Daiwa expects the pace of foreign capital returning to the Chinese stock market to slow down next year

Daiwa published a report indicating that from November 3 to 7, it met with 22 investors in Europe. Among the 11 investors who shared their holdings (mainly global emerging market funds or Asian funds), 90% held a "neutral" or "overweight" stance on the Chinese market, significantly higher than the 60% ratio observed in recent communications with U.S. investors. However, this "optimistic" sentiment mainly reflects a portfolio rebalancing during the revaluation process of the Chinese stock market. Most European investors remain concerned about China's deflation issues, and with limited room for valuation multiple expansion, investors are waiting for earnings growth to catch up before considering increasing their positions in the Chinese stock market.

The report noted that, similar to their U.S. counterparts, European investors' positions in the Chinese stock market are currently highly concentrated in a few large stocks, such as Tencent (00700.HK), Alibaba-W (09988.HK), CATL (03750.HK), and AIA Group (01299.HK), reflecting that the pace of future market rebounds led by large tech stocks may slow down. Although most investors are optimistic about China's AI and high-tech "localization" story in the long term, some investors believe that related trades have become overheated in the short term, and are therefore seeking diversification into defensive sectors.

Daiwa continues to recommend that investors diversify into domestic demand sectors such as beverages, healthcare, and high-dividend industries (such as finance, home appliances, and shipping) to cope with market volatility in the fourth quarter of 2025. Due to favorable policies, the potential easing of geopolitical tensions before Trump's visit to China, and ongoing liquidity support from domestic investors, the firm maintains a constructive outlook on the market prospects for the first half of 2026. However, as the "mean reversion" of global fund reallocations is nearly complete, the pace of foreign capital returning to the Chinese stock market in 2026 is expected to slow down