JPMorgan Chase & Co. has updated its recommendation for Chinese stocks to "overweight," highlighting a more favorable balance of potential gains over significant losses in the coming year.

"China has relinquished much of its earlier outperformance this year, presenting an appealing entry point," wrote JPMorgan strategists including Rajiv Batra in a note published Wednesday. "Multiple supportive factors such as AI adoption, consumption measures, and governance reforms are anticipated to bolster the market next year."

JPMorgan's positive outlook follows a recent decline in Chinese equities from their multi-year highs reached about a month ago. The MSCI China Index has fallen 6.2% this quarter, while the broader MSCI Asia Pacific Index has risen by 1.3%.

Batra and colleagues had previously suggested investors buy Chinese stocks in early April. Since that recommendation, the MSCI China Index has increased by about 33%, compared to a 37% rise in the Asian benchmark.

The strategists noted that the Chinese equity market is in the early stages of recovering from the downcycle that began in late 2020, resulting in "acceptable valuations and still light positioning."

JPMorgan's optimistic stance on China contrasts with Morgan Stanley's outlook, where strategists foresee a consolidation phase next year due to uncertain corporate earnings and high valuations.

Buoyed by positive sentiments towards China, policy support, ample liquidity, governance reforms, and favorable prospects for AI-focused stocks, JPMorgan project Asian equities to achieve moderate to strong gains next year.