China: outside the spotlight

As with any investment, your capital is at risk.

In emerging markets today, the beam is bright and narrow. It falls mostly on Taiwan and Korea. This is totally understandable. The AI boom has pulled foundries, memory chips, component providers, advanced packaging and server supply chains into the spotlight. Taiwan and Korea have what investors currently want most: visible demand, earnings upgrades and the clearest link to one of the most powerful investment themes in the world

The illumination around these tech-dominated markets makes the rest easier to miss. China currently sits outside of the spotlight. This strikes us as odd. Not least because it is developing a globally competitive AI stack of its own, albeit with different constraints (advanced chips) and different opportunities (power). But more broadly, China also boasts some of the same ingredients that investors crave elsewhere: engineering talent, world-leading manufacturing, leadership in globally relevant industries (batteries for example), and deep consumer platforms. In several industries, Chinese companies are not trying to catch up but are already setting the pace¹.

Our Investment Risk Team recently investigated correlations within emerging markets. It’s striking how many of your Chinese holdings are among those least correlated with the Korean and Taiwanese semiconductor majors, and the Global AI theme more broadly. In the context of a diversified portfolio, this is also making China increasingly interesting to us.

I discussed the risks of focusing too much on that ‘bright and narrow beam’ with one of China’s leading LLMs, Deepseek. The chatbot might be biased, of course, but it summarised the discussion like this: 失之交臂. The figurative translation is: “to let a golden opportunity slip through one’s fingers”. The meaning and deeper implication might be framed as: “It isn’t that the opportunity was hidden or unreachable; it was right there, at arm’s length, and yet slipped away through inattention or misjudgment.”

This isn’t a perfect summary of our position, but it captures it reasonably well. We think China currently presents a range of strong growth opportunities, and current valuations imply that confidence is still scarce. That applies to investor confidence, but we would extend it to domestic consumers as well.

One of our third-party research providers recently published a thought-provoking note on Chinese consumer confidence. It argued that the negative wealth effect from the weak property market in China is diminishing. This is about base numbers. A 10 percent decline in property prices today implies a wealth loss of CN¥25tn, compared to nearly CN¥40tn five years ago. The note goes on to suggest that together, the stock market and real economy should have a combined positive wealth effect of roughly CN¥27tn this year, overwhelming the CN¥25tn estimated loss from the housing market.

Why is this important? Essentially, it implies that the property market has already fallen far enough that each further decline destroys less wealth than it did five years ago. It means that, for the first time since 2021, this year could see a positive net wealth effect in China. Of course there are lots of assumptions baked into these numbers, but it’s an aspect that’s missed by most commentary on Chinese consumers, which tends to focus on month-to-month retail sales growth. The important point is not the precise numbers though, rather that if this is true (or close to the truth) then it may well be hugely supportive for household consumption.

The first order impact of this increased spending would be positive for the consumer companies in your portfolio. We are already seeing strong signs of life. Appliance and electronics trade-in programmes have already generated huge sales this year. Household electric appliances and communication devices have seen strong growth rates.

Take Midea as an example. The market still prices it as a low-multiple Chinese appliance maker at around 12x earnings, but the strength in the core business has also helped spur its industrial business. This is now over a quarter of revenue and growing at around 20 percent a year. The market doesn’t give it credit for that industrial division, which encompasses its Kuka robotics and factory automation businesses, data centre cooling and commercial heat pumps, and a broader industrial components business that supplies everything from electric vehicles to humanoid robots. Overall, investors are getting a diversified business, delivering free cash flow compounding at 10 percent a year, while paying out a further 4 percent annually in dividends. That is rare and attractive, as well as having little direct correlation with whether the US AI capex tide turns.

The second order impact of consumption growth might be more important than the first: rising consumer spending makes the whole market more attractive to foreign investors. As US IPO fever-pitch hits, the push for diversification may well intensify. China has a real chance to shine. Encouraging more household savings into equities, improving capital-market depth and supporting private enterprise would all help China reduce reliance on property as the main store of wealth. With US$23tn of excess household savings sitting in low-returning bank deposits, even a small switch into equities would have a significant impact on a domestic equity market around half of that size. It would also give global investors an even clearer reason to look again.

Let us be clear, risks remain. Property may stay weak. Policy may remain too cautious. Geopolitics can interrupt good investment cases. Overcapacity can turn good industries into poor shareholder returns. Cheap markets can stay cheap without upgrades or a lower risk premium. Investing in China is therefore not a broad call. It is a case for looking carefully and not keeping that real potential ‘at arm’s length’. But on careful inspection, we are now finding more opportunities than we have for several years. This matters both for return-seeking opportunities and portfolio diversification. We won’t wait for the spotlight to move.

1. Information technology accounts for around 70 percent of Korea and 90 percent of Taiwan equity indices, but only around 20 percent of MSCI China All Shares. China has more breadth. We would argue that like Taiwan and Korea, it also has world-class technology companies, but they are not the same companies that investors currently associate with the AI hardware boom. 

Risk factors 

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in June 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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