China equities set to shine

CHINA’S equities look set for a strong 2026, with policymakers and markets aligning on growth and innovation. The country’s ability to stand firm against US trade pressures reflects the narrowing technological gap between the two economies, setting the stage for a more constructive year ahead, according to Franklin Templeton.

“We anticipate a less confrontational approach towards trade in 2026 as both sides seek to focus on growing their economies,” the asset management group says in a recent report.

Franklin Templeton highlights several themes likely to drive the market, including rising corporate margins, increasing power demand and fiscal stimulus.

One of the defining trends is anti-involution, a multi-year policy shift that moves companies away from destructive price competition towards quality-driven growth.

It explains: “The policy is starting to drive rational competition with 2026 likely to bring about increased consolidation in sectors with over capacity.”

Large firms are expected to be the main beneficiaries, as reduced competition boosts margins and return on equity, it points out.

Another key driver is what Franklin Templeton calls China’s “Deepseek moment”.

The launch of Deepseek’s large language model in January 2025 shook the global technology scene. Its efficiency, combined with open-source software, positions China to expand artificial intelligence (AI) applications even amid constrained power grids.

“China’s monthly token use in AI models is forecast to be in a range of 220Qa to 670Qa from 2025 to 2030, compared to between 100Qa and 175Qa in the United States,” Franklin Templeton notes.

This surge in AI activity is expected to fuel investment in data centres and power infrastructure, benefitting domestic power equipment suppliers, particularly in regions like Gansu, Guizhou and Inner Mongolia where local governments have lowered electricity costs for AI operations.

Growth areas

Fiscal stimulus is also on the horizon. The central government plans to increase bond issuance by one trillion yuan in 2026, front-loading supply early in the year.

With the fiscal deficit projected to rise to 4% of gross domestic product, the stimulus focuses on boosting consumption and supporting innovation in sectors such as semiconductors and high-import industries.

This aligns with the forthcoming 15th five-year plan, which emphasises sustainable, efficient, and balanced growth, with more attention on consumption and innovation than on investment and green energy.

Franklin Templeton sees technology as a major growth area.

China continues to close the gap with the United States in semiconductors, while government support for domestic software and AI ecosystems aims to create an alternative global supply chain.

“Developing domestic ecosystems creates the potential for an alternative global AI supply chain,” Franklin Templeton says, adding that the development is opening export opportunities, particularly to Belt and Road countries.

The consumer discretionary sector stands out as a key beneficiary of anti-involution.

As companies pivot from competing solely on price, margins are expected to rise. Consensus expectations for the sector point to 35% earnings growth in 2026, led by China’s Internet and delivery platform giants.

“We remain positive on Chinese Internet platform companies, viewing anti-involution as a positive catalyst,” Franklin Templeton says.

Industrial equities, particularly power equipment, are also in focus.

Rising demand for data centres and the replacement of ageing global infrastructure could benefit Chinese suppliers, who offer cost-efficient, scalable solutions.

The International Energy Agency forecasts that the installed power base for data centres will increase by over 20% annually between 2025 and 2028, offering significant market opportunities.

Healthcare, especially biotech, is another bright spot.

China has increased its share of global clinical trials in oncology to 39% in 2024 from just 5% in 2014.

The international acceptance of Chinese clinical data, along with advantages in labour costs, economies of scale, supply chain efficiency, government support and cost-effective research and development, bolsters confidence in the sector.

Successes in non-small cell lung cancer trials, validated in The Lancet in 2024, highlight the country’s growing influence in biotech.

Valuation metrics also offer encouragement.

The MSCI China index trades at a 2026 price-to-earnings ratio of 12.6 times, slightly above its long-term average, following a 28% gain from January to mid-December 2025.

Global equity funds remain 6.5% “underweight” China, compared with a post-Covid-19 average of 5.5%, suggesting room for foreign inflows if margins recover as expected.

Consensus forecasts point to 15% earnings growth for MSCI China overall in 2026.

In summary, Franklin Templeton identifies several catalysts to lift Chinese equities: anti-involution, the Deepseek-driven AI expansion, fiscal stimulus, and technological self-reliance.

Sectors poised to benefit include semiconductors, consumer discretionary, power equipment and biotech. As it puts it, prior plans were a useful roadmap for investors in deciding where to allocate capital.

With margins improving, valuations reasonable and policy support clear, China’s equity market appears well-positioned for another year of growth.