Global fund managers are strategically pivoting towards Chinese equities, particularly in the industrial sector, while maintaining holdings in volatile technology shares. This move signals a growing conviction that a two-year market rally possesses the resilience to navigate through current economic uncertainties. Attractive valuations and the promise of steady returns are acting as powerful magnets, drawing foreign investment back to Chinese shores.
The Bull Run Gathers Momentum
China's benchmark CSI300 index has delivered a year-to-date gain of roughly 16%, performance on par with the S&P 500. Meanwhile, Hong Kong's Hang Seng Index, soaring about 30%, is tracking towards its most significant annual increase since 2017. The prevailing sentiment, however, is more measured compared to the stimulus-driven euphoria of the previous year. The journey has grown bumpier, especially with renewed pressure on major developer China Vanke serving as a stark reminder that the protracted property sector downturn is far from over.
Despite these challenges, a sense of panic is notably absent among investors and analysts. Many view the current phase as a temporary pause in a longer bull market. "We believe we are just at the beginning of a gradual reallocation process by foreign investors coming back into China," stated Laura Wang, chief China equity strategist at Morgan Stanley. She noted that encouraging developments this year are gradually shifting investor mindsets, with less focus now on U.S.-China tensions.
Drivers of Resilience and Strategic Shifts
Chinese stocks have demonstrated notable resilience, climbing despite Sino-American trade friction. This strength is attributed to robust state support, enhancements in corporate governance, and significant gains in artificial intelligence-linked stocks following the impressive launch of DeepSeek's chatbot. A monumental inflow of HK$1.38 trillion from mainland China has also revitalised Hong Kong's capital markets.
Fund managers are aligning with Beijing's "anti-involution" drive—a campaign against industrial overcapacity and destructive price wars—betting it will lead to improved corporate profit margins. "The next leg of the bull run will likely be driven by fundamental improvements and earnings growth," predicted Xia Fengguang, a fund manager at Shenzhen Rongzhi Investment.
Valuations in the industrial space are particularly compelling. "Cyclical stocks are relatively cheap, so you can start building positions when prices are weak as anti-involution policies gradually take root," explained fund manager Wang An. Data from financial provider Datayes reveals substantial net inflows: 13.5 billion yuan entered ETFs tracking the CSI Battery Thematic Index, and 11.2 billion yuan flowed into funds tracking the CSI chemicals sub-industry index over the past three months. In contrast, funds tracking the tech-heavy STAR 50 Index saw net outflows of 31.1 billion yuan.
Valuation Appeal and the "New China" Narrative
The valuation gap remains a key attraction. The Shanghai Composite Index and Hong Kong's Hang Seng are both trading at approximately 12 times earnings. This compares to a multiple of 28 for the S&P 500, 21 for Japan's Nikkei 225, and a P/E ratio of 21 for Europe's FTSE 100 Index, according to LSEG data. "Whether you look at valuation or liquidity, we are just halfway through the bull run," asserted Wang Wendi of Shanghai Intewise Capital, which has increased stakes in steelmakers, chemical producers, and express-delivery firms.
This optimism is translating into concrete investment actions. Shanghai-based fund manager Xu Jie of Yuanzi Investment Management has purchased stocks in solar energy, steel-making, and coal. He sees the slow bull run extending into next year, fueled by potential inflows from both foreign and domestic sources. Other firms, like Zenith & Xenium Capital, are also betting on cyclical sectors such as photovoltaics, refining, and chemical processing.
The narrative is increasingly distinguishing between the "old" and "new" China. Florian Neto, head of investment for Asia at Europe's largest asset manager Amundi, remains neutral but highlights the divergence. He points to "new China"—encompassing AI and biotech firms with strong earnings growth prospects—as the primary market driver, contrasting it with exporters and developers facing headwinds.
While foreign holdings, at 3.5 trillion yuan by end-September, remain below the 2021 peak of 3.9 trillion yuan, the recent increase reflects renewed strength. As global investors assess full-year returns, the paradigm may shift further. "A number of other stock markets have performed better than the U.S. this year," noted Kristina Hooper, chief market strategist at Man Group in New York. This realization, she believes, will encourage investors to seek opportunities beyond stretched U.S. valuations, potentially making them active buyers in Chinese markets by 2026.
