China Investment Compass - Quarterly: 3Q26: navigating a K-shaped market

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China Investment Compass - Quarterly: 3Q26: navigating a K-shaped market

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China Investment Compass - Quarterly

3Q26: navigating a K-shaped market

Equity Strategy

A stock pickers’ market with diverging performance 07 July 2026

China equities posted divergent performance in 2Q: MSCI China/HSCEI fell 7.6%/9.8%, Equity Strategy

while ChiNext/STAR 50 surged 38.6%/78.6%, highlighting the gap between internet- China

heavy HK benchmarks and A-share growth indices. Globally, macro events (eg Iran

conflict, the Trump-Xi meeting) had limited market impact, while AI capex drove

earnings upgrades across tech supply chains. Positioning became more concentrated and

crowded, volatility is elevated, and retail leverage (incl leveraged ETFs) amplified market

swings. Sentiment became more fragile amid inflation and liquidity concerns. We

continue to view China as a stock pickers’ market, with A-shares likely to outperform H-

shares until the global AI rally unwinds. We maintain our barbell strategy, favoring both Table of Contents

value/yield and sectors with strong earnings support and R.E.A.L. moats.

Executive summary: the 3Ms 2

Market: inexpensive, but not yet compelling Market: inexpensive, but not compelling 3

MSCI China fell 7.6% in 2Q26 in USD terms, underperforming global markets (vs MSCI China flow lens 7

World: +14.5%, MSCI EM: +23.3%). Within MSCI China, IT was the only sector with Macro: export-led, uneven growth 10

positive return in 2Q (+36.7%), while Consumer Discretionary (-20.7%), Consumer Other key things investors are watching 13

Staples (-18.6%) and Materials (-18.3%) were the worst performers. The index currently Sector model portfolio 16

trades at 10.3x forward P/E, a 12% discount to its long-term average, but still above the

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