China Perspectives - Reasons to stay constructive in 2026

• China’s equity market staged a phenomenal come-back in 2025, with MSCI China gaining 31.5 per cent for the year. However, with valuation gaps narrowing with rest of EM, and China’s macro data flashing signs of softness – slowing investment, lingering disinflationary pressure and lukewarm consumption - the big question is in plain sight: can the bull run continue?
• We maintain our constructive stance in China equity, with an Overweight call for several reasons: 1) China’s stock market has evolved to have a smaller share of the old economy than the GDP, and its earnings outlook is turning favourable; 2) Persistent low onshore yields and diminishing real economy investment opportunities have propelled more private wealth rotation into risk assets although this is happening slowly; 3) The global tailwind of diversification is expected to continue. Reasonable valuation and a temporary truce in Sino-US geopolitical rift can help China equity
• To capture the China upside in 2026 we continue to favour a two-prong allocation strategy

▪ Within the technology space, we are a fan of players that can benefit from widening AI deployment and monetization, including vertically integrated internet giants, cloud service providers, gaming, substituting software, globally competitive AI components and smart consumer electronics. The case also extend to the healthcare industry where Chinese innovation is increasingly recognized

▪ To balance this growth leg, the defensive side of the barbell emphasizes high-dividend equities, particularly quality State-Owned Enterprises (SOEs) that have demonstrated resilience in profitability metrics. This defensive allocation also applies to select consumer staples with stable dividend profiles. We look for signs of dividend sustainability in key metrics, such as profit margin, free cash flow over equity, receivables risk and senior management consistency

• In summary, we think the 2026 outlook for Chinese equities remains promising with supportive overall earnings recovery. The market’s performance is unlikely to hinge on a broad macroeconomic data surge but stays closer to the visible progress of the new economy and shifting allocation trend both domestic and abroad