Chinese equities continued their recovery in 2025, with the A-share and H-share markets delivering returns of approximately 16% and 29% year-to-date, respectively. Since their cyclical lows in late 2022, cumulative rebounds have expanded to 30% and 75%, according to Goldman Sachs data.

In its latest report, Goldman Sachs predicts Chinese stocks still have 38% upside potential by the end of 2027. This outlook is based on three key factors: 1) Gradual earnings recovery, with projected growth of 14% in 2026 and 12% in 2027; 2) Moderate valuation re-rating potential of about 10%; 3) A shift in market returns from valuation repair to earnings realization and mild P/E expansion.

Domestic capital, previously underallocated to equities, is accelerating inflows. Southbound funds have seen record annualized inflows of $180 billion in 2025, far exceeding 2024's $104 billion. Retail investors are also increasing stock allocations, supported by excess savings and moderate leverage.

Foreign investor sentiment shows signs of warming. Global hedge funds have gradually raised their China exposure, with net positioning increasing from 6.8% at the start of the year to 7.8% by November. Meanwhile, emerging market and Asia-focused mutual funds have slightly reduced their underweight positions on China.

Goldman Sachs maintains that China's market remains investable, though uncertainties persist including global recession risks, AI sector volatility, U.S.-China relations, domestic policy pacing, and disinflation. However, core risks have eased compared to previous years, with technological breakthroughs ("DeepSeek moment"), improved private sector regulation, and growing global diversification needs bringing Chinese assets back into international investors' focus.

"We maintain our investment in China and will increase positions during pullbacks to better benefit from the earnings recovery cycle and right-tail opportunities," Goldman stated in the report.

Sector strategies are crystallizing around two themes: riding the tech wave and contrarian bets on consumer staples. Most institutions agree technology offers higher elasticity, especially amid accelerating innovation cycles, while consumer sectors present value opportunities with historically low valuations and institutional positioning.

Policy anchors the long-term investment thesis. Analysis shows aligning portfolios with Five-Year Plan priorities could generate 13% annualized alpha. The upcoming 15th Five-Year Plan emphasizes: 1) Upgrading traditional industries (mining, manufacturing, logistics digitization) 2) Cultivating strategic emerging industries (AI, 6G, biotech, new energy, advanced materials) 3) Developing future industries (urban air mobility, quantum computing, humanoid robotics)

On the consumer front, policy documents repeatedly emphasize domestic demand's strategic importance. The CSI Main Consumer Index's P/E of 19.4x sits below its 10-year 5th percentile, with sector ETFs seeing over $100 million inflows recently. Notably, "new consumption" segments like specialty retail and pet food have outperformed, delivering 43% returns versus 5% for traditional consumer stocks (ex-internet) in 2025.

As tech valuations consolidate at elevated levels, structurally optimized consumer sectors with depressed valuations are regaining attention from both capital and policymakers.