- US stock market concerns are prompting investors to reconsider Chinese equities.
- China’s stock markets are seeing historic gains after years of underperformance.
- Goldman Sachs highlighted China’s tech advances and reduced regulatory risks.
The US stock market skidded last week over concerns about a potential recession — and it’s making some investors consider China again.
The change in tune comes on the back of a bull run in China’s stock markets. The MSCI China Index is up 20% so far this year, marking the best start of the year in history for Chinese stocks. The strong gains come after several years of dismal performance.
Goldman Sachs analysts wrote in a Sunday note that global mutual funds — who are typically long-only investors — may “rekindle their interest in and sponsorship for Chinese equities.” Over the last three years, these investors largely sat out rallies and reduced their exposures.
“Our latest investor conversations suggest that global LO mandates have become more engaged in Chinese capital market transactions (IPOs and placements) of late, and are increasingly motivated to add to the public market given the recent weakness and volatility in the US stock market where their allocations are close to all-time highs,” wrote Goldman Sachs’ analysts.
They wrote that investors are also considering Chinese stocks because of China’s technological breakthroughs and reduced regulatory uncertainty.
The analysts estimate markets could see $8 billion worth of net buying in Chinese equities if global mutual funds up their allocation to the asset class by just 1 percentage point.
The MSCI China Index’s gains have outperformed developed and emerging markets by well over 10%.
Goldman Sachs is maintaining its overweight calls on China H-shares and A-shares — those listed in Hong Kong and on the mainland, respectively. However, the analysts wrote that they expect China’s bull run to slow and profit-taking pressures to emerge as US-China geopolitical tensions continue.
Goldman Sachs also repeated its stance that China’s current market rally is different from a short-lived September surge in Chinese stocks that was driven by an aggressive stimulus blitz from Beijing. September’s policy pivot reduced downside risks for stocks, but recent developments in China’s tech space are a game–changer, the analysts wrote.
The boost in Chinese tech stocks is thanks to the recent rise of DeepSeek, a Chinese startup that released a cost-competitive AI model.
This development flipped the narrative for Chinese Big Tech stocks that were previously under pressure from a state-led crackdown. It suggests that Chinese tech may present serious challenges to capital-intensive AI development that has long been dominated by Western firms.
Hong Kong’s Hang Seng Tech Index has surged about 32% so far this year. Stocks of tech giants Alibaba, Tencent, and Baidu have jumped 66%, 27%, and 12%, respectively.
“The latest technology breakthroughs are more micro- and innovation-driven in nature, and are beneficial to earnings as well as to valuations, which might give the recovery more staying power than those that were purely driven by liquidity and policy expectation repricing,” the Goldman Sachs analysts wrote.
