(Bloomberg) -- China’s equity rally will gather pace as earnings improve amid a consumption recovery, according to Fidelity International which is seeking to capitalize on the nation’s growth pivot.

State-owned developers and technology stocks are part of the playbook, while the money manager’s Global Multi Asset Income Fund sold 90% of its Chinese sovereign debt holdings last year, co-manager George Efstathopoulos said. Bonds will have little upside as inflation quickens and the prospect of further policy easing wanes, he said.

“We think earnings bottomed out last quarter,” Efstathopoulos said in an interview. “Foreign investors are really materially underweight China equities, and this is material, because we don’t have to worry about investors selling the rally.”

Traders are pondering their next move in Chinese stocks as a 50% rally from an October low ignites debate about whether the bulk of the gains is past. While China’s reopening and the easing of a regulatory crackdown have sparked optimism, President Xi Jinping’s common prosperity agenda means investors have to navigate a landscape where there’s more state control and less room for private enterprises.

China has the second-largest weighting in the Fidelity fund’s equity allocation, even after it trimmed holdings following the rally in November, according to Efstathopoulos. The vehicle, which beat 85% of its peers in the past three months, is investing in shares of state-owned property firms, after booking profits on offshore dollar debt in the sector.

Both private and state-owned property stocks “are cheap, but if I think long term the SOEs are probably the bigger beneficiaries of the policy support,” Efstathopoulos said. “There’s going to be more oligopolies, SOE-driven, and they are going to be the beneficiaries — if you take a five-year view — of all the policies for consolidation happening right now.”

Months of a funding squeeze had led to defaults by China’s private developers, with liquidity only improving recently as Beijing changed tack. Authorities have also signaled an end to a clampdown on the Internet sector. Tech stocks will gain, though they won’t enjoy the peak valuation seen in the past, according to Efstathopoulos.

In comparison, Efstathopoulos is less keen on Chinese sovereign bonds, reasoning that domestic growth is reviving and inflation will probably accelerate. The Singapore-based executive, who is part of a team that manages about $12 billion, prefers US Treasuries amid expectations of a global downturn.

Fidelity International Buys Treasuries, Yen as Recession Hedges

“Given the pro-growth policy, inflation will be facing upside risks going forward, especially given the speed of reopening,” Efstathopoulos said, referring to China.

Global funds sold a record 616 billion yuan ($91 billion) of Chinese bonds in 2022 and Wall Street banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. say capital is unlikely to return anytime soon. China’s benchmark 10-year yields have climbed over 30 basis points to around 2.92% since reaching a low in August.

--With assistance from Ruth Carson.

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