Chinese equities are regaining global investor favor, driven by their strength in artificial intelligence and resilience amid geopolitical tensions, with Wall Street widely betting the rally will extend into 2026.
Major global asset managers, including Amundi SA, BNP Paribas Asset Management, Fidelity International, and Man Group, anticipate further gains in Chinese stocks. JPMorgan Chase & Co. recently upgraded its rating on China’s market to "overweight," while Allspring Global Investments noted that this asset class is becoming "indispensable" for foreign investors.
This optimism reflects a fundamental shift in investor sentiment—from initial skepticism to recognizing China’s ability to deliver unique value through technological advancements. According to Bloomberg data, the MSCI China Index has surged about 30% this year, marking its largest outperformance against the S&P 500 since 2017 and adding $2.4 trillion in market value.
While current inflows are primarily driven by passive funds, expectations are growing that active fund managers will return as corporate earnings improve and reflationary trends emerge, potentially fueling the next phase of the rally.
**Sentiment Shift and Valuation Appeal** Investor perceptions of China have transformed significantly. "China has reached an inflection point, proving its resilience. Investors are increasingly embracing an 'investable' China that offers diversification and innovation," said George Efstathopoulos, a portfolio manager at Fidelity International in Singapore, who now favors buying Chinese stocks on dips. Gary Tan of Allspring Global Investments also views Chinese assets as increasingly essential.
Beyond improving sentiment, valuation advantages remain a key draw. Despite the rally, Chinese stocks remain cheaper than global peers. The MSCI China Index trades at 12 times forward earnings, compared with 15 times for the MSCI Asia Index and 22 times for the S&P 500. However, institutions caution that next year’s returns may not match this year’s pace. Nomura Holdings Inc. forecasts a 9% rise for the MSCI China Index from current levels, while Morgan Stanley projects a 6% gain.
Morgan Stanley data shows foreign long-only funds bought about $10 billion in mainland and Hong Kong stocks as of November, reversing a $17 billion outflow in 2024.
Winnie Wu, Bank of America’s head of Asia-Pacific equity strategy, noted that the bar for investing in China remains high given strong U.S. market performance. But she emphasized that improving corporate earnings could shift the dynamic: "The next leg of China’s stock rally will be driven by global funds."
**Tech Leadership and Reflation Opportunities** The bullish case for China hinges on optimism around its tech giants, particularly in semiconductors, biopharma, and robotics. The AI boom has already lifted shares of companies like Alibaba and Cambricon.
Meanwhile, lagging sectors—especially consumer stocks—are seen as poised for a rebound. Andrew Swan, Man Group’s head of Asian equities, sees opportunities in stocks benefiting from economic stabilization rather than pure reflation:
"If reflation is the next phase for China’s economy, there will be plenty of opportunities."
Some argue foreign investors aren’t essential to China’s rally. Domestic mutual funds are buying, and regulatory support earlier this year has boosted demand from insurers.
The biggest hope lies in China’s vast household savings—roughly $23 trillion in deposits seeking higher returns. Many believe this liquidity could propel markets further. Florian Neto, Amundi SA’s head of Asia investments, said:
"If we confirm the return of mainland investor sentiment to local markets, stocks will continue soaring."
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