Lunar New Year begins today (17 February), with the Year of the Horse celebrated in China and other nations that follow the lunar calendar.
According to Chinese astrology, the horse represents energy, ambition and endurance built through sustained effort.
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Spring Festival celebrations in Chongqing, ushering in the Year of the Horse.
(Image credit: Kuang Zhi/VCG via Getty Images)
While not accompanied by any major stimulus package, this emphasis on consumption could be constructive as far as China’s outlook is concerned, says Stuart Rumble, head of investment directing APAC at Fidelity International.
“The aim is to stabilise confidence and improve growth quality rather than drive a short term surge, implying selective upside rather than a broad based recovery,” said Rumble.
“Within that context, consumer sectors offer some of the lowest valuations in the market because expectations remain subdued, creating selective opportunity. In areas such as travel, sportswear and certain discretionary categories, domestic leaders continue to gain share and benefit from long term under-penetration trends.”
What do the experts think will be the key factors shaping China’s economy during the Year of the Horse – and which sectors do they think investors should target to profit?
Investing in China: A runaway horse?
The run-in to the Year of the Horse took place at something of an unruly gallop politically. Late in January, China’s top general Zhang Youxia was ousted as part of a purge that has seen the country’s Central Military Commission (CMC), which usually consists of seven members, reduced to just two, including president Xi Jinping.
“This marks one of the most dramatic ruptures in China’s political system in decades,” said Daniel Casali, chief investment strategist at Evelyn Partners. “The speed is unprecedented in the context of Chinese elite politics, where purged leaders typically vanish for months before any explanation is offered.”
General Zhang Youxia at the opening of the Western Pacific Naval Symposium in April 2024.
(Image credit: Kevin Frayer/Getty Images)
The purge represents a fracturing of the balance between factions within the ruling Chinese Communist Party (CCP).
“Given China’s political opaqueness, with no clear line of succession to president Xi, this political uncertainty raises concerns over governance and could weigh on investor sentiment,” said Casali. “The risk for investors is that domestic political uncertainty could depress regional equity market valuations and returns.”
However, Casali added that Chinese and emerging market stock markets have so far shrugged off the political instability, and that both are primarily being driven by companies’ earnings growth within a supportive global economic backdrop.
China’s AI ecosystem
One of the key drivers behind China’s gains last year was the emergence of DeepSeek, an event which rocked Western stock markets and shaved nearly $600 billion off Nvidia’s market cap in a single session.
“The ‘DeepSeek moment’ acted as a pivotal catalyst for a broad revaluation of the country’s AI sector,” said Yang.
“The market has yet to fully appreciate how rapidly China’s domestic AI ecosystem is innovating around constraints, such as architecture choices, open-source diffusion, and engineering pragmatism that can compound quickly when capital is directed with intent and accompanied by policy support,” said Nicholas Yeo, head of China equities at Aberdeen Investments. “We would expect to see more of how companies are turning workarounds into products, which then get adopted and used widely through the ecosystem.”
The key question to ask before investing in China’s AI ecosystem is valuation, “especially after strong rallies in many ‘pure play’ names where profitability and durable earnings may still be several years away”, according to Rumble.
“Infrastructure providers and major platforms are monetising earlier, while many application focused companies are still in investment mode and, in some cases, valuations appear to anticipate cash flows that will take time to materialise,” Rumble added.
Yang picks out China’s tech giants Tencent (HK:0700) and Alibaba (HK:9988) as the biggest potential beneficiaries of China’s accelerating AI shift. “Their strong cloud infrastructure and rapid integration of advanced AI models have reinforced their roles as the foundational enablers of the country’s AI ecosystem,” said Yang.
China’s broader technological leadership
China’s status as the global leader in electric vehicles (EVs) was consolidated last year as domestic manufacturer BYD (HK:01211) overtook Tesla as the world’s largest producer of EVs.
“China is the world’s largest and most competitive [EV] market, with high penetration rates and domestic brands that have scaled rapidly on the back of deep supply chains and fast product iteration,” said Rumble.
It is likewise leading the way in robotics. “With a shrinking working age population, automation is both economic necessity and policy priority” for China, according to Rumble. Again, though, he cautioned that much future potential is already built into valuations of relatively early-stage companies in this space.
“The discipline lies in separating technological progress from sustainable earnings power and being mindful of how much investors are paying for access to these themes,” said Rumble.
How to invest in China during the Year of the Horse
Investors have an array of funds and investment trusts to choose from if they want to invest in China for the Year of the Horse.
Three investment trusts in particular focus on Chinese stocks: Baillie Gifford China Growth (LON:BGCG), Fidelity China Special Situations (LON:FCSS) and JPMorgan China Growth & Income (LON:JCGI). Of these, FCSS achieved the greatest share price return in the year to 16 February, gaining 30.9% compared to BGCG’s 22.1% and JCGI’s 22.7%, according to data from Morningstar via the Association of Investment Companies.
Note that other investment trusts like Invesco Asia Dragon provide exposure to China as well as other related markets.
According to FE fundinfo, the three funds focusing on China that delivered the greatest returns in the year to 16 February were the Invesco ChiNext 50 UCITS ETF (LON:CHNX) (gaining 61.1%), T. Rowe Price China Evolution Equity Fund (which gained 38.2%) and Allianz China A-Shares Equity Fund (which gained 35.0%).
