China enters 2026 – the Year of the Horse – on a firm footing after a notable rebound in 2025. With a triad of policy support, improving investor sentiment and the emergence of new growth drivers, we believe a window for achieving attractive, risk-adjusted returns in Chinese equities is now open, supported by a wave of structural opportunities.1
China’s GDP growth is expected to moderate to around 4.5% in 2026 from the targeted 5% this year. The slightly slower pace reflects cyclical rebalancing and a transition away from property and low-end manufacturing towards innovation-led and sustainable development.
Policymakers’ new targeted support and strategic structural upgrades should lay a resilient foundation for the future. The government is actively addressing critical tail risks, particularly those related to debt management and the property sector downturn, through monetary and fiscal policies and structural reforms (see Exhibit 1).
Watch out for higher volatility
Inflation is expected to be subdued, with consumer prices gently rising after a prolonged bout of deflation. That said, if growth falters or deflation reemerges, modest policy rate cuts or liquidity injections are likely. At the same time, investors should expect – and embrace – higher volatility.
Key swing factors include:
- The sustainability of the US artificial intelligence (AI)-driven rally, where a narrow group of mega-cap technology names dominate index performance and capital spending
- Domestic property sector challenges being addressed proactively for a stable and controlled adjustment
- Trade and technology tensions between the US and China that are likely to persist into 2026, but with a trend pointing towards managed competition and negotiated solutions
- A more fragmented global trading system marked by industrial policy and rising protectionism.
These elements are, to a degree, already reflected in equity prices, so we see them as sources of volatility rather than thesis-breaking risks for three reasons:
- Monetary, fiscal, and regulatory policy support are increasingly calibrated towards stabilising growth while fostering private sector confidence.
- Flows from domestic retail investors and selective reallocations by global investors are starting to rebuild market depth and breadth, providing more support to equity valuations.
- New growth engines, led by innovation-rich sectors and higher value-added manufacturing, are gradually offsetting the drag from legacy sectors.
Four major growth themes
We believe equity investors should align with fundamental market drivers such as innovation, industrial upgrades, lifestyle change and sector consolidation.
These long-term growth themes are expected to generate robust earnings and cash flow, and they are increasingly complemented by renewed domestic retail interest and early signs of re-engagement from global investors.
Innovation
We are particularly optimistic about innovation and industrial upgrades, where strong policy support and global competitiveness are most apparent. Innovation-driven sectors are set to be among the fastest-growing and most favoured by the market as China strives for technological self-reliance and global leadership in pivotal industries.
China’s capabilities are more advanced than many have assumed, and its underappreciated innovation capacity is starting to be valued by the market. Beijing’s 15th Five-Year agenda explicitly prioritises tech innovation, which should be a long-term tailwind for equities.
Industrial upgrading
Industrial upgrading is both an internal necessity and an external opportunity. Large parts of the capital stock remain low-tech and energy-inefficient.
A decade ago, Chinese heavy equipment makers were seen as followers. Now they are world-beaters. This reflects a broader trend: firms have aggressively invested in R&D and have expanded abroad, establishing production bases and distribution in Asia, Africa and Latin America. This has boosted global market share at the expense of some traditional Western and Japanese competitors.
Consumers’ lifestyle choices changing
We see exciting growth from within the consumption complex – services, experiences and sports – offering potentially vibrant opportunities for discerning investors.
Widespread healthy consolidation
Consolidation promises enduring upside for quality franchises, accelerating the exit of weaker players, and paving the way for stronger incumbents to claim greater market share and pricing power. For investors, consolidation can mark the bottoming of a cycle and the start of more sustainable growth for the winners.
In 2026, we expect consolidation to be prominent in upstream sectors such as building materials, renewables, consumer, financials and industrials.
Overall, we believe China equities present an attractive blend of macroeconomic stability, dynamic sectoral growth, and compelling valuations relative to their global peers.
[1] For a detailed analysis of China’s prospects, read “China equities outlook 2026 – Year of the horse, China’s growth path forward”.
