Blue-chip index CSI300 has matched the S&P 500 with a roughly 16% year-to-date gain
[SINGAPORE/SHANGHAI] Fund managers are picking Chinese industrial stocks and holding volatile tech shares, betting a two-year-old equities rally can withstand an economic rough patch, as valuations and steady returns lure foreign investors back.
China’s blue-chip index CSI300 has matched the S&P 500 with a roughly 16 per cent year-to-date gain, while Hong Kong’s Hang Seng – up about 30 per cent – is on course for its most substantial annual rise since 2017.
The mood is far from the stimulus-triggered euphoria of a year ago, though the ride is becoming bumpier – especially as pressure on developer China Vanke reminds market participants that a prolonged property downturn is far from over.
But there seems to be little panic among investors and analysts who say the bull market is just taking a breather.
“We believe we are just at the beginning of a gradual reallocation process by foreign investors coming back into China,” said Morgan Stanley’s chief China equity strategist Laura Wang.
“I think what they have seen so far through the course of this year has already been encouraging enough for them to gradually change their mind,” she said, adding that she had been spending less time talking with investors about US-China tensions.
China stocks have also defied Sino-American trade friction and climbed thanks to state support, improved corporate governance and big gains for artificial-intelligence-linked stocks after the impressive release of DeepSeek’s chatbot.
A record HK$1.38 trillion (S$220 billion) was also poured from China into Hong Kong, where capital markets have been revived.
“The next leg of the bull run will likely be driven by fundamental improvements and earnings growth,” said Xia Fengguang, fund manager at Shenzhen Rongzhi Investment.
Like others, he is supportive of Beijing’s campaign against industrial overcapacity and price wars, referred to as its anti-involution drive, betting it can improve corporate margins.
Anti-involution
Valuations of industrial stocks are also attractive, fund managers say, and they are helping to draw investment.
“Cyclical stocks are relatively cheap, so you can start building positions when prices are weak as anti-involution policies gradually take root,” fund manager Wang An said.
Over the past three months, 13.5 billion yuan (S$2.5 billion) in net inflows entered ETFs tracking the CSI Battery Thematic Index, while another 11.2 billion yuan went into funds tracking the CSI chemicals sub-industry index, according to financial data provider Datayes.
Funds tracking the tech-heavy STAR 50 Index experienced 31.1 billion yuan of net outflows during the same period.
Xu Jie, a Shanghai-based fund manager at Yuanzi Investment Management, has bought solar energy, steel-making and coal stocks.
“There is no question” that China’s slow bull run will extend into next year, Xu said, citing potential inflows from foreigners and local depositors.
Currently, the Shanghai Composite Index and Hong Kong’s Hang Seng are both trading at roughly 12 times earnings.
That compares with a multiple of 28 for the S&P 500, 21 for Japan’s Nikkei 225, and a price-to-earnings ratio of 21 for Europe’s FTSE 100 Index, according to LSEG.
“Whether you look at valuation or liquidity, we are just halfway through the bull run,” said Wang Wendi, distribution manager at Shanghai Intewise Capital, which has increased its holdings in steelmakers, chemical producers and express-delivery firms.
Another Chinese fund house, Zenith & Xenium Capital, said it also placed wagers on cyclical plays like photovoltaic firms, refiners and chemical processors and new energy sectors.
New China
Foreigners have previously held concerns over policy risks in China and for the past few years have kept allocations relatively light while US and global investments have performed strongly.
Some investors said they were not all in on China and, as factory activity slowed for an eighth straight month in October, there are headwinds.
“When I say China, we’re on the fence,” said Vincenzo Vedda, global chief investment officer at DWS.
China no longer publishes real-time data on foreign inflows and the latest central bank figures showed foreign holdings rose to 3.5 trillion yuan at the end of September, well below a 2021 peak of 3.9 trillion yuan, but it reflected some strength.
Florian Neto, head of investment for Asia at Amundi, Europe’s biggest asset manager, is neutral but draws a distinction between the “old China,” where exporters and developers faced economic headwinds and “new China” where AI and biotech firms can expect earnings growth.
“The market, in fact, is actually driven mostly by new China, by the innovation, tech and innovative drugs … we are very, very much looking forward to adding further,” he said.
And as investors take note of their full-year returns, they may become buyers in 2026.
“A number of other stock markets have performed better than the US this year,” said Kristina Hooper, chief market strategist at Man Group in New York.
“And that is, I think, a paradigm shift that most investors will recognise at least by January … and I think that helps encourage looking outside the US for opportunities, especially with valuations so stretched.” REUTERS
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