In this PERSPECTIVES Viewpoint – "China: Upside driven by AI optimism and policy stimulus", we evaluate the rally seen in Chinese equities, comment on the implications of a U.S. growth slowdown and potential tariffs. We conclude by analysing whether the rally may continue and enumerate the factors that could support the rally, the sectors we like and the upcoming catalysts.
Key takeways:
- The benchmark Hang Seng Index has rallied 17.6% YTD, beating major indices such as the S&P 500, Nasdaq 100 and Stoxx Europe 600, driven by strong inflows into AI stocks.
- Looking ahead, the upcoming April 2 review of U.S. trade policy, as a potential new date for new tariff announcements, currently still overshadows the decoupling potential that could be present for Chinese equities.
- However, we believe the influx of long- and medium-term capital into Chinese equities is likely to further bolster recent rallies and enhance market sentiment in 2025. Some factors that could support the rally going forward include the AI buildout and its implications for productivity and profitability, sustainability of the macroeconomic recovery driven by policy support and improving corporate earnings expectations.
- Valuations remain attractive with Chinese indices trading at a significant discount to global peers. The MSCI China is trading at a 1-year forward P/E of 11.2x with EPS growth expectations of 8.6%, Hang Seng at 10.3x and 4.6% vs the S&P 500 at 21.1x and 11.5% and the Stoxx Europe 600 at 14.0x and 6.6%. We reiterate our preference for the IT, consumer discretionary and green energy sectors.
