As global investors recalibrate portfolios for 2026, China is re-emerging as one of the most debated, and probably misunderstood, opportunities in Asia.

According to Julius Baer, the year ahead is less about macro acceleration and more about selective positioning across Chinese equities, Hong Kong markets, and bonds. Richard Tang, China strategist and head of research in Hong Kong, argues that while China’s growth challenges persist, the investment case is shifting from pessimism to pragmatism.

Chinese equities remain central to Julius Baer’s Asia strategy, based on its Market Outlook for 2026. The bank has maintained an overweight position since mid-2024, a stance that has begun to pay off despite ongoing economic softness. Tang acknowledges that headline growth indicators such as retail sales, property investment, and fixed asset investment remain weak. However, he stresses that markets are increasingly forward-looking.

“We have no disagreement that the economic situation is challenging,” Tang says. “But even if revenue growth is not doing as well, we are already seeing signs of hope from the margin line.”

Overseas expansion

A key pillar of this optimism lies in China’s export resilience and corporate adaptation. While exports to the United States have fallen sharply due to tariffs and trade barriers, Chinese firms are rapidly diversifying into emerging and non-US markets. Tang notes that many listed Chinese technology companies now see overseas expansion as a strategic priority, with foreign revenues delivering higher margins than domestic sales.

This structural shift matters as external revenues currently account for roughly 15% of corporate earnings across China’s listed universe. Even incremental gains could materially improve profitability, particularly in technology, hardware, and industrial sectors. At the same time, China’s growing share of global patents reinforces its competitive position in mass-market technology, where price efficiency remains a decisive advantage.

Julius Baer’s equity preferences extend beyond internet platforms. Biotech, semiconductors, automation, and selected advanced manufacturing segments are highlighted as areas growing well ahead of the broader economy. “There are a lot of new industries growing way beyond what the broad market is growing,” Tang says, underscoring a bottom-up investment thesis rather than a macro rebound narrative.

Hong Kong equities are expected to play a pivotal role in foreign investor re-engagement with China in 2026. Julius Baer forecasts the Hang Seng Index to reach 29,500 by end-2026, supported by low-teens earnings growth rather than aggressive valuation expansion.

Importantly, Tang views flows, not multiples, as the upside catalyst. “The upside surprise will be coming from the flow side,” he says, pointing to renewed interest from global investors who remain structurally underweight China. Conversations with European, Middle Eastern, and Asian allocators suggest that sentiment improved meaningfully in the second half of 2025, with Hong Kong seen as the preferred entry point before onshore A-shares.

Domestic flows may also reinforce the trend. Regulatory changes encouraging Chinese insurers to increase equity allocations could provide an additional, underappreciated demand source. While IPO supply, particularly in AI, semiconductors, and robotics, is a risk to monitor, Tang believes the market can absorb current issuance levels.

Despite strong performance in 2025, Hong Kong-listed Chinese technology stocks continue to trade at a significant discount to US mega-cap peers, reinforcing the valuation argument for selective exposure.

Cautious on bonds

In contrast to equities, Julius Baer remains cautious on Chinese bonds, particularly CNY-denominated corporate credit. Tang argues that the relative attractiveness of equities outweighs bonds at this stage of the cycle.

“If I want to benefit from currency appreciation, do I own stocks or do I own bonds?” Tang asked rhetorically. “We are more constructive on the equity space in China versus the bond space in China.”

While China’s substantial trade surplus introduces upside risk to the renminbi, bond returns remain vulnerable to interest-rate volatility and potential asset reallocation away from fixed income. Even with credit spreads offering some buffer, rising rates could still erode returns. As a result, Julius Baer would generally steer investors with CNY exposure toward equities rather than corporate bonds.

This relative stance is also reflected in market dynamics. Chinese equities are trading at their most expensive level relative to bonds since 2021, a signal Tang interprets as investors reallocating from deposits and bonds into risk assets, rather than a warning sign of overheating.

Overall, the outlook for China in 2026 is neither a boom story nor a value trap. It is, instead, a market driven by selective fundamentals, evolving capital flows, and structural competitiveness. As Tang puts it, “We are not assuming a lot of valuation expansion, but we do see reasons to be constructive.”

For investors willing to look beyond macro headlines, Chinese and Hong Kong equities may offer one of Asia’s more compelling risk-reward profiles in the year ahead, while Chinese bonds remain a secondary consideration in portfolio construction.