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While continued weakness in the property market, a soft jobs market and weak income growth weighs heavily on consumer confidence in China, investors are beginning to focus on the increasing government investment in the technology industry, which could transform the Chinese economy. Recent government policies have supported semiconductors and electric vehicle technology, while Chinese president Xi Jinping’s meeting with domestic technology leaders in February signalled the increasing focus on the industry.
One of the biggest developments came in January, when Chinese artificial intelligence (AI) platform DeepSeek released its latest model, which significantly exceeded expectations. The company is now viewed as a serious potential rival to ChatGPT, given its competitive quality and lower costs—a realisation that was immediately reflected in the valuations of AI-related stocks in the US market.
Chinese companies have previously proven their ability to monetise social media and China could become a leader in AI. Investors are now beginning to believe that a rapidly growing technology sector could create jobs, restart the investment cycle in China and become a new engine of economic growth.
At the same time, investors have so far not been deterred by the continued uncertainty around tariffs from the US. While 20% tariffs could still be implemented, this would be significantly lower than the level Trump threatened on the campaign trail. Importantly, tariffs will have less of an economic impact on China than during Trump’s first term because China has diverted exports to other markets over the past eight years and its share of US imports has steadily declined.
Over the past few years, a sluggish economy, an underperforming stock market and negative investor sentiment made limiting exposure to China an easy choice for many global investors. However, sustained equity outperformance over the past year, attractive valuations and a stabilising macro backdrop may now prompt longer-term investors to consider increasing their China allocations, which could provide a tailwind to the equity market—particularly given that the market remains attractively valued despite recent strong returns, with the MSCI China index well below its 2020 peak.
At the corporate level, the portfolio managers of JCGI have seen meaningful improvements in capital discipline from the management teams of Chinese companies over the past few years, as well as a realisation that they need to focus on shareholder returns. Improving corporate governance often leads to stronger balance sheets and the ability to pay higher dividends. Which is good news for JCGI’s portfolio managers, who are finding many companies with attractive growth and income potential across many industries. For example, JCGI has been building a position in internet giant Alibaba, where the combination of a cash dividend and share buyback programme have resulted in a yield for the stock in the high single digits.
JCGI remains well exposed to newer sectors of China’s economy and the private sector, in addition to growth and quality companies. The portfolio is most overweight the industrials and technology sectors, where China is establishing leading positions in automation, manufacturing capacity, electric vehicles and batteries. The portfolio is now complementing these positions with more internet exposure and AI beneficiaries, such as Xiaomi. JCGI also continues to have strong consumer exposure based on a favourable long-term view of rising incomes and consumption. The portfolio managers have been taking some profits in defensive positions that have performed well, such as China Resources Gas in the utilities sector, to fund some of the new positions.
While JCGI remains underweight financials, particularly the banking sector where fundamentals are still challenged, it has a key position in the higher-quality China Merchants Bank. However, limited exposure to the banking sector has been a headwind for the portfolio in recent years. Investors have been treating banks like bond proxies, due to their stable dividend yields, and they generally outperformed as rates fell and local insurance companies came under pressure to find high headline yields for their investment portfolios.
The portfolio has faced a few additional style headwinds over the past three years. Value and cyclical stocks have outperformed while the growth stocks favoured by JCGI have de-rated. The portfolio managers have made some adjustments to reinforce risk control and look for idiosyncratic growth opportunities. They have also enhanced their investment approach by leveraging insights from the China income team to help manage overall exposure to value and yield.
While the global macro environment remains uncertain, the signs of stabilisation in the Chinese economy and increasingly positive sentiment around the Chinese technology sector maybe contributing to the recent outperformance of the domestic equity market. JCGI’s positioning reflects this improving environment, with over 20% of the portfolio invested in China’s large domestic A share market—a position enabled by J.P. Morgan Asset Management’s local market presence. The portfolio is also now 10% geared, its highest level, which is one of the clearest signals of the team’s positive view on the Chinese equity market.
The companies mentioned are for illustrative purposes only and should not be taken as a recommendation to buy or sell. The portfolio is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are subject to change at the discretion of the investment manager without notice.
Investment objective
The Company aims to provide long-term capital growth from investment in ’Greater China’ companies which are quoted on the stock exchanges of Hong Kong, China and Taiwan or which derive a substantial part of their revenues or profits from these territories. The Company makes quarterly distributions, which are announced to shareholders for the next four quarters at the beginning of each financial year. On aggregate, the intention is to pay dividends totaling at least 4% of the Company NAV on the last business day of the preceding financial year. The Company has the ability to use borrowing to gear the portfolio up to a maximum level of 20% of shareholders funds. Gearing may magnify gains or losses experienced by the Company.
Risk profile
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