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The investment trusts benefiting from a China recovery | Trustnet Skip to the content

The investment trusts benefiting from a China recovery

14 August 2025

Chinese equities may be thriving but valuations remain sensible and it’s possible that the bull market can continue.

By David Brenchley,

Kepler Partners

Investors that have kept the faith with Chinese equities have had a rough time of it over recent years. The MSCI China Index fell by more than 50% in pound sterling terms between January 2021 and October 2022, a time during which the MSCI United Kingdom and MSCI USA indices both returned around 18%.

A bazooka of stimulus measures launched in September by the Chinese government was a real game-changer, though. Chinese consumer confidence had been shattered first by the country’s strict Covid-zero policy and then by a property crisis that damaged confidence due to property being a huge part of Chinese household wealth.

Stimulus measures launched in response included interest rate cuts and support for the property market alongside incentives to boost consumption, such as offering citizens the option to trade in their old electronic products for newer, subsidised models.

Consumer sentiment is critical for growth in China, so this support is welcome. Coupled with a stabilisation in property values, particularly in top-tier cities, we suspect that confidence should continue to improve. That retail sales grew 6.4% in May, the fastest pace since December 2023, is encouraging.

The result has been that China has been the best performing of the world’s major stock markets over the past 12 months. The MSCI China Index is up 42% in pound sterling terms, well ahead of MSCI Germany’s 31% gain, not to mention gains of 13% each for the MSCI United Kingdom and MSCI USA indices.

In our view, though, far from being egregiously valued, the bull market looks set fair. Indeed, not only do most of the structural forces driving China’s pre-2021 stock market boom remain in place, they have been further entrenched.

China remains at the forefront of technological innovation, with its large population helping bring down the cost of these innovations through economies of scale. These include artificial intelligence (AI) disruptors such as DeepSeek, consumer-facing super apps from the likes of Meituan, and electric vehicle manufacturing, which was famously highlighted when BYD surpassed Tesla to become the world’s best-selling electric vehicle maker in 2024.

Domestic consumers’ preferences are also evolving. Luckin Coffee has built an effective data-driven operational model and overtook Starbucks to become the largest coffee chain brand in China in 2023, just six years after being founded.

In addition, China has managed to make itself the world’s unrivalled manufacturing hub – no other country can compete with it in this respect.

Companies may be able to slowly move to a China-plus-one supply chain, but they can’t simply up and leave the country in favour of others, be that in Southeast Asia, Latin America or the US.

Continued threats of tariffs will undoubtedly cause volatility, even if president Donald Trump’s initially proposed 145% surcharge on Chinese exports seems unlikely.

Yet, China is much better prepared this time around than when tariffs were first mooted in 2018, with many Chinese companies having diversified their client base, relocated some facilities into neighbouring countries, or even built new factories or plants in the US.

Today, you’re getting access to these powerful themes at bargain basement prices, with the MSCI China trading on a forward price-to-earnings (P/E) ratio of 11.5x to the end of June, a big discount to the MSCI All-Country World Index, which is on a forward P/E of 18.6x.

A double-discount is on offer for UK-based investors, with investment companies focusing both on China, as well as the broader emerging markets, trading on discounts to their intrinsic values. They also offer an attractive way of playing the consumer story within China – and elsewhere.

Take Fidelity China Special Situations as a case in point. The trust has a clear bias towards domestic spending, which makes up 80% of the portfolio. Manager Dale Nicholls notes that consumers are “cashed up”, suggesting that if further stimulus measures help unleash consumption, this could have a powerful effect.

Again, Baillie Gifford China Growth has a portfolio well-anchored in domestically oriented companies, with more than 80% of underlying portfolio revenues generated in China. The trust stands out as a way of playing the domestic recovery while guarding against tariff-related risks.

For those not keen on taking direct exposure to China, alternatives exist to provide broad emerging market or Asia exposure with a good slug of China thrown in for good measure.

Fidelity Asian Values is one whose management’s willingness to take contrarian positions has led to them being overweight China for a while now. This, alongside an underweight to India, where the managers struggled to find high-quality companies at attractive valuations, has helped relative returns through 2024 and into 2025.

If you want to be even more indirect in your exposure to China, Ashoka WhiteOak Emerging Markets offers a mix of everything. It has a decent, yet underweight, exposure to China- and Hong Kong-listed stocks, at 23.7% of its portfolio.

However, when assessed by economic exposure rather than solely looking at direct holdings, the positioning within China is closer to neutral, at 27.8%.

To navigate geopolitical risks and potential underperformance if China rallies, the trust seeks off-benchmark stocks, typically not based in Asia, with indirect exposure to China’s growth story, such as luxury goods giants Richemont and Hermès.

Performance will undoubtedly be choppy, and we’re certainly not advocating a full-scale shift into China by any means, but having no or little exposure risks missing out on a potentially powerful recovery that may already be underway.

In addition, the current discount offered within the Chinese market, combined with the value we see within the investment trust segment, make China seem attractive at this juncture.

David Brenchley is an investment specialist at Kepler Partners. The views expressed above should not be taken as investment advice.

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