Six foreign institutions unanimously bullish on Chinese assets: A-shares enter a new "slow bull" phase with a shift in driving logic towards profit growth

2026 is the beginning of the “14th Five-Year Plan” and marks China’s entry into a new development stage.

Looking ahead to 2026, what will be the overall trend of the equity market? Will the A-shares break through key levels with sufficient momentum? When will foreign capital flow back and overweight? What other directions are worth investors’ exploration?

At the start of 2026, six foreign institutions participated in the “Spring Water Flows East—‘Chief Connection’ 2026 Market Outlook” special on The Paper, discussing investment in the Year of the Horse. Many foreign institutional representatives generally believe that A-shares have entered a “slow bull” phase, with investment logic shifting from “valuation repair” to “profit-driven,” and artificial intelligence becoming a unanimously favored core track.

A-shares Shift from Valuation Repair to Profit-Driven

Regarding the overall outlook for the 2026 A-share market, the foreign institutions interviewed are generally optimistic, believing that A-shares have entered a new “slow bull” stage, with market-driving logic undergoing profound change.

JPMorgan China’s Chief Equity Strategist Liu Mingdi clearly states that after several major bull markets, A-shares have truly entered a “slow bull.” She explains that previous bull markets were often accompanied by performance reaching cyclical peaks and abundant incremental funds, but the formation and peak were short-lived, with obvious valuation overshoot; whereas “slow bull” phases, while supported by funds, mainly depend on performance. “The A-share market is not short of liquidity; the main issue is the lack of earnings per share capable of supporting market value. If net profit margins can be reasonably improved, sustained positive returns are expected.”

Luntong Fund Vice President and Investment Director Zhu Liang predicts that in 2026, the A-share market will shift from “valuation repair” to “profit-driven,” with the sustainability of market gains depending on substantial improvement in corporate profitability rather than mere valuation expansion. Zhu points out three key logical supports: First, China’s economic restructuring provides investment opportunities. Second, corporate profits are expected to gain stronger momentum, improving long-term investment value. Meanwhile, anti-inflation, corporate globalization, and AI are also expected to support long-term profit growth. Third, in a low-interest-rate environment, equity assets are more attractive compared to fixed income, which may also support equity market valuations.

Morgan Stanley China Chief Equity Strategist Wang Ying emphasizes, “From a long-term perspective, industry and company competitiveness are fundamental. In 2026, the driving logic of Chinese assets will shift from valuation repair in 2025 to profit growth.” She reveals that Morgan Stanley expects the profit growth rate of the CSI 300 index to reach 6%-7% in 2026. Key supporting factors include: listed companies continuously increasing R&D and capital expenditure, maintaining global competitiveness in AI and high-end manufacturing; stabilization of the real estate market and accelerated consumption growth may lead to profit improvement in related industries; and multiple supports from fiscal and monetary policies will further boost profit growth.

Fidelity Fund Stock Department head Zhou Wenqun predicts that a style shift may occur in the second half of 2026. “After digesting the macro fundamentals over the past two to three years, we may see some traditional sectors start to accumulate strength at low levels. Meanwhile, the overall economic profit growth is also expected to bottom out and rebound this year.”

Clear Trend of Foreign Capital Increasing Allocation

Foreign institutions generally believe that there is still considerable room for global capital to increase its allocation to Chinese assets, and the trend of foreign capital increasing holdings is clear.

“Major global institutional investors and large-scale asset allocators still have relatively low positions in China, so there is significant room for further increase,” Wang Ying points out.

Liu Mingdi further analyzes that, based on the allocation of four types of active equity funds (global, ex-US global, emerging markets, Asia ex-Japan), global and Asian regional funds have the lowest underweight relative to benchmark indices. Asia ex-Japan funds, due to more opportunities to research mainland-listed companies and Chinese enterprises, have a deeper understanding of their competitiveness, and their underweight levels are also relatively low.

UBS China Equity Strategist Wang Zonghao emphasizes that the trend of foreign capital increasing holdings in Chinese assets will continue. He provides specific data: in Q3 2025, the underweight ratio of foreign active funds in Chinese stocks narrowed to -1.3%, while the allocation ratio of the 40 largest global funds to China was about 1.1%-1.2%, still well below the 2% at the end of 2020, leaving substantial room for growth.

Wang Zonghao further observes that Hong Kong stocks have shown clear signals of foreign capital inflow. “During the holiday on January 2, when the domestic market was closed and the southbound funds channel was shut, Hong Kong stocks surged significantly. This is very likely a signal of foreign capital increasing holdings in China, and we believe this trend will continue.”

Zhu Liang also notes that foreign investment in China is shifting its focus. “The investment logic is moving from early ‘low valuation play’ to long-term holding of ‘quality profit-driven assets,’ including globally competitive private enterprises, AI application companies, innovative pharmaceuticals, and new consumption sectors.” This trend reflects a more long-term, structural growth-oriented approach by foreign investors in A-shares.

Zhu points out that, besides profit correction opportunities, improved corporate governance and investor returns (such as dividends and buybacks) are also conducive to attracting long-term foreign capital inflows.

Artificial Intelligence Sector Is Unanimously Favored

In terms of industry allocation, AI industry chains are the core direction unanimously favored by foreign institutions for the 2026 market opportunities.

“Technology wave is still in its infancy, and AI remains the main investment theme for the future,” says Lei Zhiyong, Director of Equity Investment at Morgan Stanley. Driven by policy dividends and engineering talent, the broad tech industry will continue to generate abundant opportunities in 2026. He is optimistic about investments in AI computing power, AI applications, and high-end manufacturing. He expects AI infrastructure growth in 2026 to significantly outpace most manufacturing and TMT sub-sectors, and that 2026 could be the year of AI application explosion.

Wang Zonghao is particularly optimistic about hardware and internet applications. “In hardware, especially semiconductor equipment, ‘technological self-reliance’ remains the main theme; on the internet side, opportunities are concentrated among large Hong Kong-listed companies, with domestic internet giants being the biggest beneficiaries of AI.”

Zhou Wenqun believes that demand driven by AI will likely bring good performance growth for these tech companies. “Domestic tech growth sectors are broad and resilient, with a more dispersed structure, showing a ‘full bloom’ state, such as commercial aerospace, robotics, etc., not limited to a single main line.”

Anti-inflation and outbound themes are also highly regarded. Wang Zonghao points out that the photovoltaic industry chain is a typical example under the anti-inflation theme, while companies with high overseas revenue share, especially in automotive parts, are favored in the outbound theme. Lei Zhiyong believes that China’s enterprise upgrades and globalization will continue to be recognized, and high-tech, high-value-added complete equipment industries may continue to grow. High-end manufacturing segments like military (commercial aerospace), nuclear power, wind power, and energy storage are expected to produce a batch of global leaders.

Zhou Wenqun states, “China’s current development stage allows many companies to leverage their experience from the large domestic market and strong demand to make breakthroughs in overseas competitiveness. In high-end manufacturing, electric vehicles, batteries, new energy, and cultural exports, some very strong Chinese companies are continuously gaining more market share overseas.”

The revival of new consumption and traditional consumption is also frequently mentioned. Zhu Liang favors experience-based new consumption led by private economy, aligned with the “small but certain happiness” trend. Zhou divides consumption into traditional and new categories. For traditional consumption, he sees some opportunities for bottoming and recovery this year, supported by stabilized upstream prices, easing anti-inflation policies, and inventory digestion. Regarding new consumption, Zhou believes it “more reflects emotional value or the fulfillment of consumption needs at a cultural level,” with lower penetration and large growth potential.

Dividend assets and high-quality stocks are key for defensive allocation. Zhu Liang suggests that dividend assets with healthy cash flow and rising dividend payout ratios are worth close attention. Wang Ying proposes a “barbell” allocation strategy, balancing growth and market uncertainty by combining “high growth + stable income”—covering high-growth sectors like AI, high-end manufacturing, automation, robotics, biotech; and high-quality dividend stocks and insurance sectors.

In upstream hard assets and precious metals, Zhou is optimistic about metals and non-ferrous resources, supported by a sustained weak dollar environment, strong industrial demand, and rigid supply constraints. Zhu also notes that amid the Fed’s independence challenges and high US fiscal deficits, the “de-dollarization” trend will continue to boost demand for gold and other non-dollar assets.

Hong Kong Stocks and A-shares May Run Side by Side

Regarding Hong Kong stocks, Wang Ying states that over a 6-12 month horizon, 2026 should see A-shares and Hong Kong stocks moving in tandem, but individual stock selection will have its own characteristics and scarcity, so investors can focus more on unique opportunities in both markets.

Specifically, Wang believes Hong Kong’s advantages lie in high-quality internet-listed companies and some mega-cap stocks with high liquidity that are transitioning toward AI. For investors seeking dividends and stable cash flow, some dual-listed companies with high dividend payouts in both A-shares and Hong Kong stocks are relatively more attractive in valuation.

The core advantage of A-shares is their status as globally scarce investment targets. “Fields like robotics, automation, high-end manufacturing, batteries, biotech, and pharmaceuticals, which are highly favored by international investors, are unique to A-shares and offer abundant opportunities,” Wang emphasizes. These assets are not only rare within China but also globally, and are highly concentrated in A-shares, making such allocations more effective.

Zhou believes that Hong Kong and A-shares share the same fundamental basis, as most listed companies are Chinese firms, and their trends will be highly similar, though with different rhythms. “Hong Kong is a more free market, more affected by foreign capital flows, and generally more volatile than A-shares.”

He also notes that Fed rate cuts will directly benefit Hong Kong stocks, helping absorb dollar spillover funds after rate reductions. Plus, with Hong Kong stocks still trading at a 20%-30% discount compared to A-shares, “from a valuation perspective, they are quite attractive.”

Wang Zonghao sees Hong Kong stocks benefiting more from institutional enthusiasm for AI, especially large internet firms on the application side, and expects performance to be promising amid Fed rate cut expectations. A-shares, supported by policy and long-term funds, may have smaller volatility than Hong Kong stocks, and under the “anti-inflation” theme, sectors like new energy and upstream manufacturing could see recovery. He highlights that institutional investors in Hong Kong stocks are higher, requiring more performance verification, with earnings reports in April, July, and August serving as key catalysts.

Regarding specific Hong Kong stocks, Zhou mentions three categories: first, internet platform companies, which are making increasing efforts in the new AI era; their gap with overseas comparable firms is narrowing, but most Chinese internet tech companies still trade at about 40% discount. Second, AI algorithm and application companies, which are experiencing significant growth due to AI-driven industry changes. Third, non-Chinese assets listed in Hong Kong, such as European utilities and global banks, which can serve as a balance to Chinese companies.

(Article source: The Paper)