China’s equity markets rebounded in 2024, driven by domestic policy shifts, but uncertainties in global trade, supply chains, and geopolitical dynamics may affect confidence in 2025.
BoA add that the strength and scope of the policies announced are yet to seen , and that impact will lag for quarters.
H-shares and ADRs are vulnerable to financial decoupling, while A-shares are more impacted by trade tensions.
Strategy: Begin defensively (high yield/value) in early 2025 and add quality beta during corrections or stimulus. A stronger rally is possible in 2H25 if credit growth accelerates.
Market: The Worst of De-rating and Flow-Selling is Over
The MSCI China Index rose 16% in 2024 after losing nearly 50% over the prior three years.
Top-performing sectors: IT (+40%), Financials (+38%), Communication (+26%).
Underperformers: Healthcare (-20%), Real Estate (-11%).
Forward P/E valuation rose to 10x (below the long-term average of 12x), with EPS growth forecasts of 18%/9% for 2024/2025 facing downside risks.
Macro: Strong Stimulus Needed for a 2026 Recovery
GDP growth in 2025 is expected to weaken, requiring stimulus measures to drive a recovery in 2026.
Credit growth must increase from <8% to nearly 9% YoY in 2025. Key expectations include:
40-60bp LPR cuts.
A higher budget deficit (~4%).
Some RMB depreciation.
Broader measures are needed to support jobs, consumption, and structural reforms.
Model Portfolio Preferences
Preferred sectors: Internet (media/online retail), non-bank financials, IT hardware, semiconductors, and shipping (localization theme).
Downgraded sectors: Liquors, telco, heavy machinery, and healthcare (due to negative earnings revisions).
Cautious outlook: Coal, real estate, and construction materials.
