China tech: The domestic technology sector in China has ramped up its innovation this year, making notable advances spanning the entire AI value chain, from AI platforms and models to cloud computing and semiconductors. New leading-edge Chinese AI models released this year have dispelled the misconception that the country is lagging in technology, and the sector has seen a notable uptick in supportive government policy aimed at reinforcing AI ecosystem resilience and supply chain security in response to US export restrictions. Despite strong performance year-to-date, Chinese tech valuations are at a significant discount to global peers and below their historical levels, suggesting room for further rerating. We expect 37% earnings growth in 2026, making China tech our highest conviction idea within global equities.
Chinese equities: The broader equity outlook for China has continued to improve, supported by resurgent domestic liquidity conditions, robust earnings growth, and a clear cycle of tech innovation and AI monetization. Record southbound flows, retail asset rotation, and low bond yields are fueling the rally, while underweight positions among foreign and local institutional investors suggest room for further inflows. Government stimulus has been modest, though new measures to support advanced manufacturing and technology are likely in the upcoming Five-Year Plan. Valuations remain compelling, and while risks from US-China tensions may flare up, we would consider any dips an opportunity to build positions.
Broader Asia exposure: Our constructive view on China has also lifted our outlook for Asia ex-Japan equities. A weaker US dollar into Fed rate cuts and a benign regional macro outlook support our forecast for high-single-digit returns for the regional index over the next 12 months. Positive AI capex developments across Asia are a growth tailwind, while earnings growth is solid and revisions breadth continues to improve. Regional valuations look appealing, trading at a discount to global peers. Regionally, we expect India and Indonesia to catch up as their business and earnings cycles turn. While US-China trade tensions pose a regional risk, we think both sides are incentivized to seek concessions and avoid a disruptive conflict.
