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, providing insights into 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 generally hold an optimistic view, 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 explicitly stated that after several major bull markets, A-shares have truly entered a “slow bull.” She explained 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 overextensions; 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 that can support market capitalization. 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 improvements in corporate profitability rather than mere valuation expansion. Zhu Liang highlights 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 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 revealed that Morgan Stanley expects the profit growth rate of the CSI 300 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, leading to profit improvement in related industries; and multiple supports from fiscal and monetary policies to 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 pointed out.

Liu Mingdi further analyzed that, based on the allocation of four types of active equity funds (global, ex-US global, emerging markets, Asia-Pacific excluding Japan), global and Asian regional funds have the lowest underweight relative to benchmark indices; Asia-Pacific (excluding Japan) funds, due to more opportunities to research regional and Chinese companies operating in mainland China, have a deeper understanding of the competitiveness of mainland enterprises, and also have lower underweight levels.

UBS China Equity Strategist Wang Zonghao emphasized that the trend of foreign capital increasing holdings in Chinese assets will continue. He provided 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 observed that there are clear signals of foreign capital increasing holdings in Hong Kong stocks. “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 positions in China, and we believe this trend will continue.”

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

Zhu Liang pointed out that, besides profit correction opportunities, improved corporate governance and increased 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 artificial intelligence industry chain has become a core direction unanimously favored by foreign institutions.

“Technology waves are still rising, and AI remains the main theme for future investments,” said Lei Zhiyong, Director of Equity Investment at Morgan Stanley Fund. Driven by policy dividends and engineering talent, he expects the broad tech industry to continue generating abundant opportunities in 2026, with particular optimism for 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 mark the year of explosive AI application growth.

Wang Zonghao is especially optimistic about hardware and internet applications. “In hardware, especially semiconductors and 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 expected to be the biggest beneficiaries of AI.”

Zhou Wenqun believes that demand driven by AI will likely bring good performance growth for these tech companies. “The domestic tech growth sector is broad, resilient, and more diversified, with sectors like commercial aerospace and robotics showing a ‘full bloom’ state, not limited to a single main line.”

The themes of anti-inflation and going overseas are also highly regarded. Wang Zonghao pointed out that the photovoltaic industry chain is a typical example under the anti-inflation theme, while companies with high overseas revenue share, especially in the automotive parts sector, are favored in the outbound theme. Lei Zhiyong believes that Chinese companies’ upgrading and going global will continue to be recognized, and high-tech, high-value-added complete equipment industries may see continued growth, with segments like military (commercial aerospace), nuclear power, wind power, and energy storage expected to produce a batch of global leaders.

Zhou Wenqun stated, “The current stage of China’s development means many companies, after accumulating experience from the large domestic market and strong demand, are increasingly demonstrating breakthroughs in overseas competitiveness. In high-end manufacturing, electric vehicles, batteries, new energy, and cultural exports, some very strong Chinese firms are continuously gaining more market share overseas.”

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 said that over a 6-12 month horizon, 2026 should see A-shares and Hong Kong stocks moving in tandem, but individual stock selection in both markets will have unique and scarce opportunities, so investors can focus more on the distinctive opportunities on each side.

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 more attractive valuations in Hong Kong.

The core advantage of the A-share market is its globally scarce investment targets. “Fields like robotics, automation, high-end manufacturing, batteries, biotech, and pharmaceuticals, which are currently very popular among international investors, are unique to A-shares and offer abundant opportunities,” Wang Ying emphasized. These targets are not only rare in A-shares and Hong Kong stocks but also globally, and are highly concentrated in the A-share market, making such allocations more effective.

Zhou Wenqun believes that Hong Kong stocks 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 pointed out that Fed rate cuts are a direct positive for Hong Kong stocks, which can better absorb dollar spillover funds after rate cuts. 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 believes Hong Kong stocks benefit more from institutional enthusiasm for AI, especially large internet companies in applications, and with Fed rate cut expectations, their performance is worth watching. 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 may see recovery. He specifically mentioned that institutional investors in Hong Kong stocks are higher, and “performance verification will be more important, with April and July-August earnings seasons serving as key catalysts.”

Regarding specific Hong Kong stocks, Zhou Wenqun highlighted three categories. First, internet platform companies, which are making increasing efforts in the new AI era, narrowing the gap with overseas peers, but still trading at about 40% discount from valuation perspective. Second, AI algorithm and application companies, benefiting from the 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)