Wall Street expects Chinese stocks to continue their rally with $2.4 trillion

China has won back global funds in a banner year for stocks, with investors anticipating further gains in AI and the country’s resilience amid US tensions. Global fund managers Amundi SA, BNP Paribas Asset Management, Fidelity International and Man Group all expect Chinese stocks to continue rising in 2026. JPMorgan Chase & Co. recently upgraded the market to overweight, while Gary Tan of Allspring Global Investments says the asset class is becoming “indispensable” for foreign investors.

Investor perception of China has shifted from skepticism to recognition that the market can deliver unique value through technological advancements. The MSCI China Index is up about 30% this year, beating the S&P 500 Index by the most since 2017 and adding $2.4 trillion in value. With most of the inflows being driven by passive funds, there is hope that a return of active money managers could drive the next phase of the recovery. “China has gone a step further, proving more resilient and investors are now increasingly embracing an ‘investable’ China that offers diversification and innovation,” said George Efstathopoulos, portfolio manager at Fidelity International in Singapore. “I would now be more inclined to buy Chinese dips.”

Foreign long-only funds bought about $10 billion worth of stocks in mainland China and Hong Kong through November this year, according to Morgan Stanley data, a reversal from the $17 billion outflow in 2024. The inflows were driven entirely by passive investors, who track indexes, while active fund managers pulled out about $15 billion.

Part of the reason for this is that many active investors – who rely on stock picking – are still unable to shake off years of concerns about the slowdown in the economy and Beijing’s sudden crackdown on private sectors. Although authorities have taken a more business-friendly stance this year, stimulus measures have fallen short of investor expectations.

Some global fund managers said the bar for investing in China remains high, while the US market is also doing well, said Winnie Wu, head of Asia-Pacific equity strategy at Bank of America, who regularly meets with investors to gauge their views on the market. But she said improving profits and a turnaround in China’s chronic deflation problems could turn the tide. “The next leg of China’s rally will be driven by global funds,” she said.

Slow bull

The bull case for Chinese stocks rests on optimism about a growing class of tech giants in chips, biopharmaceuticals and robotics, along with hopes that the world’s second-largest economy can finally shake off deflationary pressures.

The buzz around artificial intelligence has led to huge jumps in stocks like Cambricon Technologies Corp. and Alibaba Group Holding Ltd. But sectors that have lagged the broader market this year, especially consumer, could also expect a rebound.

“The opportunities lie in stocks that have been affected by the search for stability in the economy rather than reflation,” said Andrew Swan, head of Asia ex-Japan Equities at Man Group. “If reflation is the next phase for China, there are many opportunities.”

Investors also point out that Chinese stocks remain cheap compared to global peers. The MSCI China index, which covers stocks listed in the mainland and Hong Kong, trades at 12 times forward earnings, compared with MSCI Asia’s 15 and the S&P 500’s 22.

The caveat: Investors shouldn’t expect the same returns next year. Nomura Holdings Inc.’s base case scenario. for the MSCI China implies an increase of about 9% compared to current prices. Morgan Stanley also expects a gain of about 6% from here.

Some argue that foreign investors are not a must-have for the Chinese stock rally. Buying local mutual funds, and rising demand from insurers after a regulatory boost earlier this year, is also helping. Beijing’s desire to create a slow bull market means that sovereign wealth funds, known as the national team, are also willing to buy shares during tough periods.

The great hope, however, comes from the country’s savings. Households have approximately $23 trillion in deposits. With a years-long real estate crisis still causing pain and fixed income products offering paltry returns, many investors think this pile of cash will boost the market.

“Are we getting sentiment back from mainland investors in their own markets?” says Florian Neto, head of investments in Asia at Amundi. “If we get confirmation of this improvement, the market will continue to fly.”