Trade May Pause, But Chinese Equities Carry On
Most listed Chinese firms are domestically focused, so it’s business as usual for them. While the impact of a slowdown in exports is real, it’s unevenly distributed around the country, and the hardest-hit areas should be helped by domestic policy efforts.
China’s onshore bourse is extremely diverse across industries, with reasonably wide dispersion and a relatively low concentration in the top five stocks. What’s more, retail investors account for 85% of all trading, according to the Asian Bureau of Finance and Economic Research. We believe retail investors are relatively less exposed to negative tariff sentiment, especially compared to institutional investors, who in contrast dominate transactions in other major exchanges. And since retail-dominated trading is volatile and follows popular trends, it often creates market inefficiencies that active, research-driven investors can exploit to drive excess returns.
Which Sectors Look More Resilient?
To be sure, Chinese A-shares have been volatile in recent years, which tends to come with the territory. But areas of opportunity continually surface, not just above the usual volatility but amid today’s highly tense atmosphere as well.
We think Chinese consumer discretionary and financial stocks continue to offer quality and good value. Conversely, industries with high exposure to US markets will feel more short-term tariff pain. These include home appliance manufacturers, microchip and technology hardware makers—assuming exemptions don’t last—and auto parts, steel and pharmaceutical providers. Yet select firms will be relatively unfazed. Take electric vehicles, a prime example of Chinese manufacturers practically skipping US consumers altogether for growth opportunities elsewhere. Some Chinese firms will also benefit from the country’s retaliatory tariffs on US companies. We could see gains in market share as onshore consumer preferences shift from US products to domestic suppliers.
Investor sentiment beyond China’s borders is improving, too. Global allocations to Chinese stocks worldwide have climbed to 7% as of March 31, 2025, according to Emerging Portfolio Fund Research Global. And since these allocations are well below historical peaks, we think the market could see more inflows.
Chinese Stocks Are a Good Diversifier
While the outlook for global equities remains very cloudy, we think selective investors can find some silver linings. In this environment, we think it’s important to reevaluate regional exposures, especially when technology-led US growth stocks dominate so many portfolios.
Chinese equities offer clear diversification benefits. Return patterns of A-shares have shown low correlation to those of US, Europe, Japan and other developed countries over the last decade (Display). Bottom-up, active stock selection is key. But we think Chinese equities as a group are an attractive complement to a diversified equities portfolio, tariffs or no tariffs.
