China’s drive to build up its artificial intelligence (AI) capabilities and boost its economy have improved investor sentiment and produced a sharp rally in the equity market this year.
Equity markets tend to lead economic recoveries and this appears to be the case in China over the past year. While investors in Chinese equities are enjoying a strong rally, the economy is still weighed down by the weak property market and sluggish consumption. The stock market, however. is reflecting a turn in sentiment towards China and some renewed optimism around the potential for its economy to improve.
Proactive government policy
Government actions are attempting to address pockets of economic weakness and boost areas where China is lagging other countries. Property prices are showing signs of stabilising, an important factor in consumer sentiment, given the large proportion of wealth Chinese consumers have in real estate. China has also adopted “anti-involution” policies, which are designed to address the issue of too much capacity in some sectors that leads to competition in markets that are not growing—a losing situation for all players.
While the government is supporting rationalisation in some industries, it is encouraging investment that puts China on a path to technological self-sufficiency. DeepSeek’s* AI capabilities took the market by surprise earlier this year and refocused investor attention on China’s progress in AI industry. Several Chinese companies have developed cost-efficient large language models (LLMs)— despite restricted access to Nvidia* chips.
Many market drivers
While the real economy recovers, several other factors can continue to drive equities higher, starting with sentiment. The worst fears around the real estate market are abating and the impact of US tariffs is slightly mitigated by the fact that many US allies are also facing increased tariffs.
China’s policy interest rate has been declining and is now actually lower than the UK’s, which is generally helpful for equities and growth assets. Household deposits are still very high suggesting that as consumers’ confidence increases they will have cash to spend on goods and services, and are more likely to buy stocks than property.
The rally in Chinese equities is largely thanks to a recovery in valuations off very pessimistic levels, which has helped value stocks outperform growth stocks. Most of the capital flows into the market have come via passive equity strategies as many active managers are still underweight China. However, active managers are reassessing China; if they begin adding positions it could provide a technical tailwind for Chinese equities.
JCGI’s investment themes
JPMorgan China Growth & Income plc (JCGI) has been adding resources in Chinese equities in contrast to some competitors that have been retreating. The large local team is integrated with J.P. Morgan Asset Management’s global research team and communicates frequently to exchange information and share insights. One area where global insights are particularly helpful is across the technology sector.
JCGI believes Chinese technology stocks have significant potential as China seeks to catch up to the US in AI investment and become technologically self-sufficient. The portfolio managers are investing across three key themes within technology. The first is AI infrastructure, which includes the global server markets and companies related to hardware manufacturing, such as Foxconn*, WUB* and Huaqin Technology*. The second theme is AI use cases and includes companies like Kuaishou*, a video platform with an app where users can upload a picture to make a video. The third theme is China’s quest for technological self-sufficiency by designing and making its own semiconductor chips. JCGI holds a position in Naura*, a semiconductor processing equipment company that can benefit from China’s capacity expansion in semiconductor foundries.
Carbon neutrality is another investment theme in the portfolio. Demand remains strong and sectors with too much capacity, such as solar, are being rationalized. The portfolio has a position in Sungrow*, a supplier of battery storage systems, which is experiencing strong demand in the US from data center operators.
A recovery in Chinese consumption is also a key investment theme. JCGI has holdings in the travel sector, such as H World and Trip.com*, as well as liquor company Luzhou Laojao*, which has a high dividend yield. Valuations remain relatively attractive in the leisure and services sector and a recovery in Chinese economy could lift retail companies in the JCGI portfolio, including Alibaba* and Meituan*.
Looking ahead
The technology sector and small cap companies contributed a large part of JCGI’s recent outperformance. The portfolio remains overweight the technology sector and the domestic Chinese A-share market, benefiting from J.P. Morgan Asset Management’s local mutual fund entity to help navigate this large opportunity set. The portfolio managers are seeking to broaden JCGI’s exposure to AI and recently added positions in WUS Printed Circuit Kunshan*, Versilicon*, a silicon platform as a service company, and Meitu*, a photo and video editing app. JCGI remains underweight more value-oriented sectors, such as financials and energy, due to their lower growth.
The Chinese equity market is likely to remain volatile as the economy recovers but the combination of improving investor sentiment and continued technological advances could drive Chinese equities higher.
* The portfolio is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are subject to change at the discretion of the investment manager without notice.