From outflows to opportunity:

Investment Director Jian Shi Cortesi highlights China’s 2025 equity rebound, fuelled by low valuations and policy support. Innovation, technology and structural growth themes create compelling opportunities despite tariff headlines and shifting investor sentiment, according to Jian.

11 December 2025

Investor sentiment toward China has changed dramatically. Just 12 months ago, the common questions were: Is China investable? What about real estate? Alibaba? The education crackdown? Population decline? This year, those concerns have largely disappeared.

MSCI China is up 36% year-to-date¹, making China one of the top performing markets alongside Korea. This is a sharp reversal from early-year expectations, when many feared renewed tariffs under US President Trump would derail growth. Instead, China has rallied strongly despite geopolitical noise, drawing increasing investor attention for 2026.

Why the surge?

China’s strong equity performance in 2025 has been driven by two key factors: extremely low valuations and robust policy support. After trading at historically depressed levels in 2024, the market entered this year offering highly attractive entry points. At the same time, Beijing responded decisively to three major challenges – weak consumer confidence, property sector stress and tariff uncertainty – through aggressive stimulus measures, monetary easing, property support and fiscal spending. Global positioning to the region is still light, with many investors only beginning to re-engage. This combination of undervaluation, policy tailwinds and under-ownership provides a compelling backdrop for Chinese equities heading into next year, in our view.

Tariffs: Noise versus fundamentals

Tariffs create headlines and short-term volatility, but they rarely impact the earnings of most companies we favour. The real drivers of Asian equity performance are domestic policy and structural shifts in production. Lower-end manufacturing is moving to Southeast Asia, while China, Korea and Taiwan advance into high-end technology and advanced manufacturing. These have important implications for stock selection and long-term positioning.

Despite tariff concerns, performance has been strong: Asia ex-Japan is up 32% year-to-date², led by Korea (+93%)³, China (+36%) and Taiwan (+39%)⁴. The key takeaway from this picture is clear: these economies, traditionally considered export-driven, have performed strongly despite tariff concerns, driven by innovation and policy support rather than US trade rhetoric.

Chart 1: Export to the US as % of GDP

When we look at exports to the US as a percentage of GDP, Vietnam has the highest share, while China’s reliance on US exports has fallen sharply since the first trade war seven years ago. For economies like Taiwan and Korea, much of their export base is in technology products, which are often exempt from US tariffs.

At the company level, many businesses operate entirely within China, such as travel firms, and therefore remain unaffected. Others, like BYD or domestic wind operators, have no US exposure. In fact, semiconductors and tech hardware often benefit from US restrictions, accelerating local production. As highlighted in “Why China shouldn’t fear another trade war”, past tariff episodes did not derail growth.

Reacting to every headline adds little value. We remain focused on fundamentals and structural trends, rather than short-term noise.

Favouring China over India

Chart 2: MSCI India versus China

Our Asia equity strategy has maintained an overweight position in China and an underweight in India for the past two to three years. Historically, India and China have alternated in outperforming each other, with the MSCI India-to-China ratio moving within a range from 2010 to 2020. However, in 2021 extreme fear around China triggered significant outflows, with capital rotating into India. This, combined with strong retail participation, drove an exceptional rally in Indian equities, a move so extreme it could be described as a “six sigma” event.

By 2022–2023, we believed this outperformance was exaggerated and not supported by fundamentals, being largely flow-driven. During that period, we shifted to overweight China and underweight India, expecting mean reversion. Initially, this hurt performance as India continued to rise through 2023 and into 2024. However, starting last year, China began to rebound, and the ratio has started to normalise, benefiting our current positioning.

In our view, this recent reversal highlights the importance of fundamentals over sentiment-driven flows. While India remains a strong structural story, valuations became stretched, whereas China offered compelling opportunities at deeply discounted levels, especially as domestic policy support and improving sentiment began to take hold.

Structural themes driving growth

Our strategy continues to emphasise structural growth areas such as experience-driven consumption, semiconductors and technology hardware – sectors we believe will shape the next decade of innovation.

However, in many internet segments, saturation is evident. The highest growth phase looks like it is behind us, and the most dynamic opportunities now lie in semiconductors and technology hardware. This shift is closely linked to US export restrictions: if Chinese companies cannot buy advanced chips, they must produce them. Manufacturing semiconductors requires sophisticated machinery and equipment – areas where we see long-term demand. We hold positions in leading semiconductor equipment makers, despite US bans on selling certain technologies to China. We believe this represents at least a 10-year growth opportunity.

In AI, our portfolio includes cloud providers, autonomous driving innovators, and fintech firms leveraging AI to enhance services. Finally, renewables remain a key theme, consistent with our earlier outlook. Encouragingly, this year we have seen a notable improvement in market sentiment toward these sectors.

Four key opportunity areas in Asia

1. Experience-related consumption: Entertainment, music, gaming, education – areas growing faster in Asia than elsewhere
2. AI, semiconductors, and technology hardware: Strong demand for AI-related components; key beneficiaries in Taiwan, Korea and China
3. Fintech and wealth management: Rapid global growth in fintech, wealth management in Asia offers significant untapped potential
4. Renewables: Electric vehicles, batteries, solar and energy transition

Technology push

China’s technology sector remains a top policy priority, though support varies across segments. A key example is the China Integrated Circuit Industry Investment Fund (CICF; Chinese: 国家集成电路产业投资基金), which has allocated substantial capital to the semiconductor industry. Established in 2014, this state-owned fund aims to strengthen the entire integrated circuit value chain, including chip design, production, packaging and testing. The latest phase of the fund will target select companies in semiconductors and related industries to accelerate ecosystem development and capture emerging business opportunities.

While semiconductors enjoy strong backing, AI currently receives no direct subsidies, likely because investment targets are harder to define. Companies such as Alibaba benefit from AI-driven cloud growth without government aid, while component makers for AI infrastructure are already profitable without subsidies.

One major advantage for China is low energy costs. Electricity costs are roughly one third of those in Switzerland, providing a significant boost for AI, cloud services, data centres and semiconductor manufacturing. This cost advantage acts as a critical enabler for technology infrastructure and long-term competitiveness.

Sentiment shift

Several names we favour remained stagnant from 2020 to 2024 despite attractive valuations, as investors ignored fundamentals. Alibaba, for example, was long dismissed due to regulatory concerns. This year, sentiment shifted as its cloud business emerged as a key AI enabler, driving a sharp rally. We have also seen “hockey stick” moves – stocks trading sideways before surging vertically when the market finally recognises their potential. Foxconn Industrial Internet is a prime example. The company manufactures electronics and servers for AI data centres. After months of flat performance, its share price jumped from CNY 20 to 70 in just three months once its AI exposure became clear. A similar story played out with a semiconductor company specialising in power chips.

These patterns highlight a common challenge: a thesis can be correct, but timing its recognition is unpredictable. Patience and conviction matter – when narratives change, upside can be dramatic.

An opportune moment

If I had to summarise in one phrase: China represents undervalued innovation. I firmly believe that in AI, the race will be between two countries – the US and China. Whether it is large language models or real-world applications, other nations will play only a minor role. This dynamic creates enormous investment opportunities in both markets. In the US, these opportunities are well recognised and widely held. In China, they are not, yet.

Jian Shi Cortesi manages China and Asia Equity strategies at GAM Investments. Read more about Jian and the strategies she manages here.

As at 31 October 2025, Alibaba and BYD are held within the strategies managed by the team.