2026 China Equity Outlook: 6 Long-term Themes for Investors
What comes after the "easy money"?
As we head into 2026, the narrative for Chinese equities is shifting. The explosive, high-octane growth of 2024 (17%) and 2025 (31% YTD) has largely been a story of valuation recovery. Taking the MSCI China Index (MCHI) as a proxy, its PE has already returned to its pre-pandemic average, meaning the “easy money“ from multiple expansion is mostly behind us.
To justify further gains, we need to see the baton pass from policy-driven sentiment to genuine fundamental earnings growth.
While deflationary pressures haven’t vanished, the floor is firming: salaries are showing early signs of increase, and the property market has stopped its freefall. (This stability was achieved without massive “flood-like” stimulus—I think that suggests the bottom is likely in.)
So moving forward, I expect a “Slow Bull” market.
Additionally, the rate-cut cycle that is now in place is traditionally a positive catalyst for Hong Kong. I think 2026 will be a year of selective alpha. Here are my thoughts on the themes that will define the years to come.
Theme 1: The Consumption Pivot (Services > Products; Discretionary > Staples)
In my opinion, the Chinese consumer market is neither a total “trade down” nor a “trade up” story, but rather presents opportunities in its pivot from physical products to services, and from staples to discretionary.
What’s not working:
The struggle to escape the deflationary gravity is evident in the macro data. November data points to a clear cooldown: social retail sales growth slowed to 1.3% year-on-year, marking six consecutive months of deceleration. Within this slump, I have observed that staples are consistently performing worse than discretionary items; for instance, premium Baijiu continues to suffer from persistent price erosion. Furthermore, the momentum from earlier “trade-in” (以旧换新) subsidies is hitting a wall. Categories like smartphones, EVs, and home appliances are seeing sales stalls as these subsidies taper off.
A lot of these big-ticket, non-recurring items essentially exist in a saturated “stock market” where policy has simply pulled forward domestic demand that would have happened later. This is why I am avoiding stocks caught in the “involution” trap (to name a few examples: BYD and the broader EV sector, as well as Meituan and JD, where the price wars in food delivery and e-commerce show no signs of a ceasefire.)
What’s working:
However, I still see prosperity in sectors that reflect a fundamental shift in the Chinese lifestyle—the so-called “new consumption“ that we covered multiple times previously. This “new consumption” isn’t just about chasing 2025 stars like Pop Mart or Laopu Gold (in fact, I would be cautious about chasing those specific highs in 2026.)
The broader theme is that we must focus on the “new” things the younger generation actually values: items or services that bring joy, comfort, meanings and differentiation rather than generic utility.
For instance, this pivot directly favors the gaming sector. I remain bullish on Tencent and NetEase because they are uniquely insulated from deflationary cycles; they provide high-frequency “emotional value” that consumers are loath to cut.
I also see continued outperformance in “experiential“ spending on services (instead of physical goods). Throughout 2025, service-sector growth consistently outpaced the broader retail spending. In particular, spending on travel, live concerts, shows, and other offline events remained highlights. This trend will continue to benefit OTAs and lifestyle-centric hospitality brands like Atour that have successfully differentiated their “experiential” offering.
“Pet economy” is another high-conviction example. In an environment defined by lower birth rates among the younger generation, the “humanization” of pets represents one of the few areas where spending remains remarkably inelastic and growth remains certain.
Related reads about China’s service sector potential:
Theme 2: Domestic AI/Chips Independence
Semiconductor self-reliance in China is a high-certainty theme that will persist regardless of external geopolitical shifts. For instance, even with the Trump administration recently easing export restrictions for Nvidia’s H200s—albeit with a 25% fee attached—Beijing’s push for independence remains unwavering: China set to limit access to Nvidia’s H200 chips despite Trump export approval, proving that this is a core national strategy rather than a reactive measure to sanctions.
According to sell-side research, domestic chips are expected to account for 40% of Chinese cloud provider capex in 2026, a significant leap from the 20-30% range we saw in 2025.
In a recent breaking news, China has already produced a working EUV lithography prototype in a high-security Shenzhen laboratory. While mass production remains a long-term goal (likely for 2030 or beyond), the existence of a working prototype generating extreme ultraviolet light suggests the timeline for semiconductor independence is accelerating faster than most analysts projected.
Finally, we cannot ignore the recent heat in the capital markets. The explosive IPO debuts of Moore Threads and MetaX in December 2025—with first-day surges exceeding 500%—demonstrate that investor appetite for the sector is high. This influx of liquidity will serve as a powerful catalyst for market sentiment heading into 2026.
