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 exploring?

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 shifting from valuation repair to profit-driven

Regarding the overall outlook for the 2026 A-share market, 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 ample incremental funds, but the formation and peak were short-lived, with obvious valuation overextensions; whereas “slow bull” phases, while supported by funds, are fundamentally driven by earnings. “The A-share market is not short of liquidity; the main issue is the lack of per-share earnings capable of supporting market capitalization. If net profit margins can be reasonably improved, sustained positive returns are expected.”

Luntong Fund Vice President and Investment Director Zhu Liang judges that in 2026, the A-share market will shift from “valuation repair” to “profit-driven,” with the sustainability of market gains depending on substantial improvements 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, factors like 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 valuation levels.

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 to reach 6%-7% in 2026. Key supporting factors include: listed companies continuing to increase R&D and capital expenditure, maintaining global competitiveness in AI and high-end manufacturing; stabilization of the real estate market and an inflection point of accelerated consumption growth, driving profit improvement in related industries; and multiple supports from fiscal and monetary policies, further boosting profit growth.

Fidelity Fund Stock Department head Zhou Wenqun predicts that a style rotation 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 gather 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 exposure to 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 for mainland stocks. Asia ex-Japan funds, due to more opportunities to research regional and Chinese companies operating in mainland China, 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 much room for growth.

Wang Zonghao further observes that Hong Kong stocks have shown clear signals of foreign capital increasing holdings. “During the holiday period 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 positions in China, and we believe this trend will continue.”

Zhu Liang also notes that foreign investment in China is shifting its focus. “The logic of allocation 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, facing the market opportunities in 2026, the AI industry chain has become a core direction unanimously favored by foreign institutions.

“Technology waves are still rising, 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 engineer-driven benefits, he expects the broad technology sector to continue offering abundant opportunities in 2026, with particular interest in AI computing power, AI applications, and high-end manufacturing. He predicts that in 2026, AI infrastructure growth will significantly outpace most manufacturing and TMT sub-sectors, and 2026 may be the year of explosive AI application development.

Wang Zonghao is especially optimistic about hardware and internet applications. “In hardware, I particularly favor semiconductor equipment; ‘technological self-reliance’ remains the main theme. On the internet side, opportunities are concentrated in large Hong Kong-listed companies, with domestic internet giants expected to benefit most from 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, and other fields—not limited to a single mainline.”

“Anti-inflation” and “going global” 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 “going global” theme. Lei Zhiyong believes that China’s enterprise upgrades and international expansion will continue to be recognized, with high-tech, high-value-added complete equipment industries likely to maintain growth, and segments like military (commercial aerospace), nuclear power, wind power, and energy storage may produce a batch of global leaders.

Zhou Wenqun states, “China’s current development stage means many companies, after accumulating experience from the large domestic market and strong demand, are increasingly showing 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 abroad.”

The recovery of new and traditional consumption is also frequently mentioned. Zhu Liang is optimistic about experience-based new consumption driven by the “small but certain happiness” trend, mainly led by private enterprises. Zhou Wenqun divides consumption into traditional and new categories. For traditional consumption, he sees some opportunities this year, possibly bottoming out and rebounding, supported by stabilized upstream prices, eased anti-inflation policies reducing competition, and low inventory levels. 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 form an important part of 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, and biotech; and high-quality dividend stocks and insurance sectors.

In upstream hard assets and precious metals, Zhou Wenqun is optimistic about metals and non-ferrous resources, supported by a sustained weak dollar environment, strong industrial demand, and rigid supply constraints. Zhu Liang 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 the Hong Kong market, 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 on unique opportunities in both markets.

Specifically, Wang Ying 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 companies listed in both A-shares and Hong Kong stocks, especially those with higher dividend yields, may find valuations in Hong Kong more attractive.

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 the A-share market, making such allocations more effective.

Zhou Wenqun 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 paces. “Hong Kong is a more free market, more affected by foreign capital flows, and generally exhibits higher volatility 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 to A-shares, “from a valuation perspective, they are quite attractive.”

Wang Zonghao thinks Hong Kong stocks benefit more from institutional enthusiasm for AI, especially large internet companies on the application side, and with Fed rate cut expectations, their performance is worth watching. A-shares, supported by policy and long-term funds, may have smaller fluctuations 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 are more prevalent, requiring more performance verification, with earnings reports in April and July-August serving as key catalysts.

Regarding specific Hong Kong stocks, Zhou Wenqun highlights three categories: first, internet platform companies, which are making increasing efforts in the new AI era; the gap with overseas comparable companies is narrowing, but most Chinese internet platform tech stocks still trade at about 40% discount. Second, AI algorithm and application companies, benefiting from significant industry structural changes driven by AI demand, showing strong growth potential. 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)