China emerged as one of the big winners of 2025, with the MSCI China up 22.1% in sterling terms, according to FE fundinfo data. This is an outperformance compared to markets such as the S&P 500, which was up 9.3% and the global MSCI World, which rose just 12.8%.
However, China has had a mixed start to 2026, with the index sliding by 0.8% as of 4 February. But managers have remained undeterred and forecast there is still significant upside left in the region in 2026.
For example, Raheel Altaf, manager of the top-performing Artemis SmartGARP Global Equity fund and Artemis SmartGARP Global Emerging Markets fund, said: “We expect further gains [from China] in 2026, though at a more measured and selective pace. We can find plenty of reasons for feeling optimistic.”
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The case for valuations
One of the reasons Altaf remains optimistic is valuations. Despite strong performance since late 2024, valuations across the Chinese market remain low compared to other countries and their own history.
According to Barclays data, the MSCI China has a cyclically adjusted price-to-earnings ratio (CAPE) of 17.5x, much lower than the 55.2x peak it reached in 2007. Additionally, this is still substantially lower than the US, which trades on a 39.2x CAPE and is even cheaper than the UK (19.2x)
“Experience suggests that buying good companies on low valuations with positive earnings momentum is a good way of tilting the odds in your favour. Few countries offer more companies that fit that bill than China,” Altaf said.
On top of this, China remains a small part of portfolios, despite being the second-largest global economy. According to data from Goldman Sachs Global Investment Research, China makes up just 6.6% of active fund allocations worldwide, down from a peak of 15% in 2020.
“With foreign ownership of Chinese stocks still relatively low, we are finding plenty of high quality businesses that have strong balance sheets, trading at attractive valuations that seem to offer more immediate rewards with less risk,” Altaf said.
Improving fundamentals
On top of this, Chinese companies are increasingly high quality, competing with or even surpassing their global peers.
For example, Chinese electric car maker BYD, which was the biggest producer of electric vehicles in 2025, delivering more than 4.5 million vehicles, beating Tesla, “whose pre-eminence once appeared all but unshakeable”, Altaf said.
Meanwhile, developments such as the Chinese chatbot DeepSeek demonstrated that the “US dominance in AI is far from assured”.
Edmund Harriss, CIO at Guinness Global Investors, added China is increasingly investing in forward-looking industries, which could give it a competitive advantage.
See also: Guinness’ Harriss: Looking beyond the ‘flash in the pans’ in Asian income.
For example, China is a frontrunner in clean and sustainable energy, accounting for almost 80% of renewable energy supplies and 60% of global demand.
“If you take Asia on the one side and the US on the other, it is quite clear that the US is looking backwards, they’re looking at dominating and sustaining the things that make America great in the 60’s. China is looking at where we’re going to be in 2050 and beyond,” Harriss said.
Additionally, China is a much more stable investment than investors often think, with people in the UK being “far too bearish on China” according to Sharuk Malik, manager of the Guinness Greater China fund.
This is partially because many companies in China are state-owned enterprises, which have very different priorities and goals than what investors are used to, leading to a “deep sense of distrust”, the team said.
However, the state’s role in running businesses makes its economic policies much more predictable, according to Guinness’ Harriss.
“We know what its policies are, we know how it’s being directed, and we know what its long-term goals are.”
By contrast, American policy has been challenging to predict, with US president Donald Trump’s aggressive foreign policy, such as threatening to raise tariffs over the issue of Greenland, sending shockwaves through markets.
See also: Markets fall on Trump’s Greenland tariffs threat | Portfolio Adviser
Malik concluded, “Given the policy changes in the US and the instability, there is a case that China is a more predictable place to invest.”
“I think we’ll see a lot more investors start to consider China this year.”
