China was called 'uninvestable' not long ago. Why investors are changing their minds.
Wall Street has shunned China's stock market for its volatility amid the country's economic issues. A trade war, tough regulations, and geopolitical tensions have made it difficult for investors to navigate, but as tensions ease and AI technology continues to advance, investors are starting to warm up to China again.
"China has been a market that has been deemed almost uninvestable for the last year or two," Osman Ali, Goldman Sachs Asset Management's global cohead of quantitative investment strategies, said at the bank's mid-year investment outlook on Wednesday. "That's starting to change, both as a consequence of better growth, a consequence of reform, and also, hopefully some easing trade and tariff tensions."
Sell America
Investors' changing opinions on China come at a time when US exceptionalism is increasingly under scrutiny. Uncertain tariff policy has left businesses scrambling and cut into profit margins, and the rising US deficit has led to concerns about the status of US Treasurys as a safe-haven asset.
That's not to mention the disruption that DeepSeek caused earlier this year, leaving investors wondering if US technological supremacy was as unrivaled as they once believed.
A more optimistic tariff outlook is also boosting optimism. After the US and China dialed down trade tensions, Goldman Sachs raised its GDP growth estimates for China from 4% to 4.6% for 2025. The bank also raised its 12-month outlook for the Chinese equity indexes MSCI China and CSI300, pricing in an 11% and 17% implied upside, respectively. Nomura Capital also upgraded Chinese stocks to a "tactical overweight" in early May.
Laura Wang, Morgan Stanley's chief China equity strategist, expects an increase in flows into Chinese equities within the next six to 12 months due to their low valuations and earnings growth outlook.
She's eyeing increasing willingness among global investors to diversify into China, and Morgan Stanley has upgraded its MSCI China earnings growth outlook for this year by 2%.
"There is a declining trend of US exceptionalism," Wang said on Bloomberg on June 5. "We are also seeing the technology breakthrough led by Chinese companies, which are potentially pushing up the ROE and earnings growth for MSCI China for the offshore space."
China's 'Prominent 10'
While the Magnificent Seven have reigned supreme among US equities, China has its share of powerhouse companies investors might want to pay attention to.
Goldman Sachs recently published a report identifying 10 of China's biggest stock market names with a buy rating, which the bank dubbed the "Chinese Prominent 10."
These include Tencent, Alibaba, Xiaomi, BYD, Meituan, NetEase, Midea, Hengrui, Trip.com, and ANTA and span industries ranging from tech to pharmaceuticals.
Some of these companies are already making waves both in and out of China. For example, the electric vehicle company BYD has generated sales comparable to Tesla and has expanded aggressively in Europe and Latin America.
The bank believes these companies have the potential "improve their competitive and comparative advantages, generate positive equity returns for shareholders, and outperform vs. their industry peers in both the US and Chinese stock markets."
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