Historically, Chinese equities have risen by 30% on an annualised basis when they have been trading in an uptrend (above their 40-week moving average). Our strategists in Asia have made the case for a likely sequence of higher highs and higher lows following China’s policy U-turn back in September 2024. Recent moves in Chinese stocks have underpinned their view, and our technical analysts are doubling down on this by upgrading the Chinese technology sector. The stage is set for another move higher.

Why is China outperforming all of a sudden?

The Hang Seng Index is attempting to escape its three-year trading range, which peaked at around HKD 23,200. The index is currently still trading 35% below its all-time high of 2018. A rise above HKD 23,200 would confirm a long-term recovery and pave the way for an advance towards HKD 27,500.

We attribute the performance of the index to a number of reasons. First, we believe that the announcement of 10% tariffs on Chinese imports by the US was better than feared and that China’s retaliatory measures were targeted and measured. Second, the success of DeepSeek has brought optimism to investors that Chinese technology companies may still do well in the artificial intelligence (AI) race. Third, investors seem to be building up policy expectations again ahead of the National People’s Congress (NPC) in March.

However, all things considered, we believe the ultimate driver of all these market moves is the cooldown of excitement in the US market to the benefit of the Chinese market. Our year-end targets for the Hang Seng Index and the Shanghai Shenzhen 300 Index remain at 24,000 and 4,600, respectively. The first technical resistance is likely to come when the indices are close to last year’s high, as some investors who bought at last October’s highs may be tempted to cash out their positions. 

What does this mean for investors?

In terms of allocations, the China AI theme is likely to be an outperformer, as investors become more optimistic that DeepSeek’s success could accelerate AI adoption. This should benefit Chinese internet giants. In addition, domestic policy beneficiaries such as consumer cyclicals may do well if more trade-in programmes are rolled out to temporarily boost consumer sentiment. In contrast, our long-term preference for high-dividend stocks may suffer briefly from rotation pressure.