As the Chinese New Year arrives on January 29, 2025, it marks the end of the Year of the Dragon and the beginning of the Year of the Snake. While powerful and optimistic energies were meant to characterise the Dragon’s year, the Snake is meant to signal a period of transformation and reinvention - literally shedding old skins to make way for change.
Will this Chinese New Year, therefore, signify a turnaround in fortune for Chinese investments?
If so, what key factors should investors consider in the Year of the Snake that will help inform their investment decisions?
Key Takeaways:
- China’s economic activity appears to be improving, but challenges persist.
- Supportive government policy will be central to improving consumer confidence
- The active manager could do well in the Year of the Snake, seizing opportunities when they arise and navigating potentially heightened volatility.
China’s previous performance
When COVID restrictions were finally lifted in China, investor optimism was high. However, what followed fell well short of expectations. Economic performance was, at best, underwhelming. The markets had largely anticipated that Chinese consumers would go out in their droves and spend the money they saved during lockdowns - yet, this bounce back failed to materialise in a meaningful way. In fact, the Chinese consumer never “revenge spent” like its Western counterpart, while well documented issues in the property sectors resulted in further declines.
However, a turning point did eventually emerge in late 2024 and China's GDP achieved 5.0% growth, meeting its annual target. Moreover, after three consecutive years of negative equity market returns, Chinese equities finally turned positive in 2024. The turnaround was primarily driven by two key policy announcements, in April and September, signalling a more supportive stance from the Chinese government.
Looking ahead
The government’s supportive policy approach appears set to continue too. By building on the policy momentum of 2024, there is therefore reason for optimism in 2025. Furthermore, global investor enthusiasm for sectors like AI, computer chips, and semiconductors will persist, providing yet more reason to be positive about China’s future performance.
The country’s path to reinvention will not be without obstacles, though. A significant challenge lies in the ongoing tensions with the US, which could arguably worsen with Trump returning to the White House. Despite friendlier-than-expected rhetoric in the media
regarding relations between Xi and Trump, the American president’s potential tariff policy threatens to weigh on economic performance. Plus, until any details on tariffs are confirmed, uncertainty will be injected into the market, dampening investor confidence and amplifying the chance of heightened volatility.
Another concern is that markets may have already priced in additional policy support from the Chinese government in the future. If market expectations of valuation levels are to be met (or exceeded), China’s policymakers must deliver on those policies and ensure they are powerful enough to make a difference.
The beleaguered property market, for instance, requires substantial intervention to regain stability, while structural reforms are essential to address long-term issues such as ageing demographics, high debt levels, and those aforementioned geopolitical tensions. Without decisive action, these challenges could stifle China’s growth potential. So, it is crucial for China’s economic priority in 2025 to focus on restoring consumer confidence, boosting domestic demand significantly, through policies which improve people’s livelihoods and drive consumption.
The active manager in the Year of the Snake
Amid these complexities, investable opportunities remain. With US equities appearing increasingly expensive, China's valuations could become more attractive to global investors. Furthermore, with an increasing emphasis on shareholder returns in the region, 2025 could be a key year for China’s economic recovery.
Despite this, sentiment towards China remains fragile, so the Year of the Snake will give active managers a chance to shine. The key for outperformance by active managers will be successfully selecting investable opportunities amidst all the background noise. Doing so will mean conducting bottom-up stock selection to find companies with robust fundamentals, strong leadership and shareholder-friendly practices such as buybacks.
At Square Mile, we are focused on identifying the skilled managers who are well-positioned to find these opportunities. Our research continues to be at the heart of everything we do, centred on outcomes, so that our investment team can pick the right strategies and managers capable of delivering upon their investment objectives.
That’s because, while the Year of the Snake is a time meant for transformation, reinvention may not come easily for China. The country faces challenges, but with the right strategic insights and skilled active management, it is possible to navigate through the difficulties in the market, to generate positive returns.
Finally, all that remains for us to say is Gong hei fat choy" (恭喜发财), which means Wishing you happiness and prosperity.
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