China’s resurgence means investors are scrambling to return

The last five years have not been kind to investors in China. You might have assumed, at the beginning of 2021, that the country which had been first into Covid would be the first to bounce back from the pandemic. You would have been wrong. And if your investments had reflected that judgement, you would have missed out financially too.

A £100 investment in the MSCI China index five years ago is worth £70 today, even after a strong recovery in 2024 and 2025. The same amount invested in the S&P 500 has risen to £180. A more than 100% outperformance in half a decade. No wonder China was tagged ‘uninvestable’.

The three years from 2021 to 2023 were painful for investors. Faced with unhelpful fiscal, monetary and regulatory policy, a dire property market, traumatised consumers and deflation, overseas investors voted with their feet. The market lost 60% of its value. More than $6trn was wiped off the value of Chinese and Hong Kong-listed shares.

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The past two years have seen a dramatic reversal in sentiment. After a 16% gain in 2024, Chinese shares rose by nearly 30% last year. What changed? And will the rally continue through 2026? Should investors saddle up for the Year of the Horse, which runs from next Tuesday?

As ever in investment, no-one rang a bell at the bottom. Nothing happened in January 2024 to indicate that the market would change direction. Rather, a sequence of unrelated factors began to coalesce into a positive new narrative. It is not just that China is ‘investable’ again; there is a tentative sense of excitement.

The first inkling that investors might be onto something came in September 2024, when the announcement of a series of stimulus measures indicated a shift towards more positive government intervention in the economy and support for markets. There has been no big bang but rather a combination of monetary, fiscal and regulatory policies that have started to rekindle animal spirits.

When President Xi met with high-profile entrepreneurs in February 2025 it was apparent that the regulatory clampdown on business was over. Making money was once again acceptable.

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That was the backdrop to the DeepSeek moment, when the world woke up to the fact that China had undergone a transformation from the workshop of the world to an innovation dynamo. The gap in artificial intelligence was a lot narrower than we had been led to believe - similar performance at a fraction of the cost. This had not happened by accident. Chinese companies have increased research and development spending at 20% a year for the past 15 years. China has always played a long game.

The scale and comprehensiveness of the country’s technological ecosystem is under-appreciated. China makes two thirds of the world’s electric vehicles. It accounts for almost twice as many science, technology, engineering and maths (STEM) PhDs as the US - 50,000 doctorates a year. The country has a huge pipeline of scientists and engineers, providing a deep pool of human talent to drive the next wave of innovation.

What is most striking about China’s innovation is that it is not just technological. It sets the pace, too, in innovative business models - think Temu’s ground-breaking use of dynamic pricing, lean logistics and consumer insights to reach consumers at scale around the world. Just as Japan outgrew copy-cat products and low-cost manufacturing, 40 years ago, China is combining talent, capital, policy and commercial nous to create an unstoppable economic force.

The next key development in the China sentiment shift over the past two years was, counter-intuitively, President Trump’s ‘liberation day’ tariffs. What looked like a rupture, morphed over six months into an illustration of the fact that the new trade war is a fairer fight than we thought. The meeting in October between Presidents Xi and Trump in Busan saw an agreement to suspend tariffs and re-establish communication. Trade is more predictable for companies and investors alike.

The rally in Chinese shares over the past two years has been easy to navigate. A rising tide has lifted most boats. But a passive approach might not be the best strategy going forward. Rather, two key areas look like offering the best opportunities for stock pickers.

First, sectors that stand to gain from China’s move up the manufacturing value chain. More than half of new cars in China at the end of last year had some sort of advanced driver assistance. AI chips and light detection and ranging technologies are well positioned. The intersection of AI and manufacturing in smart factories and robotics is another area where China can threaten Japan’s dominance. Elsewhere, China is responsible for nearly a third of drug approvals. It accounts for 90% of the entire global supply chain in solar energy.

The second big investment opportunity in China is the next evolution of the country’s consumer economy. The days when Chinese consumers were content with their first TVs, fridges and cars are long gone. Now the focus is on health, convenience and experience. Spending on sportswear runs at a tenth of that in the US. Chinese consumers are embracing domestic brands in areas as diverse as cosmetics and cars. Consumption may only grow in line with overall incomes, but its shape is changing fast.

China is not without risks. After a strong run, investors should expect more volatility. China is as vulnerable as anyone else to an AI stumble. The property market remains fragile. The trade truce with America may be temporary. Demographics are poor.

But that is priced into a stock market that trades at a 40% valuation discount to the US. China is not as obviously cheap as it was after two years of recovery. But it remains unloved and under-appreciated. That’s a good starting point for an investment.

This article was originally published in The Telegraph.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.