- Investors remain watchful of a pivot, but green shoots are emerging
- A strong start to 2026; record trade surplus underscores China’s manufacturing edge
- March “Two Sessions” offered few fireworks but ample reassurance, showcasing regulatory pragmatism
- USD-debasement trade to resume once US-Iran conflict settles; HK/China among least bruised in Asia
- China’s fundamental turnaround may be closer than the consensus gloom allows
Related Insights
Long accustomed to headlines of property slumps and geopolitical frictions, HK/China equities are beginning to display an unfamiliar spring in their fundamental outlook. While equity performance has not yet staged a decisive breakout and investors remain broadly watchful, demanding clearer proof that the recent uptick is more than a seasonal mirage, the data trickling in since the turn of the year – coupled with the pragmatic tone of the “Two Sessions” in March – hints at a genuine fundamental turnaround that may be nearer than the sceptics think. Export engines are humming, early signs of reflation are flickering, and policy continuity is being leavened, positioning the region to gradually regain investor confidence and fund flows. The result is a selective opportunity rather than a blanket endorsement, but one that global asset managers are quietly beginning to notice.
Exports and the first whiff of reflation. 2026 commenced with a pleasant surprise for China. Exports leapt 22% y/y in the January to February period – the strongest start in nearly four years – powered by advanced manufacturing products (mechanical and electrical machinery, electronics, etc.) and a broadening of destinations beyond the US to include ASEAN, the EU, as well as other belt-and-road partners. A record trade surplus has ensued, underscoring China’s manufacturing edge even as global demand wobbles and geopolitical frictions continue. Fixed asset investment (FAI), long a weak spot, also turned positive y/y with manufacturing and infrastructure spending offsetting a still-sluggish property sector. Inflation, too, is stirring. February’s CPI surged 1.3% y/y, the highest reading in more than three years, while the core gauge (ex-food and energy) reached 1.8%. Producer prices, though still in the negative territory, improved to -0.9%.
Admittedly, some of these strengths may be attributed to a late Chinese New Year. The sustainability of these trends remains to be seen, particularly amid the evolving landscape in the Middle East. Tightening trade regulations in the EU may also weigh on China’s export outlook. That said, commodity tailwinds are emerging, ranging from industrial metals since the start of year to oil more recently, alongside the latest disruptions in shipping flows in the Straits of Hormuz. Our analysis suggests a +0.4x correlation between China’s PPI (which historically leads CPI) and the global industrial metal prices. This, coupled with a degree of policy support, should position China more favourably to sustainably step out of deflation over the course of this year.
Policy continuity with a pragmatic capital-market gloss. The March “Two Sessions” and the finalised 15th Five-Year Plan offered few fireworks for the market but plenty of reassurances. Beijing’s growth target was set at 4.5-5.0%, signalling realism rather than bravado. Fiscal and monetary settings remain steady, with a 4% fiscal ceiling and a “moderately loose” stance. Emphasis remains unchanged on “new quality productive forces” (AI, semiconductors, biotech, green tech), while “anti-involution” measures to curb wasteful duplication suggest continuity with a sharper edge.
Policy tone on capital markets is equally measured. The China Securities Regulatory Commission (CSRC) promised a “more transparent, stable and predictable environment”, expediting two-way opening through QFII and Stock Connect tweaks, creating green channels for strategic-tech listings, and gently encouraging dividends and buybacks. Meanwhile, RMB has held firm – and even appreciated modestly – supported by a current-account surplus and steady inflows. A stable currency is the quiet hero for investor confidence, easing FX worries for foreign investors while also encouraging onshore savers to rotate into equities.
Offering valuable stability in a debasement world. HK/China equities have seen decent foreign inflows YTD, benefitting from a broader capital reallocation towards emerging markets. This “debasement” trend – which positions for a structurally weaker dollar amid rising US policy uncertainty (hence leaving the dollar’s reliability as the global currency questioned) and a worsening fiscal health – has somewhat reversed as the US-Iran conflict temporarily reinstated the USD’s safe haven status. Still, we believe the above-listed debasement drivers will continue to play out, with the trade resuming once the dust settles.
In fact, we believe HK/China equities could be one of the more attractive destinations for foreign fund flows as debasement trades resume. China, in particular, is among the least-bruised by the Hormuz-driven oil spike within Asia. Its energy diversification and electrification shield it partially from the risks of an energy crisis, with oil intensity per GDP down nearly 45% over the past two decades. Ample strategic reserves and secure pipeline volumes from Russia also serve as cushions. This stands in contrast with Japan, Korea, and India, which feel the pinch more acutely. At the same time, the region’s relatively stable dynamics are becoming increasingly appealing to long-term capital allocators.
The corner may be turning. None of the above suggests a smooth path ahead, and markets will continue to demand more evidence. Sustained consumption recovery, clearer signs of property stabilisation, and tangible progress in implementing the 15th Five-Year Plan will be the real tests. Geopolitical escalation, prolonged Hormuz disruption, or renewed escalation in trade frictions could still derail China’s stabilisation and recovery path. Yet, the green shoots in exports, inflation, pragmatic policy scaffolding, and relative insulation from global energy turmoil all point in the same direction: China’s fundamental turnaround may be closer than consensus gloom allows. Valuations remain attractive, with HK/China equities trading at a forward P/E c.30% below DM and EM peers, offering a margin of safety and a more compelling risk-reward profile within global equities. For those willing to look past the headlines, HK/China equities are quietly evolving from a tactical trade into a selective core holding for 2026.
Eyes on tech, platform companies, financials, and commodity producers. Despite AI disruption and regulatory concerns, we continue to believe that tech and platform companies will gain from accelerating AI advancements and adoption. At the same time, non-bank financials are set to benefit from incremental foreign fund flows and a potentially more vibrant stock market. China’s strategic commodity producers are also set to benefit from the ongoing commodity rally.
- Tech and platform companies: Companies involved in the upstream AI value chain (e.g. foundries, chip designers, AI processors, data centres, and robotics) are poised to ride on Chinese hyperscalers’ ramp-up in AI capex, alongside likely supportive policies as China continues its shift towards new economy sectors. AI platform investors should also benefit as adoption accelerates.
- Non-bank financials and exchanges: These are set to benefit from Hong Kong and China’s ongoing pickup in IPO activities and a potential increase in foreign fund flows, supported by regulatory encouragement of dividends, buybacks, and market stabilisation tools.
- China commodities producers: Companies tied to the mining/production commodities that meet the definition of scarcity, security, and strategic demand (the “Three S” framework) are set to see outsized benefits from the ongoing commodity price rally. Gold, copper, and lithium are among the key examples within this category. Oil majors will also benefit from continued supply chain disruptions amid the unresolved US-Iran conflict.
Source: Bloomberg, DBS
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