The near-term outlook for China’s equities could be quite positive

Capital Economics projects a potentially "quite positive" near-term outlook for Chinese equities, despite existing headwinds. While recent gains, particularly in offshore markets like the Hang Seng, indicate strength, the primary challenge remains stagnating earnings expectations, partly due to tariff concerns. However, the firm anticipates earnings will not be a significant drag going forward, and recent positive developments, including delayed US tariffs and clarified access to advanced chips from Nvidia and AMD through export licenses, could support further near-term gains, potentially rendering their end-2025 equity forecasts conservative.

Analysis

Capital Economics presents a cautiously optimistic near-term outlook for Chinese equities, citing recent outperformance in offshore markets where the Hang Seng index gained over 2%. This view is supported by a 90-day extension on the delay of higher U.S. tariffs and increased clarity on China's access to advanced chips from Nvidia and AMD, which have secured export licenses. However, the primary headwind is not valuation but stagnating corporate earnings expectations, a trend observed since the country's post-COVID reopening and exacerbated by tariff-related uncertainty. Despite acknowledging that Chinese equities have significant ground to recover, the firm posits that earnings are unlikely to be a further drag on prices in the near-term and that its own end-2025 forecasts might now be too conservative, suggesting further gains are possible.

Key Decisions for Investors

• Investors could consider the potential for near-term tactical gains in Chinese equities, particularly in offshore-listed names, while closely monitoring corporate earnings revisions, which remain the primary identified headwind.
• The clarification of export licenses for Nvidia and AMD reduces a key geopolitical uncertainty for the semiconductor sector, potentially stabilizing a significant revenue stream from China, albeit with some revenue sharing.
• Be mindful that the positive sentiment is partly sustained by temporary measures like the 90-day tariff delay; any reversal in U.S. trade policy remains a significant risk factor that could quickly alter the market outlook.