JPMorgan has upgraded its outlook on Chinese equities from neutral to overweight, signalling confidence in a significant rise by 2026 that outweighs the risks of a major decline. The bank projects around a 19% upside for the MSCI China Index under its base case scenario. Strategists highlight that current valuations are attractive and investor positioning remains light after years of underperformance.

According to JPMorgan, Chinese stocks are in the early stages of a recovery following a pullback after the strong rally in the first quarter of 2025. Improved market sentiment could encourage capital inflows, supporting further gains.

The bank identifies four key drivers behind this bullish outlook:

– Accelerating adoption of artificial intelligence and broader technological upgrades

– “Anti-involution” policies aimed at curbing harmful price competition and raising profit margins

– Enhanced shareholder returns, including buybacks and increased dividends

– A gradual shift of domestic household liquidity from bank deposits into equity assets

Strategist Rajiv Batra’s team notes that China’s valuations are near post-global financial crisis averages, significantly lower than those seen in markets such as the US, India, and Taiwan. Additionally, global active funds remain notably underweight Chinese equities, suggesting potential for inflows if investor sentiment improves.

JPMorgan’s bullish forecast sees the MSCI China Index reaching 120 by the end of 2026, while its bearish scenario places it at 80. The bank argues that advancements in AI, expansion of high-end manufacturing, and sustained policy support will drive both earnings recovery and valuation growth over the next year.

For forex traders, this outlook suggests potential currency market impacts linked to increased foreign investment flows into Chinese equities and improving economic fundamentals.

Original Source: Eamonn Sheridan of investinglive.com