A moment of real opportunity
A rise in volatility, while unsettling, can be a time of real opportunity for active investors, as stock prices and company fundamentals often become disconnected. History suggests that these periods of stress offer long-term investors some of the best opportunities to generate excess returns.
Looking across companies and markets, we believe that Chinese companies have the resilience and the capability to navigate a challenging and evolving macro environment.
