The new moon on 29 January marks the start of the Chinese lunar new year. This time it’s the Year of the Snake, which follows the Year of the Dragon.
Investors looking for the top funds and stocks will be hoping for a repeat of last year: the main index of Chinese stocks, the CSI 300, gained 18.3%, after a 9.1% fall in 2023.
However, while there will be plenty to celebrate in terms of the Chinese New Year festivities plus last year’s stock market performance, the arrival of the snake looks set to usher in an uncertain year, full of challenges, which could take a venomous bite out of investors’ returns.
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Top of the list is the prospect of tariffs following Donald Trump’s re-election. Trump has said he is considering imposing a 10% tariff on imports of Chinese-made goods as soon as 1 February.
In traditional Chinese culture, the Year of the Snake embodies qualities of introspection, intelligence and adaptability. And the country will arguably need to channel all of these, to adapt to whatever this year brings, whether it’s dealing with Trump and recovering from its property crisis to winning the AI race with DeepSeek.
We asked investment managers what they thought of China’s prospects this year.
Has China resolved its past problems?
Abbas Barkhordar, manager of the Schroder AsiaPacific Fund, says: “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.”
Ian Hargreaves, co-manager of Invesco Asia Trust, comments: “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.”
Will McIntosh Whyte, multi-asset fund manager at Rathbones Asset Management, says the property crisis casts a long shadow over the Chinese economy. He explains: “After years of frenzied homebuilding and rampant speculation by businesses, local governments and households, billions of dollars are now locked up in property that isn’t worth what it cost to buy. The lucky ones have the keys to empty apartments; the unlucky have had to swallow the loss of big deposits while looking at half-finished shells that will likely never be completed. Estimates suggest up to 60% of China household savings have been funnelled into property, and so the property malaise has a clear impact on consumer confidence.”
He adds: “More recently the economic data coming out of China has been more positive. This includes a bounce in exports, but one must be wary this could potentially be front loading ahead of tariffs. Equally the very low inflationary environment the country faces – at times flirting with deflation - hardly feels indicative of a healthy economy.”
Will China slither to success in the Year of the Snake?
Rebecca Jiang, portfolio manager of JPMorgan China Growth & Income, comments: “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, says: “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.”
However, Bola Onifade, portfolio manager at digital wealth manager Nutmeg, says that while valuations are attractive to bargain hunters, especially after a rebound in performance last year, “challenges in the world’s second largest economy present a ‘valuation trap’ to investors”.
She warns: “China remains in a tough spot as it attempts to shift its economy from an investment-led model that has seen the efficiency of capital invested fall over the decades to a consumption-led economy. Despite impressive GDP growth, this shift has proven to be slow and painful with consumer confidence and household borrowing remaining low. Consumer wealth is also concentrated largely in real estate, in contrast to the US, exacerbating recent challenges in the property sector.
“Beyond these structural challenges, investors also need to consider the potential risks posed to China’s growth by the new administration in the United States. Reports suggest that the president is considering imposing new tariffs on Chinese-made goods, potentially harming existing supply chains and exporters.”
Will McIntosh Whyte, multi-asset fund manager at Rathbones Asset Management, adds: “The recent AI breakthrough from DeepSeek reminds us that China remains a highly innovative and economic powerhouse. Tariff fears remain an overhang, and it appears China is keeping some stimulus packages in reserve until there is more clarity. But tackling the property overhang is no quick fix, and this likely remains a drag on the economy for some time.
"Having said that, Chinese equity valuations arguably factor a lot of these concerns into their valuations, and any form of positive news, be it more stimulus or a pick-up in consumer sentiment, could see a significant rally for an unloved asset class.”
What are the biggest risks to your investment outlook?
Ian Hargreaves, co-manager of Invesco Asia Trust, comments: “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.”
Abbas Barkhordar, manager of Schroder AsiaPacific Fund, notes: “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, any policy changes are likely to also create some winners across the region, not just losers.”
How much should you allocate to China?
With China still regarded as an emerging market, it is riskier for investors than more established countries, and financial advisers generally recommend only limited exposure to China within a balanced portfolio.
Tom Stevenson, investment director at Fidelity, tells MoneyWeek that “a maximum of 5% of your money in China would be a rough yardstick”. This could be via an emerging market investment fund, an Asia fund, or perhaps through a global equity fund.
For example, Fidelity Asian Smaller Companies has about 30% of its assets in China, while Stewart Investors Asia Pacific Leaders has 9% allocated to the country. “If you would like more limited exposure to China, a global fund is one option. For example, the Dodge & Cox Worldwide Global Stock fund has 3.9% of its money in Chinese stocks,” says Stevenson.
He is dubious that the Year of the Snake will be auspicious for the Eastern giant. “Things have arguably got a whole lot more difficult for Asia and emerging markets since the US presidential election. Tariffs, a strong dollar and higher US bond yields are not a recipe for outperformance. Earnings growth is likely to be lower and valuations will be under pressure too.
“In the key regional market, the Chinese authorities are expected to respond with increased stimulus. It was hopes for this that triggered the dramatic rally in share prices in September 2024, but subsequent market volatility has reflected doubts about the pace and scale of support.”
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