China’s flying: should you go all in or invest across emerging markets?

China equity funds were on a roll over the summer thanks to a recovery in China’s markets. The Investment Association’s (IA) China/Greater China sector topped the leaderboard on both a one-month and one-year basis, returning 6% and 39% respectively at the end of August.

• Invest with ii: Open a Stocks & Shares ISA | Top ISA Funds | ISA Offers & Cashback

Both the Chinese and Hong Kong markets have rallied since 7 April when global markets were rattled by US President Donald Trump’s tariff roll-out.

With the easing of trade tensions, China’s SSE Composite Index has climbed 23%, while Hong Kong’s Hang Seng Index is up 26% (to 22 October 2025).

A series of policies introduced by the Chinese Communist Party to encourage consumer spending and stimulate growth have also played a major part in driving performance, as has China’s new pro-business stance, which includes reforms to Company Law, efforts to lower barriers for foreign investors, and championing the private sector. A prime example of this is in the tech sector.

Following the surprise release of artificial intelligence (AI) start-up DeepSeek at the start of the year and China’s president Xi Jinping reaching out to support tech CEOs, investors have flocked to the country’s tech companies. Chinese tech giant Alibaba Group Holding Ltd ADR (NYSE:BABA) – which announced plans to invest in AI infrastructure earlier this year – is up 93% over six months.

“DeepSeek’s emergence challenged the cost behind LLMs (large language models) and the wider US-centrism of AI investing,” explains Alex Watts, senior investment analyst at interactive investor.

China is now moving towards self-reliance in AI, but James Carthew, head of investment companies at QuotedData, warns that it could take some time for China to catch up with the US, and separating the wheat from the chaff will be the challenge for investors.

“Some of the companies that are riding high on the back of investor interest in the Chinese tech sector may turn out to be duds,” he says. “However, China will likely end up with some world-leading companies in many sectors – Contemporary Amperex Technology Co Ltd Ordinary Shares - Class H (SEHK:3750) (CATL) in batteries, for example.” 

Further to run?

So, after such a stellar summer, have Chinese equities had their time in the sun? Ernst Knacke, head of research at Shard Capital, thinks they could have further to run.

“Despite the Chinese Communist Party adopting a markedly more pro-business posture, actively backing technology founders and fostering innovation, global investors remain significantly underweight China, leaving a deep pool of high-quality, innovative companies trading at strikingly undervalued levels,” he says.

“With both monetary and fiscal measures now geared towards boosting domestic consumption, we believe the recovery is still in its early stages, presenting a compelling entry point.”

Jonathan Unwin, UK head of portfolio management at Mirabaud Wealth Management, agrees that valuations still look “very reasonable” on a historical basis and points out that US dollar weakness is continuing to serve as a tailwind for emerging markets more broadly.

However, he adds that while markets are largely ignoring trade and tariff headwinds as Chinese exports to non-US destinations have materially picked up, changes to US policy “can be swift and severe”.

“More broadly, the recent 20% surge in the market may prompt the Chinese authorities to take action to cool down the equity market and currency,” he adds.

• Where to invest in Q4 2025? Four experts have their say
• Ian Cowie: the adventurous investment trust I’ve bought

Edward Allen, private client investment director at Tyndall Investment Management, says that after the recent rally, “the picture is more nuanced”, namely due to the property crisis, which is now in its fifth year.

“American belligerence aside, the main reason to be bearish on China is the ongoing property bust,” he says.

“Financial history tells us that deep and ongoing falls in property values are a drag on spending and consumer sentiment and tend to form a self-reinforcing negative spiral.”

However, Darius McDermott, managing director at FundCalibre, suggests the collapse in the real estate market could benefit equities if money that was traditionally used for property is channelled into the stock market.

“A lot of the savings pool is now being redirected towards equities, and given how much Chinese consumers save, that is a potentially powerful tailwind,” he says.

“The big challenge for China is that consumer confidence remains weak. The property slump has created a huge negative wealth effect, and consumers have subsequently become more cautious.”

Consumers at a supermarket this month in Zaozhuang, Shandong Province, China. Photo: Sun Zhongzhe/VCG via Getty Images.

Looking elsewhere

For David Winckler, senior investment analyst at Casterbridge Wealth, subdued consumer confidence is a concern, alongside the weak property sector and policy uncertainty.

“Due to these structural changes, we remain cautious on the durability of the China rally,” he says.

“In addition, elevated government intervention and persistent governance concerns continue to pose a meaningful risk of capital loss for investors,” he warns.

Winckler says that he is structurally positive on emerging markets more generally due to their attractive valuations and a broadening earnings recovery, and favours India.

“Within emerging markets, we are more positive on India than China over the long term, given India’s stronger governance, more sustainable growth drivers, and ongoing reform momentum.”

• Funds and trusts four pros are buying and selling: Q4 2025
• Two hot investment areas beyond tech

Francis Chua, a multi-asset fund manager at Legal & General Investment Management, suggests investing in China and India is a zero-sum game.

“For China, stronger performance has come at the expense of India, which has struggled with performance over the last 12 months,” he says. “A reversal of performance in India could lead to a rebalancing of investors’ allocation in emerging markets, potentially acting as a headwind to Chinese equities.”

Neil Shah, executive director, content and strategy, at Edison Group, counters that China tends to be less correlated to other markets, making it valuable from a portfolio diversification perspective, but adds that there are more attractive opportunities elsewhere.

“Vietnam, recently upgraded from frontier to emerging market status, stands to benefit from supply chain diversification out of China,” he says.  

Broadening out

The consensus among our experts was that investors are better off getting exposure to China through an emerging market fund rather than a dedicated China mandate, unless they have a higher-risk profile or are investing in a China strategy as a satellite fund.

“Investors in dedicated China funds need to be comfortable with volatility and ensure they’re backing a manager who truly understands the local landscape,” FundCalibre’s McDermott says, picking JPMorgan China Growth & Income Ord (LSE:JCGI) as an example.

“For more hands-on investors who can stay on top of political and economic developments, these funds can be powerful drivers of alpha.”

Winterflood’s investment trust research analyst Alex Trett points out that the investment trust structure is well suited to the volatile features of the Chinese market, as managers are not forced sellers during periods of stress and can instead capitalise on dislocations. He names Fidelity China Special Situations Ord (LSE:FCSS) as an example.

“The investment trust structure allows managers to invest with a long-term horizon, which is essential if you want to navigate the volatility effectively,” he says.

• How to decide whether to take profits or run a winner
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Tyndall IM’s Allen says that while a broader emerging market fund is a way of delegating the navigation of the boom-and-bust waves China and India are prone to, a combination of both emerging market and China-specific funds may be appropriate for higher-risk portfolios.

Quilter Cheviot’s Moorhouse agrees. “There is an argument to have both China and GEM funds, depending on how bullish you are on China,” she says.

“If you are very positive on China, you may want to ensure you are getting exposure to that market, as not all broader GEM funds have a large allocation to China.

“By investing in a dedicated China fund, you have more control over the allocation – be that via an A share fund, which often have a greater focus on the domestic onshore China market, or a fund with a higher level of small and mid-cap exposure, aiming for the next Tencent Holdings Ltd (SEHK:700) or Alibaba.”

Three emerging market fund options feature in interactive investor’s Super 60 investment ideas list: Fidelity Index Emerging Markets, JPMorgan Emerging Markets Ord (LSE:JMG), and Utilico Emerging Markets Ord (LSE:UEM).

For single-country exposure, Fidelity China Special Situations also features.

While there are no India options in the list, Jupiter India has been popular with interactive investor customers over the past couple of years, although it recently slipped out of the ii Top 50 Fund Index, which ranks the most-bought funds, investment trusts and exchange-traded funds (ETFs) each quarter.