However, these funds came bounding back in 2024, with IA China becoming the fifth-best performing Investment Association sector of the year as returns leapt 13.8%.

This strong performance contrasted with prior years, with eleven funds making total returns upwards of 20%, and only two portfolios – Guinness China A Share and Fidelity China – reporting losses.

See also: Is China at a turning point, or will it disappoint yet again?

It begs the question: should investors be re-considering an allocation to China funds within their portfolios? Those with a sturdy risk appetite should certainly be eyeing up the sector, according to Chelsea Financial Services managing director Darius McDermott, who said China has some of the highest return potential on the market this year.

Bold stimulus plans from the People’s Bank of China (PBoC) are what propelled Chinese equities in 2024, and further measures to revive China’s economy and stabilise its property market are expected in the months ahead. These new stimulus announcements could again push China funds to new heights, according to McDermott.

See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package

Yet the readjustment last year was sharp and fast, making it easy to miss. The IA China sector shot up 20.7% in the week following the PBoC’s announcement in September before levelling out, where it has stayed ever since. Investors who want to bank on another round of stimulus plans stimulating the market should act fast, or risk being left behind, McDermott warned.

“It shot up in a very short period of time, so if you’re waiting for another stimulus announcement, be ready to pull the trigger, because it won’t wait for you,” he added.

Tariffs could extinguish hopes for growth

There is one overbearing factor that could turn China’s outlook from hopeful to grim – tariffs. Trump’s proposed 60% tariff on Chinese imports to the US could offset the positive sentiment injected by upcoming stimulus announcements and plunge China funds’ returns back into the red, according to McDermott.

See also: How will Trump’s tariffs impact markets?

Until further details are shared on the extent of tariffs and stimulus plans, the potential outcomes for China funds remains stark. Investors stand to make some high returns from the Chinese market in 2025, but could equally lose just as much, according to McDermott.

“You can’t have a low risk way of investing in China. If you’re investing in China, you are seeking superior returns, and for that you must expect superior risk,” he added.

“If Chinese equities went up 40% this year I wouldn’t be surprised – but equally if they went down 40% I also wouldn’t be surprised. When you’ve got such a wide spread of potential outcomes, it really shows the inherent volatility in that market.

See also: China’s AI breakthrough causes US tech stock tumble

“There is more stimulus to come after the tariff position is understood, and that could be a catalyst as it was last year for a sharp upward tick. But the lingering threat of course is China’s interest in Taiwan – that question mark refuses to go away.

“And with the Communist Party of China becoming more authoritarian under Xi Jinping, all those question marks still have people feeling uncomfortable about investing in the region.”

Despite investors’ hesitancy to reallocate to China, Ben Yearsley, director of Shore Financial Planning, said China funds are “cheap and fascinating”. Share prices in the region have dropped sizably amid the downturn of the past few years, presenting an appealing entry point for those with the right risk tolerance.

See also: A World Of Higher Inflation 2025

Yearsley is continuing to buy funds such as Fidelity China Special Situations and Matthews China Discovery, which are up 18.1% and 16.6% respectively over the past year.

The former is trading at a 12.7% discount to its net asset value (NAV), which could provide investors with a slight buffer should returns tumble.

As the Chinese zodiac turns to the Year of the Snake, investors are left wondering what the new year holds for its equity markets.

Traditionally associated with wisdom, strategy, and adaptability, the snake offers a fitting metaphor for navigating the twists and turns of China’s economic landscape and geopolitical environment.

Trade war with Trump

China’s growth paradigm since late 2020 has been a two-speed model – a very strong export machine with poor domestic consumer demand. Its trade surplus hit a record high of about $1trn in 2024, while its 10-year government bond yield hit a record low of 1.6% with its economy trapped in a deflationary cycle with weak consumer confidence.

President Trump’s re-election and the prospect of a new trade war will threaten the sustainability of export growth, as exports to the US account for about 3% of China’s GDP.

How the forthcoming trade war is fought matters a great deal. A modest and gradual increase in tariffs is unlikely to derail export growth, but a strong and swift tariff increase scenario would put considerable pressure on economic growth in the foreseeable future.

The range of outcomes is very wide, and the path to the end game is highly uncertain. Investors need to stay agile and prepared for volatility and opportunities.

Bolder fiscal stimulus

The narrative changed significantly after the critical policy pivot in the last week of September 2024. While this was seen as an inflection point in stimulus policy, the follow-through so far has fallen short of investors’ expectations.

A crucial reason for the lack of a big bazooka so far is that policymakers don’t yet know which one to bring out. The size of the bazooka is dependent on the severity of the trade war.

As Trump prepares to fire his initial shots after being formally sworn in, they will assess and adjust the size of the stimulus accordingly, and the National People’s Congress in March will offer a timely occasion for them to do so.

Much bolder fiscal stimulus focusing on boosting domestic consumption would improve consumer confidence and rekindle the animal spirits.

Capital market reform

One policy directive that investors have not paid enough attention to are Beijing’s plans to “invigorate the capital market” by “using the capital market as a lever (to boost economic recovery)”. A better and more efficient capital market serves to achieve two important goals. 

Chinese households firstly need a new avenue to store, invest, and grow wealth. This role was previously fulfilled by the property market.

House ownership is high, and 60% of household assets sit in property. The best days of the property cycle are behind us, and the negative wealth effect of the property downturn is hurting consumers’ willingness to spend.

A deep, efficient and transparent domestic capital market with a strong pool of high-quality public companies that can deliver good long-term shareholder return is a very convincing and much needed alternative.

Another important problem that needs fixing is the state-owned banks’ ineffective and wasteful lending driven model, which is no longer fit for purpose in a technology and innovation driven stage of growth.

The bank lending model works fine when growth is driven by funding manufacturers with tangible plants and equipment. However, when the new sources of growth are mostly in innovative industries with more intellectual property and intangible assets, a deep capital market with sophisticated risk takers from venture capital, private credit and equity, and patient long-term institutional investors plays a much more important role in allocating capital efficiently.

China’s efforts to reform its capital market would improve corporate governance, raise the quality of listed companies, and in turn, boost shareholder return.

Stimulus policy is more important than trade war

Trump’s recent re-election brings the trade war narrative back to the forefront of many investors’ minds. The Year of the Snake is going to be a tug-of-war between domestic policy stimulus and the trade war, which will bring plenty of good investment opportunities that may come with some manageable volatility.

How policymakers will apply  stimulus policy tools to boost consumer confidence to fight deflationary pressures, and respond to the trade war and its impact on export growth is the most critical driver of equity market returns in China.

The policy pivot at the end of September 2024 was a critical turning point. It signalled that at long last, the policymakers acknowledged the long-term damage of the deflationary pressure and poor consumer confidence and signalled their willingness to fight.

In essence, this put a floor on economic growth and asset prices. What remains to be seen is whether the policy goal is to merely arrest the downturn or to get the economic engine humming again.

A trade war would undoubtedly put pressure on external demand growth, but it could also serve as a much-needed final kick that policymakers need for unorthodox and bolder reflationary stimulus policies, which is a more important driver for asset prices in China.

China’s latest Ministry of Finance press conference may have lacked specific measures to directly support consumption, but the unexpectedly large size of China’s fiscal stimulus package has done a great deal to boost investor confidence in the struggling Chinese economy.

The measures announced, including new tools for China’s central bank to help companies buy back shares using refinanced bank loans, prompted a rush into Chinese equities in September. Stocks on the Shanghai exchange rose, with turnover reaching $101bn.

Initially, the exchange experienced glitches in order processing and delays, before stocks in China finally recorded their best day in 16 years on the last day of September.

See also: Is China at a turning point, or will it disappoint yet again?

Following China’s latest interest rate cuts, we now see the world’s second-largest economy potentially taking a more targeted route to economic revival. The country’s renewed efforts are designed to help securities firms, insurers and other institutional investors raise funds by clearing their balance sheets.

We view the immediate market reaction to these moves as a strong indicator of not only investors’ appetite for value, but also a sense of FOMO (fear of missing out) that we believe could continue to fuel the market rally.

Short covering may also have played a role in the recent rally. Traders who have suffered heavy losses may be unwilling or unable to bet against the government again anytime soon, which could lend stability to the current rally.

See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package

However, with weak domestic consumption, a troubled property sector and other structural problems still weighing on the Chinese economy, quick fixes seem unrealistic. There is a long way to go, still.

That said, the signal that these measures are sending to the market is the strongest it has been in at least three years and has laid the foundation for a better perception of the Chinese equity market.

External geopolitical risks has created uncertainty, especially in the run-up to the US presidential elections. Talk of a possible trade war between the US and China also continues.

See also: Macro matters: Why managers are buying China again

Yet investors may take some comfort from the fact that, as in recent decades, the US is still likely to have a divided Congress – which may limit far-reaching changes to legislation.

All of this is not to say that we are not encouraged by the Chinese leadership’s new determination to stabilise markets. The measures have already pushed emerging market equities to highs not seen in more than two years.

The Brazilian and South Korean stock markets, both of which hit their year-to-date lows in August, have since rebounded. The same is true for the Mexican market, where equities rebounded after a dip in early September.

See also: Fairview’s Yearsley: China becomes ‘story of September’

However, this may be a reminder that there are long-term global market opportunities.

While the market focus this week may be on China, and while the long-term case for an allocation to Chinese equities has likely improved with the recent announcements, we cannot overstate the importance of diversification.

Asia and emerging Asia is becoming increasingly bifurcated, a trend we believe will continue. With the global interest rate cycle, the US election and geopolitical fragmentation all adding layers of complexity, we believe that investors should prioritise flexibility and agility in this economic climate.

See also: Fidelity’s Dale Nicholls remains ‘cautiously optimistic’ on China

We see China’s concerted comeback effort in global markets as a positive signal for the country and the broader region. Long-term trends such as technology leadership, attractive valuations and the expansion of production capacity offer ample opportunities for investors along the risk spectrum.

The road ahead will certainly not be smooth, but the biggest risk for investors could indeed be to ignore Asian markets in their allocation decisions.

The survey also recorded the biggest jump in growth expectations since May 2020.

Backing up the improved sentiment for global growth, managers increased equity allocations by their largest amount in over four years, while there was a record monthly drop in bond allocations.

See also: Will the European Central Bank cut interest rates faster than expected?

The BofA Global Research report also witnessed a rotation into EM stocks, driven by China’s stimulus package, as well as discretionary and industrials. Consumer staples and utilities were on the other end of the trade.

Meanwhile, investors say the ‘biggest winners’ from China’s stimulus package are likely to be  EM stocks and commodities, while it will negatively impact government bonds and Japan stocks.

Overall, 76% of respondents expect a soft landing for the US economy, 14% believe there will be a ‘no landing’ scenario, while 8% fear a hard landing.

Meanwhile, investors are forecasting 160bps of interest rate cuts over the next 12 months, while 85% expect the yield curve to steepen.