Will China prosper during the Year of the Snake, or will Trump's tariffs inflict damage?
It's time to ring in the Year of the Snake on January 29, kicking off the Chinese lunar new year. This coming year will be quite the challenge following the successful Year of the Dragon, as investors anticipate a rollercoaster ride.
The main index of Chinese stocks, the CSI 300, experienced a 18.3% gain in 2024 after a 9.1% fall in the previous year, providing a bit of reason to celebrate. But buckle up, because the Year of the Snake promises a year full of uncertainties that may take a big bite out of investors' returns.
Trade tensions, one such uncertainty, take the spotlight as Donald Trump ponders over imposing a 10% tariff on imports of Chinese-made goods starting February 1. In traditional Chinese culture, the Snake embodies introspection, intelligence, and adaptability, all qualities China will need to channel to navigate whatever this year brings – whether it's handling the geopolitical landscape, recovering from its property crisis, or emerging victorious in the AI race with DeepSeek.
We checked in with investment managers to find out their perspectives on China's prospects for the Year of the Snake.
Has China Squared Away Its Old Problems?
Abbas Barkhordar, manager of the Schroder AsiaPacific Fund, remains hopeful. He states, "Consumer confidence is still at a low point due to a weak housing market and uncertain income prospects. Trade and investment restrictions have impacted certain industries, causing GDP growth to slow, inflation to approach zero, and company earnings to deteriorate. Yet, the undemanding valuations of the Chinese and Hong Kong markets suggest there's room for a positive surprise if policies improve."
Ian Hargreaves, co-manager of Invesco Asia Trust, agrees. He states, "The large-scale stimulus package announced in 2024 boosted the Chinese stock market immediately and indicates renewed determination from officials to support the economy and stabilize asset prices. Restoring market confidence is back on policymakers' agenda, which could help improve fundamentals. However, we'll have to wait and see how effective these stimulus measures prove once they're implemented."
Will McIntosh Whyte, multi-asset fund manager at Rathbones Asset Management, adds, "The property crisis casts a long shadow over China's economy. Assets that were once purchased at inflated prices are now sitting vacant or underwater, with estimations suggesting up to 60% of Chinese household savings are tied up in property." He continues, "Despite recent positive economic data, like a bounce in exports, I remain cautious about China's turbulent economic landscape."
Will China Slither to Success in the Year of the Snake?
Despite the unfavorable economic atmosphere, some investment experts are optimistic about China's prospects in the Year of the Snake. Rebecca Jiang, portfolio manager of JPMorgan China Growth & Income, asserts, "We remain optimistic about the Chinese market. Valuations remain attractive due to recent rebound, and corporate reforms aimed at improving capital allocation and shareholder returns have been met with enthusiasm by investors."
Qian Zhang, investment specialist at Baillie Gifford China Growth, shares her perspective: "Our on-the-ground research shows that Chinese companies are increasingly competitive on a global scale, transforming from producers of cheap, low-quality goods to leaders in essential industries. Examples include Midea, CATL, BYD, and Pinduoduo."
However, Bola Onifade, portfolio manager at Nutmeg, raises red flags: "While valuations are attractive to bargain hunters, especially after a rebound in performance last year, challenges in China's extensive economy can represent a 'valuation trap' to investors. China remains in a tough spot as it attempts to shift its economy from investment-led to consumption-led. Consumer confidence and household borrowing remain low, and consumer wealth is concentrated in real estate, leading to vulnerabilities in the property sector."
Rathbones Asset Management's Will McIntosh Whyte also shares concerns: "Tackling the property overhang is no quick fix, and this likely remains a drag on the economy for some time. Having said that, Chinese equity valuations arguably account for much of these concerns, and any form of positive news, such as more stimulus or an improvement in consumer sentiment, could result in a significant rally for an underappreciated asset class."
What Are the Biggest Risks to Your Investment Outlook?
Ian Hargreaves, co-manager of Invesco Asia Trust, emphasizes that "Tariffs are a concern, but Donald Trump is known for being transactional, and the tariff agenda appears to focus on US reindustrialization – incentivizing foreign companies, including Chinese companies, to move production to America. If the market feels that there is a floor under US-China relations, then that could be supportive to sentiment."
Abbas Barkhordar, manager of Schroder AsiaPacific Fund, points out, "Although there are potential headwinds from higher tariffs and US interest rates, it should be remembered that the first Trump presidency coincided with positive returns for Asian stocks, as higher US growth benefited the region's exporters, despite more restrictive trade policies. There's a great deal of uncertainty about what the actual policies of the Trump administration will be in his second term, and the impact that these will have on Asia."
How Much Should You Allocate to China?
Given China's status as an emerging market, it's generally advisable for investors to maintain a limited exposure to China within a well-diversified portfolio. Tom Stevenson, investment director at Fidelity, recommends: "A maximum of 5% of your money in China would be a rough yardstick. You could access China through an emerging market investment fund, an Asia fund, or a global equity fund. For example, the Dodge & Cox Worldwide Global Stock fund has 3.9% invested in Chinese stocks."
Stay tuned as we continue to monitor the Year of the Snake and its impact on the Chinese economy and stock market!
In the Year of the Snake, investors are braced for a year filled with uncertainties, including trade tensions and potential tariffs on Chinese goods. Despite the challenges, optimistic investment managers like Abbas Barkhordar and Ian Hargreaves believe China's large-scale stimulus packages and renewed government support could restore market confidence and improve financial fundamentals.
However, concerns about China's property crisis, economic turbulence, and the shift from an investment-led to a consumption-led economy persist among experts like Will McIntosh Whyte and Bola Onifade. They argue that China's extended economic landscape and weak consumer confidence might result in vulnerabilities, particularly in the property sector.
As the Year of the Snake unfolds, some see promising opportunities for the Chinese market, debt-to-equity reforms, and corporate transformations making Chinese companies more competitive in international markets. Rebecca Jiang and Qian Zhang highlight top performers like Midea, CATL, BYD, and Pinduoduo, expressing optimism for the sector.
Investors contemplating future financial decisions are advised to maintain a diversified portfolio and allocate limited exposure to China. Tom Stevenson advocates for a maximum of 5% investment in China, which can be accessed through various global equity funds.
Despite the risks, some experts remain hopeful for positive surprises that could result from improved policies and stimulus measures. As market observers continue to monitor the Year of the Snake, investors should remain cautious and adaptable, drawing inspiration from the Chinese Snake's symbolic qualities in traditional culture: introspection, intelligence, and adaptability.
