Chinese stocks staged a strong rebound following the conclusion of the U.S. midterm elections, with JPMorgan arguing that as political uncertainty fades and the global AI trade shows signs of loosening, Chinese assets are entering a new allocation window.
On November 5, the three major A-share indices advanced amid volatility, with the ChiNext Index surging over 3% intraday and the STAR 50 climbing as much as 5% before paring gains by the midday close. Solar equipment, precious metals, and lithium battery sectors led the rally. A day earlier on November 4, A-shares had also posted sharp gains, with the CSI 300 rising 2.3%, the ChiNext Index jumping 6.4%, and the STAR 50 soaring 9.9%. A-share turnover returned to 2 trillion yuan for the first time in 25 trading days.
According to JPMorgan strategists including Chloe Liu and Tim Huang in their latest report, the rebound is driven by three key factors: the resolution of U.S. midterm election risk, a substantial reset in valuations and positioning, and the entry of state-backed funds and regulators to boost sentiment. The analysts noted that A-share valuations have recovered only 8%-10% from the "924" low and remain at depressed levels, with an estimated 10%-15% further upside. They maintained their preference for A-shares over Hong Kong stocks and reiterated a bullish view on domestic tech and brokerage sectors.
Goldman Sachs' Asia team, in a report titled "China: Buy the Dip?", wrote that China's domestic AI-related names, after pulling back nearly 54% from summer highs, "look increasingly ripe for a rebound," and expressed optimism about its "China Domestic AI Basket" (GSXACADO).
Midterm Elections Settle, Global AI Trade Landscape Shifts
With U.S. midterm election results finalized, market uncertainty has dissipated. JPMorgan believes that given legislative constraints and presidential veto power, the election outcome will not bring substantive changes to the overall U.S. policy landscape, and the market had already priced in a scenario of a Democratic sweep of both chambers. Historical data shows that Chinese stocks tend to rebound after U.S. midterm elections conclude, primarily due to the removal of uncertainty.
More notably, the global AI trade is showing signs of loosening. Texas accounts for over 25% of planned U.S. data center capacity through 2030, and the state's incoming government has signaled a stance favoring stricter restrictions on new data center construction. JPMorgan pointed out that as controversy over the global AI trade intensifies, Chinese assets stand to benefit—the current situation could trigger short covering and capital rotation.
The report also emphasized that Chinese stocks themselves offer diversification value relative to the global AI trade, and that China's AI development follows an independent trajectory with relatively limited dependence on U.S. AI capital expenditure.
Dual Reset in Valuations and Positioning Leaves Room for Further Upside
JPMorgan views the comprehensive reset in valuations and positioning as an important structural foundation supporting further gains.
On valuations, even after the November 4 rally, the MSCI China and CSI 300 indices remain only 8%-10% above the "924" low, leaving room for valuation recovery. Goldman Sachs data shows that the forward price-to-earnings ratio of its China Domestic AI Basket has compressed from approximately 53x at the July peak to roughly 25x currently, returning to levels seen before the AI rally began in summer 2025. The basket index has fallen about 55% cumulatively from its early July high, giving back nearly all of its year-to-date gains.
On positioning, JPMorgan listed three sets of data: margin financing balances have declined from 3 trillion yuan in June to approximately 2.3 trillion yuan currently, retreating to September 2025 levels and largely digesting this year's leverage buildup; northbound holdings' exposure to A-share IT sector dropped from 35% at end-June to 27% at end-September; and among domestic mutual funds' top ten holdings, IT positions declined from about 60% in June to 48% in September, with JPMorgan estimating a further drop to roughly 40% in October. This positioning reset means substantial sidelined capital has the potential to enter the market, potentially driving a phased rebound in the tech sector.
Goldman Sachs similarly views positioning as an important structural support. Its report shows that global active funds' allocation to China has continued declining to 5.5%, near a five-year low and at the 6th percentile since 2015, down about two-thirds from peak allocation of roughly 15% in 2020, representing a 215 basis point underweight relative to benchmark. Goldman Sachs analysts Finn Dattenberg-Doyle and Janvi Sharma wrote in the report: "From a positioning perspective, after recent adjustments, the setup looks more constructive."
Policy Bottom Gradually Solidifying, State-Backed Funds a Key Variable
Beyond market-driven forces, policy-level support cannot be overlooked. The STAR 50 Index has retreated about 50% cumulatively from its June high and decoupled from the U.S. AI rebound in August. Entering October, state-backed funds accelerated ETF purchases, with net buying reaching 330 billion yuan in a single month. Net ETF inflows since the second half of the year have already equaled 35% of first-half net outflows, with approximately 900 billion yuan in potential "dry powder" remaining.
Signals from the People's Bank of China and the securities regulator this week further indicate that authorities intend to provide a floor for market downside. JPMorgan characterized this as "not a bazooka, but a more solid floor."
Marketing Feedback: Focus Shifting from AI to Diversified Sectors
Investor feedback gathered by JPMorgan during roadshows in Hong Kong and Singapore shows that most investors agree downside is limited after policy support, with offshore investors showing relatively stronger willingness to increase allocations.
Investor focus is broadening from AI to more diversified sectors. Bank stocks received the most attention, followed by healthcare and certain consumer companies offering attractive shareholder returns and high earnings visibility.
At the individual stock level, JPMorgan reiterated its top ten preferred China market names and added a new AI-related stock screening list—with criteria including: JPMorgan "overweight" rating, 2027 estimated P/E below 20x, 2027 estimated EPS growth exceeding 30%, and share price down more than 40% from 52-week highs. Goldman Sachs highlighted its GSXACADO basket, with constituents covering Piotech, Chuangchuan Technology, Hua Hong Semiconductor, AMEC, ChangXin Memory, and Cambricon, among others.
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