Why investors should remain bullish on Hong Kong, mainland stocks in 2026

Judging by investor sentiment in the final quarter of last year, the spectacular rally in mainland Chinese and Hong Kong equities is over. The CSI 300 index of Shanghai- and Shenzhen-listed stocks declined 0.2 per cent while the MSCI China Index fell by over 7 per cent. The Hang Seng Index, meanwhile, lost 4.5 per cent.\nWhile most Wall Street banks remain bullish on Chinese stocks, some have turned more cautious. Morgan Stanley believes 2026 will be “a year of stabilization after 2025’s high returns”, while Citigroup downgraded its recommendation for the MSCI China Index from overweight to neutral due to the weakness of China’s economy and concerns about the outlook for corporate earnings.\nHowever, a cautious view on Chinese equities proved costly over the past two years. Last year, the MSCI China Index had its best year since 2017, outpacing the benchmark S&P 500 index by the widest margin in eight years. Despite the fierce rally, the MSCI China Index still stands around 30 per cent below its peak in February 2021, underscoring the potential for further gains.\nWeak economic data and lacklustre earnings growth were big concerns at the beginning of last year, but that did not prevent China’s stock market rally from accelerating rapidly. In Hong Kong, the proceeds from listings, share placements and block trades quadrupled in 2025 to more than US$73 billion. The city became the top fundraising venue in Asia for the first time since 2013.\nThe dramatic recovery in Chinese equities has been supported by two global trends that are likely to persist. The first is the underperformance of US equities relative to the rest of the world. The MSCI All Country World ex-US Index rose 29 per cent last year compared with a 16.3 per cent gain for the S&P 500.\nThe damage wrought by US President Donald Trump’s assault on world trade – including the dollar index suffering its sharpest annual decline since 2017 due to doubts about the US dollar’s status as a safe haven – encouraged global investors to diversify away from the US.\n\n\nMajor equity markets that were unpopular with investors in recent years, such as those in Europe and emerging economies, staged a stunning comeback.\nChina is one of the biggest beneficiaries, partly because foreign investors were too bearish on the country’s stocks. Morgan Stanley notes that US and European mutual fund inflows into Chinese equities last year were around 30 per cent of the total outflows in 2023-24.\nThe second global trend is the boom in generative artificial intelligence (AI). China’s “DeepSeek moment” sparked interest in the country’s thriving AI ecosystem and changed the investment narrative around Chinese equities from a deflation and economic slowdown story to one of technological breakthrough and innovation.\nChinese AI companies are leading the boom in initial public offerings (IPOs) in Hong Kong. Last month was the busiest month for IPOs in the city since November 2019, with tech firms accounting for half of the 25 companies that made their trading debut in Hong Kong, according to Bloomberg.\n\nHowever, it stands to reason that investors should temper their enthusiasm after last year’s blistering rally. There are plenty of risks, from the ever-present threat of further geopolitical flare-ups to persistent concerns about insufficient policy support to revive domestic demand, especially given the festering crisis in the housing market.\nYet investors are attaching more importance to sources of resilience that became more apparent last year. First, China’s remarkable progress in building a self-sustaining AI ecosystem in the face of US export controls has helped reshape Asia’s equity market landscape.\nAccording to Bank of America, China is the “global runner-up in AI [after the US], competing across nearly every level of the supply chain [and benefiting from] strong national policy support, vast data resources, leading manufacturing capabilities, diverse AI application scenarios, and a fiercely competitive private sector”. Crucially, China is better positioned in terms of power supply at a time when surging demand from data centres is constraining investment in the US and other countries.\n\n\nSecond, the rebound in mainland Chinese and Hong Kong stocks is not just about AI. Materials stocks performed as strongly as tech shares last year, partly due to soaring gold and silver prices as investors hedged their portfolios against geopolitical risks.\nMoreover, Beijing’s “anti-involution” campaign has supported materials prices by easing pressure on industries suffering from overcapacity and curbing excessive price competition. JPMorgan said the anti-involution drive has helped institutionalise an “onshore equity market that looks to earnings and shareholder returns seriously over periodic liquidity surges”.\nThird, while Chinese policymakers’ reluctance to implement more aggressive stimulus measures to boost consumption adds to the uncertainty over the outlook for equities, the Chinese government has done enough to convince investors that it will not allow the economy to deteriorate dramatically.\nBank of America said Beijing “successfully cut off tail risks, restoring confidence in market stability”. Sentiment towards China is not as fragile as it once was.\nFourth, inflows into Hong Kong’s equity market via the Stock Connect’s southbound channel are likely to remain a major source of liquidity. Beijing has signalled its desire for a strong and stable Hong Kong capital market. The Hang Seng Index also offers investors more exposure to Chinese tech innovation themes. While the decline in Chinese stocks last quarter warrants scrutiny, a careful look at the underpinnings of the 2024-25 rally shows further gains are likely in 2026.\n