Potential upside for China

CHINA’S equity market looks set to carry momentum through the year, with a rally that broadens out and leans more on earnings, policy execution and selective risk-taking rather than a blunt stimulus sugar hit.

The path forward appears less about a straight line up and more about navigating shifts in growth drivers, capital flows and geopolitics.

According to Eastspring Investments, despite the strong recovery in both onshore and offshore China equities over the past two years, investors have largely remained underweight, unconvinced that the stock market rally is sustainable.

That scepticism shows up clearly in positioning.

“On an asset-weighted basis, global active mutual funds underweighted China by 340 basis points (bps) versus their benchmarks at the end of September 2025 (versus underweight by 320 bps at the end of June 2025),” the fund manager observes.

In Eastspring Investments’ view, this wariness has kept valuations at discounted levels compared to developed markets.

Valuations, however, already tell a more nuanced story.

“Even after the recent gains, MSCI China trades at 13.3 times forward price-to-earnings, marginally above its 10-year average,” Eastspring Investments points out.

Put against global peers, the gap is starker.

“When compared to other key global market indexes, the MSCI China is trading at over 20% below its recent peak in 2021, while others have reached or exceeded their peak valuation in recent years,” it notes.

Cheap stocks

For Eastspring Investments, the oft-repeated line that China is cheap for structural reasons misses what is changing under the surface.

“It is convenient to argue that China remains ‘cheap for a reason,’ yet this overlooks the shifts that are underway,” it says, pointing to a recalibration in policymaking.

“China’s macro narrative is shifting in a more deliberate way. Rather than relying on broad-based stimulus, policy support will be geared towards higher-value industries and long-term tech self-sufficiency as recommended in China’s most recent 15th Five-Year Plan, 2026-2030,” it adds.

That plan lays out clear priorities. “The plan emphasises deepening China’s ability to innovate and accelerate breakthroughs in artificial intelligence (AI), semiconductors, advanced computing, biotech, next-generation materials, satellite communications and clean energy systems,” it explains.

These areas, according to Eastspring Investments, are at the forefront of China’s mid- to- long-term growth model.

Alongside innovation, resilience matters.

Supply chain security and industrial resilience also feature prominently in this plan, with ambitions to localise critical technologies, reinforce strategic manufacturing capacity and modernise traditional industries, it adds.

“In parallel, the plan recommends bolstering domestic demand by placing greater emphasis on sectors such as healthcare, elderly care and service consumption,” Eastspring Investments says.

It notes these segments have seen structural under-investment and now offer multi-year growth potential, adding that these policy priorities are reshaping the landscape of investment opportunities and creating a conducive environment for active stock selectors.

On the earnings front, Eastspring Investments highlights regulatory follow-through as a swing factor.

“A key theme in our view is the accelerating execution of anti-involution measures after the National People’s Congress in March,” it argues.

That matters for profitability.

“This supports a healthier competitive environment and bodes well for earnings growth; consensus estimates for earnings per share are around 13% in 2026 – placing China in the upper tier of Asia-Pacific markets,” it notes.

AI importance

Notably, AI remains front and centre, but Eastspring Investments argues the market underestimates China’s role.

“AI remains a dominant multi-year theme, but China’s AI advancement is under-appreciated,” it highlights.

With spending rising globally, there will be strong demand for China’s upstream hardware suppliers which offer scale, speed and pricing, while local AI beneficiaries and early AI monetisation proxies gain attention as consolidation plays out, it adds.

Beyond technology, financials feature prominently. Financials also feature as another theme, especially non-bank financials such as life insurers, which benefit as there’s a significant amount of household time deposits that are maturing this year, according to Eastspring Investments.

Consumption rounds out the picture. “Yet another theme to monitor is domestic consumption which is expected to experience a K-shaped recovery, with resilience in the luxury segment,” Eastspring Investments says. It flags service-led consumption – spanning healthcare, leisure, wellness and experience-based spending – as a standout.

Positive trend

Liquidity dynamics could amplify these trends. “Chinese households’ US$22 trillion in deposits could be a powerful catalyst for equity markets,” Eastspring Investments says.

As property loses appeal and yields fall, more of this liquidity is expected to migrate into alternative areas including equities, it notes.

On rates, the next move from the People’s Bank of China would likely be an interest rate cut starting in the second quarter of 2026, while easing by the US Federal Reserve could mean further share price upside, it says.

“With increased new life insurance premiums, there could be more capital flowing into China’s equity market,” Eastspring Investments says.

This, it adds, comes as authorities encourage insurers to take a longer-term role. Externally, trade risks linger but may soften.

“We believe that some of the negotiated tariffs have swung too far,” Eastspring Investments says. And if inflation bites in the United States, the administration could be forced to unwind some of these trade actions, it adds.

Volatility, though, remains part of the deal. “The China market could stay volatile,” Eastspring Investments says, citing rally fatigue, geopolitics and persistent US–China frictions.

Even so, Eastspring Investments keeps its stance constructive. “We believe China equity markets could continue to rally in 2026, albeit at a more gradual pace,” it says, noting this trend is underpinned by earnings, currency dynamics and selective capital inflows.

Its approach stays pragmatic: “We remain focused on fundamentally sound companies with reasonable valuations and credible growth,” pairing that with “a ‘barbell’ approach” to stay nimble as the story evolves.