Fidelity: Multiple factors support China's "slow bull" market, with different themes and industries bringing diversified opportunities

According to the Zhitong Finance APP, Jessie Meng, Director of Investments at Fidelity China, and Christopher Wong, Client Portfolio Strategist, recently published an article analyzing the Chinese market, dynamics, and investment thinking. The article points out that the rebound in the Chinese stock market is mainly benefited by the government's policy shift, the continuous development of artificial intelligence (AI), and ample liquidity. In the Chinese market, there are still abundant opportunities in new consumption, electric vehicles, technological innovation, and robotic automation. Overall, China is shifting from pursuing high-speed GDP growth to focusing on high-quality development, and is introducing policies to encourage corporate dividends and increase shareholder returns, thereby supporting a "slow bull" market and fostering a long-term stable growth market outlook.

Factors Driving the Rebound in the Chinese Market

The rebound in the Chinese stock market is mainly benefited by the government's policy shift, the continuous development of artificial intelligence (AI) ("DeepSeek's emergence"), and ample liquidity. While investors are busy analyzing China's economic data to assess its fundamentals, the stock market has rebounded from its September lows, with some small and medium-sized stocks and innovative technology companies performing exceptionally well, and the Hang Seng Index has risen about 30% year-to-date.

The Chinese government has adjusted its policy direction, focusing on supporting high-quality development, demonstrating its determination to drive the economy out of deflation. Supply-side reforms include the "anti-involution" initiative, aimed at taking measures to reduce production capacity and curb disorderly price competition. Stimulus measures to boost demand include issuing household subsidies to stimulate the consumer goods industry and other service sectors.

China's DeepSeek has emerged, launching low-cost AI models that alleviate investors' concerns about whether China can compete with global companies in AI or other technology-related fields after decoupling from the United States. Alibaba's launch of new AI technology, along with other developments in biotechnology and robotic automation, is also one of the factors driving the rebound in the Chinese stock market.

Additionally, the rebound in the Chinese stock market is also due to ample liquidity, with institutional investors becoming increasingly active, becoming a major source of funds flowing into the domestic A-share market. Since the second half of 2024, insurance funds have also increased their holdings in A-shares and overall stocks in hopes of improving investment returns.

Significant Gap Between Offshore Market Rebound and Domestic Market Lag

The overall upward trend in the Chinese market is led by H-shares (i.e., stocks of mainland Chinese companies listed in Hong Kong), with one key driving factor being the southbound funds from the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. The Stock Connect program allows eligible mainland Chinese investors to purchase qualified H-shares. Although most H-shares are still held by non-Chinese investors, a slight increase in demand has successfully driven the rebound in this offshore market.

However, since the second and third quarters of this year, the domestic A-share market has significantly caught up, mainly benefiting from consumption stimulus policies and the significant impact of the "anti-involution" initiative on domestic companies. In addition to these positive developments, the fundamentals are also improving. The first-quarter performance of MSCI China index constituent companies is positive, marking the first time in over four years that it has overall met market expectations. Although the performance of A-share companies still lags, the gap between earnings performance and expectations has narrowed.

Meanwhile, retail investors have not yet entered the stock market on a large scale. In a low-interest environment, the attractiveness of renewing deposits is decreasing, prompting households to seek higher-return assets With the wealth effect brought by stocks strengthening, households may shift their "excess savings" to the domestic stock market, which is expected to provide additional momentum for the stock market. In this regard, the bank believes that the A-share market will continue to catch up with the offshore market.

Diverse Opportunities from Different Themes and Industries

In terms of investment themes, the bank's fund managers are focusing on AI, robotics, and automation in the manufacturing sector, believing that these areas harbor growth opportunities.

Dividend stocks have also performed well, with H-shares outperforming A-shares due to the more attractive dividend yield of H-shares, which is approximately 7% at the index level, compared to 4.5% for A-shares. A significant amount of insurance funds has flowed into the stock market, especially in bank stocks listed in the offshore market with prices lower than those of onshore stocks.

In the new consumption sector, the younger generation seeking unique experiences is flocking to entertainment culture stores like Pop Mart that sell trendy toys. Today, new consumption is no longer limited to traditional goods such as liquor or spirits. Although some stock valuations may seem high, related fields continue to present investment opportunities. Other industries worth noting include electric vehicles, innovative technology, and the industrial sector