Two China fund ideas for Year of the Snake

As China’s roller-coaster Year of the Dragon has drawn to a close and we enter the Year of the Snake, we look at how the country’s economy and stock market might fare.

Structural issues including a collapsed property market, the effects of which have seeped into consumer confidence and spending, still haunt China’s economy and (unlike many other economies) the threat of deflation looms large.

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Relations with Western regions have been fraught in light of the perceived threat of conflict with neighbouring Taiwan, and Donald Trump’s convincing second-term victory and full-force “America first” policy has saddled China with renewed and reinvigorated threats of US trade tariffs. In tandem with a declining economic growth rate, these factors have led some investors to view the region bleakly.

However, despite these foreboding challenges, China’s market benefited from signs of recovery throughout 2024. Following three years of decline, the MSCI China index rose nearly 22% in 2024, as the market positively digested a raft of stimulus measures imposed by the government and People’s Bank of China at various points throughout the year, reversing some of the decline in valuations and worsening sentiment of the three years prior.

While growth forecasts may have slipped, China is still one of the faster-growing major world economies. A growth rate in 2024 of 5% may look weak in comparison with pre-Covid levels, but this still would be an enviable figure for most developed economies. In addition, while Trump’s tariffs against China’s manufacturers are shaping up to be punitive, we shouldn’t forget that China has dealt with tariffs during Trump’s first term and, despite an impressive export surplus, many of China’s companies have predominantly domestic revenue exposure.

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It is also worth remembering that China plays an integral part in global innovation and supply chains of critical markets, such as electric vehicle (EV) production and clean energy supply, bolstering its position on the global stage. China’s EV market, for example, houses Shenzhen-based BYD Co Ltd Class H (SEHK:1211), which has recently surpassed Tesla Inc (NASDAQ:TSLA) to become the world’s biggest producer of electric automobiles which have become a common sight on European roads.

In recent days, the phenomenon that is DeepSeek rocked global markets as investors at first glance were impressed by the generative AI’s output compared with more costly US competitors, showing that China cannot be written out of the artificial intelligence (AI) race.

Still, with aggregate price/earnings (PE) valuations for the Chinese equity market of roughly 11x forward earnings, some risk-friendly investors may consider this provides an opportunity to tap into China’s compelling innovation and structural growth story at a little over half the valuation multiple of developed markets.

HSBC MSCI China ETF

For those looking for broad exposure to the Chinese market, the HSBC MSCI China ETF GBP (LSE:HMCH)invests passively in more than 580 large and mid-cap China-listed companies. The index tracked includes both on and offshore A and H shares and is offered at a very reasonable charge of just 0.28%.

Fidelity China Special Situations

More adventurous investors might look to gain exposure via Fidelity China Special Situations (LSE:FCSS). Managed by Dale Nicholls for the past decade, the trust seeks capital growth from investing in undervalued companies with good long-term potential.

One area where Nicholls currently sees opportunities is Industrials, as China pivots towards high-end manufacturing and production, as well as the long-term transition to consumption-led growth. An allocation of up to 15% is permitted in unlisted names, which currently includes ByteDance – the owner of TikTok, and Pony.ai – a leader in autonomous mobility.

China is a volatile region for investors to navigate and they should also be aware of the heightened risk profile that Fidelity China Special Situations levies on account of high gearing levels, discount volatility, private company exposure and allocation to smaller companies.

However, Nicholls’ own expertise and knowledge of the region, as well as the wider resource of Fidelity’s analyst team, positions the trust well to benefit from China’s structural growth story.

Source: Morningstar Total Return (GBP) to 31/12/2025. Past performance is not a guide to future performance.