So far this year, China has been one of the best performing equity markets and the question is whether this time it’s different. George Efstathopoulos, portfolio manager, Fidelity International is “inclined to say yes”.
“Post the mini fiscal stimulus in Q4 2024, we’ve seen better economic data. And while the improvement has been gradual and uneven, China’s monetary and fiscal policy stance has firmly shifted,” he wrote in a note released today.
Efstathopoulos is also encouraged that consumption is responding to the subsidies, which sent a signal to both policy makers but also market participants, that there is a strong link between fiscal stimulus and the Chinese consumer.
“Clearly more needs to happen to make it sustainable (and China has said more will come), but it also answers the question many had on whether fiscal policies would work at all given the low China consumer confidence levels,” he noted.
Although Chinese equities delivered strong returns in 2024, “it certainly didn’t feel that way, as Chinese equities were amongst the most volatile equity markets, exhibiting meaningful ebbs and flows”. Rallies tended to be short-lived and unconvincing.
But there are also other factors that mean the current rally could be sustainable.
The property market has been responding better to the incremental measures, and this could well mean that the worst of the property deleveraging cycle is behind us, and potential tail risks have been pre-emptively dealt with.
“And while markets have been monitoring the potential of a trade war, any tariffs announced so far have not been alarmingly high nor particularly disruptive. If anything, it appears that tariffs outside of China is where more of the action will be in Trump 2.0.,” said Efstathopoulos.
Moreover, China’s January credit data also points to a solid start to 2025, and higher government spending driven by fiscal deficit expansion and rebounding credit impulse would help alleviate deflationary concerns and only add to the ongoing China equity market re-rating.
Meanwhile the emergence of Chinese AI and Deepseek challenges the view that China is vastly behind the US on the tech front, according to Efstathopoulos.
“This has been a strong reminder to investors that China can and does innovate,” he said. “It has certainly helped with market confidence and sentiment around China’s investability is clearly shifting”
Efstathopoulos believes that Chinese AI can help drive earnings, productivity, and help employment. The recent meeting between Chinese officials and private tech companies shows that the government is embracing of ‘new productive forces’.
“We believe that these all make up important differences when thinking about the current rally. With China AI perhaps the most important one as it reflects improving fundamentals and helps form a new narrative. Essentially hope is taking a back seat while fundamentals are in the driving seat,” noted Efstathopoulos.
