China's economic fundamentals will be key driver of next market cycle, equity strategists say

Asset managers said investors should place greater weight on China's economic fundamentals rather than short-term market swings, as they expect the next phase of Chinese equities to be driven primarily by underlying fundamentals.

By Thursday's close, the Shanghai Composite Index finished at 3,875.26, up 0.29 percent, while the Shenzhen Component Index closed at 12,875.19, down 0.25 percent. The ChiNext Index, which tracks China's Nasdaq-style growth enterprises, closed at 3,031.30, down 0.44 percent.

Analysts said that China's A-share market may undergo a short-term correction, but based on the strong long-term fundamentals of the Chinese economy, the market is expected to rebound after the adjustment.

China's 15th Five-Year Plan (2026-30) recommendations signal a shift from quantity-driven expansion to a more sustainable and innovation-led high-quality development. High-quality growth emphasized in the recommendations is expected to influence sector rotation and valuation dynamics over the next 12 months, said Shi Bin, head of China equities at UBS Asset Management.

At a recent UBS Asset Management flagship event, several fund managers shared their latest insights and outlook on China's stock market.

Shi said Chinese equities remain attractively valued. After a solid rebound earlier in the year, valuations for the MSCI China Index have normalized to around 13.2x forward earnings, above the 10-year average level.

"We are far from overheated — the next stage for Chinese equities will be driven by fundamentals," he said.

Investor sentiment is improving, especially internationally. He said, "Global investors are coming back — you can see their enthusiasm in both primary and secondary markets."

It is worth noting that the IPO market in the Hong Kong Special Administrative Region is active with high-quality issuers. Most of the Chinese companies' listings in 2025 have performed well, with roughly 90 percent trading above their IPO offer prices.

"The IPO pipeline is vibrant, and many of these Chinese companies can become global champions," he said.

Wang Ying, chief China equity strategist at Morgan Stanley, and her team recently issued a report stating that China's stock market is expected to see moderate gains next year.

Both the MSCI China Index and the Hang Seng Index have risen more than 30 percent year-to-date, making China one of the best-performing major equity markets globally in 2025. The key drivers behind this performance include structural improvements across multiple dimensions, such as companies enhancing shareholder returns, policy support for private enterprises, and the rise of Chinese companies in artificial intelligence, technology and smart manufacturing, said Morgan Stanley.

The New York-based multinational investment bank expects these structural improvements to continue into 2026, providing strong support for China's equity market.

Morgan Stanley also noted that if the current policy stance continues, particularly with a focus on boosting consumption, reducing real estate inventory and addressing involution-style competition, both the onshore A-share market and the Chinese offshore equity market are likely to maintain net capital inflows in 2026.

"In recent strategy road shows and major client events, we have continued to receive positive feedback from global investors regarding China's equity market. This reinforces our view that global investors are gradually returning to the China market and that steady net inflows will continue over the coming year," Wang said.