Key points
- The backdrop for Chinese equities is brightening, supported by a more stable environment following the Fourth Plenum and the ongoing trade détente with the US.
- Despite the lingering cyclical headwinds, innovation breakthroughs are strengthening confidence in China’s long-term prospects.
- Widening dispersion underscores the importance of a fundamentals-driven, active approach in identifying long-term winners.
Chinese equities enter 2026 with a constructive outlook. Recent developments, including the approval of the 15th Five-Year Plan at the Fourth Plenum and the meeting between Presidents Xi and Trump in South Korea, together with the announcement of Mr. Trump’s state visit to Beijing in April, signal a more predictable policy and external environment for companies and investors alike.
The 15th Five-Year Plan reaffirmed the government’s commitment to building a modern, high-tech and manufacturing-centric economy, accelerating technological self-sufficiency and innovation, and boosting domestic demand. Meanwhile, China and the US stabilised a rocky relationship by agreeing to extend tariff truces, suspend selected trade levies, and re-establish regular communication channels, while a formal trade deal is still under negotiation.
Despite cyclical challenges, China’s structural strengths remain intact.
Policymakers remain confident of achieving this year’s ~5% growth target, on the back of strong production and export performance in the first three quarters. As a result, expectations for further large-scale stimulus to boost domestic demand have moderated. However, sustaining nominal GDP growth over the medium term will likely require additional policy support for households.
“Anti-involution” – a tailwind for equities
Domestic policymakers have relied on targeted fiscal easing and flexible monetary tools to sustain growth and maintain liquidity. A key element of the current policy framework is the government’s “anti-involution” campaign, which aims to ease deflationary pressures arising from excessive and inefficient competition, whilst preserving confidence among private enterprises. This campaign has touched fast-growing sectors such as EV and solar energy, and in some traditional industries such as paper and cement.
Early evidence suggests that whilst existing capacity has not been materially reduced, the pace of new capacity expansion is likely to slow. This should allow excess supply to be absorbed over time, supporting margins and profitability, if demand holds up. We believe the potential consolidation may still be underappreciated by the market.
Slow consumption revival
However, the muted performance of the Double 11 shopping festival in November - China’s biggest retail event - suggest domestic demand continues to be restrained. Despite aggressive e-commerce discounts, AI-powered shopping personalisation, and an extended sales window, retailers had to work hard in converting interest into spending.
We believe sustained demand recovery hinges largely on a more stable property sector. Recent trends remain mixed, with both new and existing home prices falling further in October as policy support waned, although new home prices in Shanghai posted marginal gains. While there is divergent performance across categories, pockets of resilience can be found. Well-positioned franchises that adapt to shifting consumer preferences continue to grow, while weak investor sentiment has created some of the most attractively valued opportunities in the market.
Structural tailwinds: tech and innovation
Despite cyclical challenges, China’s structural strengths remain intact. The country continues to lead globally in manufacturing scale, innovation, and technological upgrading – key priorities under the Five-Year Plan. China has been widening its moats – exports are shifting away from the US towards other emerging markets, while Chinese firms are climbing the value chain in advanced manufacturing.
Rapid adoption of artificial intelligence – achieved with significantly lower capex than in the US and exemplified by the ‘DeepSeek moment’ – illustrates China’s strengths in data, R&D, and talent. These advantages remain underappreciated by markets but will be critical to sustaining its long-term competitiveness.
While capex, infrastructure and policy support are well aligned, we believe the bigger growth catalyst for the domestic AI industry lies in the practicality, adaptability and competitive mind of Chinese companies to bring innovative products to market. Areas ripe for innovation include the “low-altitude economy,” where commercial aircraft technology is merging with drone technology, and electrification, where China leverages its global leadership in battery technology and supply chains. Beyond tech, life sciences are also fast-growing, with Chinese companies benefiting from the country’s deep engineering talent to grow their share of global clinical trials in fields like gene therapy, oncology, and GLP1 treatments. We believe these trends are going to create multiple investment opportunities going forward.
Select opportunities
Following a strong recovery in 2025, equity valuations have normalised to some extent. As of end October, the MSCI China Index traded at around 13 times 12-month forward earnings, still more than 40% below the S&P 500. Recent performance has become increasingly concentrated in high-beta and momentum-driven segments such as technology and AI, while widening dispersion continues to create selective opportunities where fundamentals and share prices have diverged.
In our view, these dynamics create a fertile ground for selective, long-term investment opportunities through a fundamentals-driven approach. We remain focused on companies with durable earnings visibility, exposure to structural growth themes, and disciplined capital allocation. We see particular promise in advanced manufacturing, automation, and technology-enabled industrials; areas aligned with policy priorities and capable of compounding value over time. The consumer sector remains a key focus area given attractive valuations. Although near-term demand is soft, household savings are high, debt levels have moderated, and a stabilising property market should gradually improve confidence and spending.
