Chinese equities have been underperforming over the past 10 years, with the Shanghai Stock Exchange Composite up 43% over the past decade, while competitors such as the US surged 278.7%.
However, recent months seem to have marked a bit of a turnaround, with the Shanghai Stock Exchange Composite up 27.5% over the past year, just barely ahead of the wider MSCI ACWI.
For the team at Stonehage Fleming Global Best Ideas Equity, this provides an opportunity to start “kicking the tyres” on Chinese equities in search of some new opportunities.
This marks a sharp contrast for the team, who noted that China has been a challenging place to invest in recent years as the pandemic, youth unemployment and state interference, served as major headwinds.
Carolyn Bell, new lead manager on the Stonehage Fleming Global Best Ideas Equity fund, said: “We tend to invest in mature capital markets; we want stability, we want good governance. That has been an issue in China.
“But I think we have to revisit it, because China’s been ignored and savagely discounted for about six or seven years,” she told Portfolio Adviser.
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Part of this desire to revisit the market comes from more supportive macro signals, such as valuation and how it stacks up to areas like the US.
The increasingly antagonistic relationship between China and the US means the region is becoming a more serious competitor and less of a contributor to US margins, she explained.
This comes as the Chinese equity market has become far more “outward facing” and is producing much stronger and better-known intellectual properties. For example, he pointed to Chinese car manufacturer Jaecoo, which was one of the top-selling cars in the UK in March, that styles itself as a cheaper alternative to Range Rovers, she explained.
“China’s no longer just a producer of cheaper fast followers; the quality of what they’re producing has gone right up.”
“The quality was not there in China for years; it is now,” the Stonehage Fleming manager noted.
Because of this, as well as the tense geopolitics, places like Europe may increasingly turn to China for other products beyond just cheap electric vehicles, she explained.
“It’s difficult to keep a lid on the S&P 500, but last year ex-US outperformed it, and China was part of that.” Indeed, according to FE fundinfo data, the Shanghai Composite was up 15.2%, while the S&P 500 was up just 8% in 2025.
She added the valuation difference between the US and China now looks more interesting. According to Barclays data, the MSCI China index currently trades at a historic cyclically adjusted price-to-earnings (CAPE ratio) of roughly 15x, versus the US at 40x.
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In particular, she argued the “market is underappreciating that China has become a bit of a tech powerhouse”.
China is not generally a tech-dominated region, with an 11.4% allocation to information technology in the MSCI China, compared with nearly 25% in consumer stocks.
However, the region looks increasingly well positioned and looks “as ambitious as the US, which is not something everywhere can say”.
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Bell highlighted the number of tech professionals from China who have returned to their domestic market following hostile policies from the US.
“China now has more tech manpower, and while they don’t have the GPU’s that America has, we’re arguably in a new phase where CPUS are now in demand, and China has plenty of those,” Bell explained.
“On the AI side, I suspect they’re increasingly world-class.”
As a result, there are “several tech stocks that we’ve never owned that we’re now doing a bit of work on to see if there is any we can choose to buy,” she explained.
That said, she noted that China still has several persistent issues that have led the team to hesitate to commit extra capital.
Government intervention remains a serious issue, she conceded, with the government able to meddle a significant amount, often in “odd ways”.
“You can choose to not engage because of that, or you can choose to manage your exposure.”
“If the businesses get cheap enough, you’ve arguably priced in some of that meddling already,” she concluded.
The Stonehage Fleming Global Best Ideas Equity fund has delivered a 253.4% return for investors since inception in 2013. This represents a relative underperformance compared with the MSCI ACWI, although it was still better than the average peer in the IA Global sector.
