JPMorgan Turns Overweight on China, Sees 19% Upside as AI, Policy Shifts and Buybacks Set Stage for 2026
JPMorgan has upgraded Chinese equities to overweight, arguing the balance of risks now favors a cyclical and structural rebound into 2026. The bank’s base case points to roughly 19% upside for MSCI China, with a bull scenario targeting 120 by end-2026 and a bear case at 80.
Why the Call Matters Now
A strong Q1 2025 bounce in Chinese stocks faded into a pullback, but JPMorgan says that correction has reset expectations and left positioning light—conditions that can magnify any improvement in sentiment. Strategist Rajiv Batra’s team notes valuations sit near post–global financial crisis averages and remain well below multiples in the US, India and Taiwan. With global active managers still underweight China, a shift in narrative could unlock fresh inflows.
Key Points
- Upgrade to overweight: JPMorgan lifts China from neutral, citing a better risk-reward into 2026.
- Base case upside ~19%: MSCI China seen recovering as earnings and multiples expand.
- Bull/bear scenario: Index at 120 by end-2026 in a bull case; 80 in a bear case.
- Four drivers: AI adoption and tech upgrade; “anti-involution” policies to curb price wars; stronger buybacks/dividends; household liquidity shifting from deposits to equities.
- Positioning and valuation: Global funds are underweight; China trades near post-GFC averages and at a discount to peers.
Four Catalysts Behind the Upgrade
1) Accelerating AI and Tech Modernization
JPMorgan anticipates broader AI rollouts and high-end manufacturing initiatives to lift productivity and support margins across hardware, software and industrial automation supply chains.
2) “Anti-Involution” Policies
Measures aimed at reducing destructive price competition are expected to stabilize industry structure and raise profitability—particularly in sectors that have faced prolonged price wars.
3) Shareholder Returns Rising
Buybacks and higher cash dividends are gaining traction, a trend that tends to support equity valuations and attract long-only capital seeking consistent payout profiles.
4) Liquidity Reallocation at Home
A gradual move by households from bank deposits into equities could add a steady domestic bid, complementing any foreign inflows if global sentiment turns.
Valuation, Positioning and the Macro Backdrop
Chinese equities trade at a marked discount to major markets, reinforcing the “re-rating gap” narrative if earnings delivery improves. With global investors underweight, even modest upgrades to exposure can move prices given thin liquidity periods. Policy support—both targeted industry initiatives and measures to bolster capital markets—adds a cyclical cushion.
FX, Commodities and Cross-Asset Implications
– A clearer earnings path and higher risk appetite could bolster China-sensitive FX pairs and the offshore yuan over time, though the currency’s trajectory remains tied to relative growth, rates and policy guidance.
– Stabilization in Chinese demand expectations would likely buoy industrial metals and parts of the energy complex, aiding broader EM beta.
– Equity volatility may remain elevated as markets test the durability of policy support and earnings guidance.
What the Scenarios Mean for Traders
JPMorgan’s base case envisions both earnings recovery and multiple expansion over the next year. The bull case reflects faster AI diffusion, sturdier margins and a stronger turn in domestic risk-taking; the bear case captures downside from policy execution risk, geopolitics or an uneven earnings recovery. For multi-asset allocators, the skew suggests adding China exposure on dips while closely tracking policy signals and sector-level pricing discipline.
FAQ
Why did JPMorgan upgrade Chinese equities to overweight?
The bank sees a better risk-reward into 2026, underpinned by accelerating AI adoption, policies to reduce ruinous price competition, stronger shareholder returns and a gradual shift of household liquidity into equities—alongside attractive valuations and light global positioning.
How much upside does JPMorgan expect?
Its base case projects roughly 19% upside for MSCI China, with a bull case level of 120 by end-2026 and a bear case at 80.
Which factors could unlock inflows?
Improving sentiment, clearer earnings visibility, expanding buybacks/dividends and policy follow-through could draw both domestic and foreign capital back to Chinese equities, especially given that many global funds remain underweight.
What are the implications for the yuan and EM FX?
If risk appetite improves and earnings delivery holds, yuan-sensitive pairs could find support. However, FX outcomes will still hinge on relative growth, interest-rate differentials and policy signals.
What are the key risks to the bullish view?
Policy execution, geopolitical frictions, an uneven earnings recovery or renewed competitive pressure in key sectors could derail re-rating hopes. Traders should monitor margins, capital-return policies and high-frequency data for confirmation.
Reporting by BPayNews.
