The second quarter of 2025 was characterised by significant market volatility followed by a measured recovery. The quarter began with a sharp sell-off triggered by “Liberation Day” in early April, which marked a deterioration in US-China relations. Investor sentiment weakened rapidly, particularly in sectors exposed to external trade. However, by May, markets had regained stability, supported by sustained inflows from the National Team. These state-backed entities stepped in to contain downside risks and restore confidence. Following the resolution of the US-China trade agreement in Geneva, market activity turned more subdued, with investors cautiously awaiting fresh catalysts to sustain momentum.
The MSCI China All-Shares Index rose 2.3% in USD terms, while our China fund returned 1.3%, reflecting a modest underperformance of 1.0% alpha. Throughout the quarter, we maintained an active portfolio allocation of over 60%, reflecting our conviction in selected, high-quality names. Our strategy continues to emphasise alpha generation through a mix of sector rotation, bottom-up stock selection, and early exposure to underappreciated growth drivers, such as the ongoing re-rating of China’s biotech and innovation sectors.
The most disruptive event of the quarter was the escalation in US-China trade tensions. On 9 April, the US imposed a sweeping 125% reciprocal tariff on Chinese imports, with effective rates reaching nearly 145% due to earlier, fentanyl-related duties. In retaliation, China raised tariffs on US goods from 84% to 125% over the following days. The sudden escalation reignited fears of a full-scale trade war, sparking volatility across global markets. However, tensions eased in mid-May following high-level negotiations in Geneva. Both sides agreed to scale back the tariffs—down to 30% for the US and 10% for China—effective 14 May. While rates remained elevated compared to pre-crisis levels, the agreement was seen as a step toward de-escalation.
Despite the shock, China’s export sector demonstrated notable resilience. Although shipments to the US declined, exports to the European Union and ASEAN rose sharply. By mid-2025, both regions had surpassed the US as China’s largest export destinations, with exports to ASEAN alone exceeding USD 60 billion. This shift highlights China’s long-term efforts to diversify trade partners and reduce its reliance on the US market. Notably, export data for April and May came in above expectations, with year-on-year growth of 8.1% and 4.8%, respectively. These gains were partly driven by pre-tariff stockpiling, but also reflected strong demand in categories like electric vehicles, green energy components, and intermediate goods.
On the domestic front, consumer sentiment showed gradual improvement, albeit uneven across sectors. Among our portfolio holdings, Pop Mart delivered a standout performance. Its share price rose 69% during the quarter, contributing 133 basis points to alpha. The surge was fuelled by robust international demand, particularly in the US, where Q1 sales increased ninefold. This success demonstrates the growing influence of global growth drivers for Chinese consumer companies and the rising appeal of China-origin brands overseas. Pop Mart’s overseas expansion strategy, coupled with digital engagement and licensing partnerships, played a key role in its performance.
Sector-wise, financials emerged as the largest positive contributor to portfolio performance. The sector benefitted from steady inflows via Southbound Stock Connect, driven by demand from domestic insurers and long-duration capital seeking high-yielding, stable investments. With interest rates remaining low and dividend yields relatively attractive, financials gained favour among investors looking for defensive income plays. Our overweight in select high-quality names in the sector helped cushion portfolio volatility during the quarter.
Looking ahead, while geopolitical risks persist, the Geneva agreement has reduced near-term uncertainty. The risk of further tariff escalation has diminished, although long-term structural tensions between the US and China remain. Domestically, we expect the Chinese government to continue prioritising economic stabilisation. Policy momentum has picked up, with recent measures aimed at supporting consumption, improving SME access to credit, and stimulating infrastructure investment.
We believe Chinese equities remain underowned globally, leaving room for sentiment to improve meaningfully on the back of positive surprises. Valuations are still attractive, and fundamentals for many companies are intact. With a combination of targeted stimulus, improving trade diversification, and modest investor expectations, the second half of 2025 offers potential for renewed market momentum. We continue to position the portfolio with a focus on high-conviction, fundamentally strong names, aligned with long-term growth themes such as advanced manufacturing, consumer upgrading, and healthcare innovation.
Performance in USD net of fees.
The information should not be used as the sole basis for an investment. Please read the Prospectus and the KID, which are available on the fund page. This publication is not directed at you if we are prohibited by any law in any jurisdiction from making this information available to you and is not intended for any use that would be contrary to local laws or regulations. Every effort has been made to ensure the accuracy of the information, but it may be based on unaudited or unverified figures or sources.