From "doubt" to "recognizing unique value," Wall Street is optimistic about the continued rise of the Chinese stock market next year

China's stock market is regaining global capital's favor thanks to its strength in the artificial intelligence sector and resilience amid geopolitical tensions, with Wall Street generally betting that this upward trend will continue into 2026.

Major global fund management companies, including Amundi SA, BNP Paribas Asset Management, Fidelity International, and Man Group, all expect the Chinese stock market to continue rising. JPMorgan Chase & Co. recently upgraded its rating on the Chinese market to "overweight," while Allspring Global Investments pointed out that this asset class is becoming "indispensable" for foreign investors.

This optimistic sentiment has driven a fundamental shift in investor perception, with the market moving from initial skepticism to recognizing that the Chinese market can provide unique value through technological advancements. According to Bloomberg data, the MSCI China Index has surged about 30% this year, marking the largest outperformance against the S&P 500 Index since 2017 and adding $2.4 trillion in market capitalization.

Although the current capital inflow is primarily driven by passive funds, the market generally expects that as corporate earnings improve and re-inflation takes a turn, the return of active fund managers is likely to lead the next phase of the rebound, further consolidating the market's upward momentum.

Sentiment Reversal and Valuation Appeal

Investor views on the Chinese market have changed significantly. "China has reached a turning point, proving to be more resilient, and investors are increasingly embracing a 'investable' China that offers diversity and innovation," said George Efstathopoulos, a portfolio manager at Fidelity International in Singapore, who currently prefers to buy Chinese stocks on pullbacks. Gary Tan from Allspring Global Investments also believes that Chinese assets are becoming indispensable.

In addition to improved sentiment, valuation advantages are also a key factor attracting capital. Despite the recent surge, Chinese stocks remain cheap relative to their global peers. The MSCI China Index currently has a forward price-to-earnings ratio of 12 times, while the MSCI Asia Index is at 15 times, and the S&P 500 Index is as high as 22 times. However, institutions also warn that next year's returns may not maintain the same intensity, with Nomura Holdings Inc.'s base case predicting that the MSCI China Index will rise about 9% from current levels, while Morgan Stanley expects an increase of about 6%.

According to Morgan Stanley data, as of November this year, foreign long-only funds have purchased approximately $10 billion worth of stocks in the mainland China and Hong Kong markets, reversing the $17 billion capital outflow expected in 2024 Winnie Wu, the head of equity strategy for Asia Pacific at Bank of America, stated that given the strong performance of the U.S. market, the threshold for investing in China remains high. However, she emphasized that improvements in corporate earnings could change this situation, “The next phase of the rebound in the Chinese stock market will be driven by global funds.”

Technology-Driven and Re-Inflation Opportunities

The core logic behind the optimism for the Chinese stock market lies in the positive expectations for its large group of technology giants, especially in the fields of chips, biopharmaceuticals, and robotics. The hype surrounding artificial intelligence has significantly boosted the stock prices of companies like Alibaba and Cambricon.

At the same time, sectors that have lagged behind the market this year, particularly the consumer sector, are also seen as having rebound potential. Andrew Swan, head of Asian equities at Man Group, stated that opportunities lie in stocks influenced by economic stabilization rather than purely re-inflation:

“If re-inflation is the next phase of the Chinese economy, it will contain a lot of opportunities.”

Some viewpoints suggest that foreign investors are not a necessary condition for the rise of the Chinese stock market. Local public funds are buying in, and demand from insurance companies has also been rising under regulatory encouragement earlier this year.

The greatest hope for the market comes from China's massive household savings, with Chinese households holding about $23 trillion in deposits looking for avenues. Many investors believe this substantial amount of money will help drive the market higher. Florian Neto, head of Asia investments at Amundi SA, stated:

“If we confirm that domestic investors' sentiment is returning to the domestic market, the stock market will continue to soar.”