Taking a Breather

Please find below our latest thoughts on China:

• China equity markets have taken a breather in recent weeks, consolidating impressive year-to-date gains.
• As part of the pullback, there has also been some marked rotation. Previous market leaders such as tech and healthcare stocks have seen profit-taking, with more defensive and higher-yielding sectors such as energy, telecoms and banks being more resilient.
• While the AI jitters in the US played some part, we also see a more domestic catalyst at work.
• Earlier this month, the securities regulator in China issued guidelines requiring domestic fund managers to adhere more closely to their mandates. As well as aiming to improve transparency in the mutual fund industry, this was also interpreted as a warning against excessive speculation and crowding in the TMT space.

• Recent economic data has also been somewhat underwhelming, leading to a more muted near-term environment.
• This begs the question of whether China equities can make further gains in the coming year if the macro environment as a whole remains subdued.
• From our perspective, we see little correlation historically between the macro and the market.
• China’s years of strongest economic growth often saw quite poor equity returns. And the more than 25% returns (USD) in both China A- and H-shares this year have been achieved against a weak property market and ongoing deflationary pressures.¹
• One reason for this is that the structure of China’s equity markets is quite different to the structure of the underlying economy.
• The widely followed MSCI China A Onshore Index, for example, has close to 25% exposure to the tech sector. This weighting has more than doubled in the last decade. In contrast, the real estate sector is less than 1% of the index.²
• So, in our view, while an unexpected macro shock would no doubt impact equities, the current set-up, where monetary and fiscal policy settings are occasionally nudged to achieve the GDP growth target – likely to be in the range of 4.5%-5% again next year – should not be a barrier to future equity gains.
• Indeed, as we look ahead to 2026, the interlinked subjects of geopolitics and technology are likely to have more of a market impact.
• A key question is whether the strategic competition between the US and China – which for many years has contributed to the higher risk premium on China equities and will likely continue to be a source of volatility – may also come to be seen as an opportunity.

• Since the US first imposed export controls targeting Huawei in Trump’s first term, China’s strategic focus has pivoted to national security.
• This resulted in resources on a massive scale being redeployed from “unproductive” sectors such as real estate, to build up domestic capabilities in critical tech-related areas. In doing so, the goal has been to reduce reliance on Western supply chains.
• This is the context to why China’s policymakers have largely tolerated the property market slump over the past years, even though it resulted in extreme equity weakness for a sustained period.
• The good news here is that the direct economic costs are getting smaller as the property sector shrinks. Housing sales are now equivalent to just over 5% of GDP, back to the level of 20 years ago.³
• While the recent trade truce buys some welcome breathing space, in effect both the US and China look to be buying time, digging in, and making further efforts to reduce mutual dependence.
• The US government has been signing a raft of deals on rare earth materials, while Beijing is doubling down on investments in chipmaking.
• China’s long-term policy support and infrastructure build-out are key reasons we view the tech and AI space in China positively.
• Take power supply as an example. Decades of investment have led to China’s electricity generation already being twice that of the US and growing much faster.⁴
• Being able to deliver abundant and stable electricity at low cost may well turn out to be China’s trump card, given that AI data centres can consume energy on the scale of small cities.

¹ Source: Bloomberg as at 17 November 2025
² Source: IDS GmbH, Allianz Global Investors as at 31 October 2025
³ Source: Gavekal as at 17 November 2025
⁴ Source: Gavekal as at 14 November 2025