Catalysts in 2026
Several structural factors underpin our constructive outlook for Chinese equities in 2026.
- People’s Bank of China
The People’s Bank of China (PBOC) still has room to ease monetary policy by lowering the reserve requirement ratio and cutting the policy rate. However, we do not expect aggressive stimulus. The PBOC recently downplayed the significance of loan growth deceleration while promoting ‘cross-cyclical’ policy adjustments, signalling a focus on long-term stability rather than short-term recovery.
- Innovation and consumption
Technology innovation, industrial upgrade, and domestic consumption remain key development areas under the central government’s five-year plan. Targeted support for these sectors is likely.
The Hong Kong initial public offering (IPO) market should remain active. Hong Kong emerged as the top fundraising hub globally in 2025, raising US$24 billion from 66 IPOs in the first three quarters. Although this is below the fundraising boom of 2021, the Hong Kong Exchange maintains an active pipeline with around 300 listing applications as of early October, suggesting sustained capital markets activity ahead.
Perhaps most compelling is the potential from Chinese household deposits. A mere 5% deployment of the RMB163.7 trillion (US$23 trillion) deposit pool as of October, without leverage, would equal 6% of the total market capitalisation (market cap) of onshore and offshore China equity markets combined. This represents substantial dry powder that could flow into equities as confidence strengthens.
Key risks to watch
Despite positive momentum, several headwinds warrant attention.
The domestic economy continues to show weakness. Industrial output grew just 4.9% year-on-year (YoY) in October, while retail sales rose only 2.9%, both marking the slowest growth rates since August 2024. Property price declines have deepened alongside fixed-asset investment contraction, reflecting persistent challenges in the real estate sector.
Structural issues also pose concerns. Intense competition and excess capacity in certain industries are eroding margins, which will weigh on corporate earnings growth. This ‘involution’ dynamic could limit profitability improvements even as top-line growth remains positive.
US-China relations remain a wild card. While tensions have stabilised for now after reciprocal tariffs were suspended until November 2026, unknown factors could affect geopolitical risks, including United States’s stance on Taiwan and trade restrictions around high-tech chips and rare earths. Any escalation could quickly reverse market gains.
Setting the base case for 2026
The rally in Chinese equities since 2024 has been mainly driven by valuation re-rating, while corporate earnings growth has remained in the low to mid-single digits. For the rally to sustain, earnings growth must accelerate meaningfully.
The Hang Seng Index’s forward 12-month price-to-earnings (P/E) ratio currently stands at 11.8x according to London Stock Exchange Group (LSEG) Institutional Brokers’ Estimate System (IBES), almost one standard deviation above the index’s 10-year average forward P/E ratio of 10.7x, but still well below the 10-year peak of 15.5x reached in 2021. While valuation is not cheap relative to history, the premium is justifiable given rapid technological advancement and recovering global investor demand. Relative to global peers such as the S&P 500, which trades at a forward P/E ratio of 22x, Chinese equities remain at a significant discount.
Our base case anticipates that some capital outlays in innovation will start translating into profit in 2026, though monetisation will be gradual. We expect corporate earnings YoY growth to accelerate from 4% in 2025 to 8% in 2026. Assuming the P/E ratio remains at a similar level, our base case price target for the Hang Seng Index is 28,300 by end-2026.
From an investment theme perspective, key focus areas align with the central government’s five-year plan priorities. We favour technology and consumer companies that can lead the AI race and capture market share in innovative sectors. Within cyclicals, industry leaders positioned to gain market share under structural reform may outperform peers, benefiting from anti-involution policies designed to reduce wasteful competition and promote sustainable growth.