HUB EXCLUSIVES PANEL DISCUSSION
Panel discussion, hosted by Cherry Reynard, with:
Dale Nicholls, Portfolio Manager, Fidelity China Special Situations PLC, Fidelity International
Qian Zhang, Investment Specialist, Emerging Market Equities, Baillie Gifford
Having spent several years in investment purgatory, the Chinese market revived in 2025. A reappraisal of the relative risks of emerging markets generally, plus excitement over China’s technological capability following the launch of Deep Seek, piqued the interest of international investors.
Dale Nicolls, manager of Fidelity China Special Situations plc, admits it’s been a bumpy ride. “Initially, we saw an extra focus on driving domestic consumption. The excitement around that drove an initial recovery in markets. Then we had Liberation Day, which brought concerns over tariffs and the potential impact, particularly on the exporters.”
Since then, he says, it has been a bifurcated market with AI winners on the one hand, including the data centre supply chain and power companies, plus anything defence related. On the other side have been the consumption related names, which have been significant laggards, along with property.” More recently materials and commodity companies have performed better, particularly in response to the crisis in Iran. “There’s been a broad divergence between sectors,” he says.
Qian Zhang, investment specialist on the emerging markets client team at Baillie Gifford says while the group’s horizon is long-term, at the margin, they’ve sought to diversify through this period. “We’ve added some less-correlated growth names into the portfolio. There has been a phenomenal enthusiasm for innovation-led or AI-related names. Some of the IPOs have done fantastically well. We are being selective there, but are also looking at some of the bottlenecks in infrastructure and energy.”
Changing Chinese market?
2025 has also seen ongoing improvements in corporate governance that has helped support appetite for Chinese companies. Zhang says corporate governance started from a low base in China, but there has been some progress from both the regulatory side and the companies themselves. The Public Evidence Code has been revised, while reporting and disclosure have also improved significantly. “The number of companies in our portfolio who have standard ESG disclosure has notably improved,” she says.
The Baillie Gifford approach naturally leads them to companies with good governance. Zhang says: “A lot of the companies we invest tend to be founder led. We try to get to know the business very early, sometimes investing them privately and owning them after IPO. That's an effective way to do due diligence.”
Nicholls says there are still pitfalls for the unwary in the market, particularly among state-owned entities (SOEs), where shareholder interests may not be front-of-mind. His solution is not a wholesale avoidance of SOEs – there are still some good businesses among them – but to make sure they are getting a good business at the right price, and that the management’s interests are aligned with their own. He says some of the SOEs have changed over time
“We believe things are improving. That’s demonstrated by the returns that are coming back to us as shareholders. If you look at areas such as buybacks and dividends, the improvement has been as significant as in countries with high profile corporate governance reform programmes such as Korea and Japan.” He points out that until recently, in aggregate, companies in China were net issuers of stock. That exerts a natural drag on the market. 2024 was the first year that changed.
China outlook
The conflict in Iran is creating uncertainty for Chinese companies, but the consensus remains for low-teens earnings growth, says Nicholls. “MSCI China is sitting on 12-13x forward earnings. Both earnings are below historical averages, and obviously still sit at a significant discount to many other markets.”
“Earnings are going to be a key factor. Part of the weakness in China has been that the overall trend of earnings revisions has been downwards. There are signs that is stabilizing, so hopefully we can hit earnings expectations this year. We are confident about the companies in our portfolio. What happens bottom-up is most important, and we’re happy with the opportunities that we’re finding and their valuations.”
He hopes that some of the negative factors may start to fade for the Chinese market. Some stabilisation in property prices would be an important catalyst. Some pause in the relentless geopolitical turmoil would also be useful for Chinese markets, plus a trade deal with the US.
Zhang says they are seeking out the durable growth stories in China’s AI development. “China stands shoulder to shoulder with the US on AI, but if you look at the valuation of China’s AI companies altogether, it’s probably less than an Amazon or Meta.” They are also looking for the beneficiaries of changes in consumption patterns, plus Chinese manufacturing companies that are making waves overseas.
Ultimately, China’s stock markets are home to a wealth of opportunities Valuations are still low, in spite of the strength of Chinese markets over the past year. There is plenty of uncertainty, but China has put itself in a position to weather it well.
