Chief Outlook | Fidelity's Zhou Wengqun: A-shares valuation advantage stands out, focusing on four major allocation directions

【Editor’s Note】

2026 is the inaugural year of the “14th Five-Year Plan,” marking China’s entry into a new development stage.

Under the new circumstances, voices from foreign investment banks praising China are continuous. Goldman Sachs recommends overweight positions in A-shares and Hong Kong stocks in 2026; JPMorgan Chase has upgraded the ratings of mainland China and Hong Kong markets to “Overweight”; UBS believes that policy support, improved corporate earnings, and capital inflows may drive up A-share valuations. These judgments reflect international capital’s recognition of China’s economic transformation direction and development prospects in 2026, and also suggest that, as winter turns to spring, global capital is expected to flow toward the East.

The “Chief Connection” market outlook for 2026, titled “Spring Water Flows East,” also conveys this meaning. In the outlook, the “Chief Connection” studio will interview dozens of authoritative economists, fund managers, and analysts to discuss their views on China’s economy in the new year and analyze new investment opportunities.

“We hold a very positive attitude towards the entire A-share market in 2026,” said Zhou Wenqun, head of the stock department at Fidelity Funds, during a guest appearance on the “Spring Water Flows East—‘Chief Connection’ 2026 Market Outlook” on February 23.

Zhou Wenqun pointed out that the core logic supporting this judgment is the resonance of domestic fundamentals improvement and capital inflows. From the market’s own conditions, Zhou believes that A-shares still have valuation advantages. “In sectors like technology, high-end manufacturing, or outbound-related fields, Chinese companies are very competitive. Considering these factors, we believe that the overall fundamentals this year are favorable for A-share performance.”

Earnings Growth Is Expected to Bottom Out and Rebound

Looking back at the performance of the A-share market in 2025, Zhou Wenqun noted that the overall increase was close to 30%, but with very obvious structural differentiation. Behind this differentiation are the strong leadership of technology growth, high-end manufacturing, and some resource sectors, while traditional sectors are constrained by relatively weak consumer and real estate demand.

Looking ahead to 2026, Zhou predicts that market styles will present a “tension,” with different characteristics in the first and second halves of the year.

“Over the past one or two years, growth style has indeed been dominant, supported by strong fundamentals, including continuous breakthroughs in high-tech and high-end manufacturing fields. The improvement in these fundamentals also confirms the major direction of China’s economic transformation,” Zhou explained. “In the first half of the year, opportunities in growth sectors, especially those led by technology, will still be plentiful. Driven by AI demand, these tech companies are expected to see good earnings growth.”

In the second half, a style shift may occur. “After digesting the macro fundamentals over the past two to three years, we may see some traditional sectors start to gather strength at low levels. Meanwhile, the overall profit growth of the economy is also expected to bottom out and rebound this year,” Zhou said. He believes that some value-oriented, high-quality companies within traditional sectors may see opportunities for recovery. “This switch is fundamentally driven by economic cycle recovery. As demand rebounds to some extent, it could shift the entire industry from a highly competitive, relatively weak state to a more balanced one.”

Regarding capital flows, Zhou emphasized that the trend of financial relocation will strengthen market support. “Considering the overall fundamentals, global asset allocation needs for increased Chinese market exposure, and overall capital flows, we remain very optimistic about China’s market in 2026, especially A-shares.”

Focusing on Four Major Allocation Directions

In terms of specific stock selection strategies, Zhou follows Fidelity’s bottom-up research framework, favoring high-quality companies. “I personally prefer high-quality blue-chip stocks, with key screening indicators including high ROE, strong balance sheets, and robust cash flow, combined with industry cycle position and valuation levels for comprehensive judgment.”

In 2026, Zhou highlights four major allocation directions.

First is the technology growth sector. Zhou believes that AI-driven demand will likely bring good earnings growth for these tech companies. She points out that the domestic tech growth sector is broad, resilient, and more dispersed, showing a state of full bloom, such as in commercial aerospace, robotics supply chains, and other fields, not concentrated on a single mainline.

Second are outbound companies with global competitiveness. “China’s current development stage means that many companies, after accumulating experience from the large domestic market and strong demand, are increasingly demonstrating breakthroughs in overseas competitiveness,” Zhou said. She cited examples in high-end manufacturing, electric vehicles, batteries, new energy, and cultural exports, stating that “some very strong Chinese companies are continuously gaining more market share overseas.”

Third are upstream hard assets. Under the globally accommodative monetary environment, Zhou is optimistic about upstream hard assets like metals and non-ferrous minerals. The supporting logic includes a sustained weak dollar environment, strong industrial demand, and rigid supply constraints. “The extraction cycles for these hard metals are generally long; even for brownfield projects (upgrading and expanding existing mines), from project approval to capacity release, it usually takes three to five years. When facing short-term demand surges, supply cannot quickly catch up,” she emphasized. “The supply-demand gap will likely persist.”

Finally, Zhou is optimistic about the consumer sector. She divides consumption into traditional and new consumption. For traditional consumption, she sees some opportunities this year, potentially bottoming out and rebounding, supported by factors such as stabilized upstream prices, eased anti-inflation policies reducing competition, and inventory digestion to low levels.

“Once demand rebounds to some extent, the entire industry can shift from intense competition and relative weakness to a more balanced state,” Zhou said. Traditional consumer stocks tend to have stable cash flows and high dividend yields, averaging around three to four percent, with some high-quality companies reaching five to six percent, making them attractive for high dividends.

Regarding new consumption, Zhou believes it “more reflects emotional value or the fulfillment of consumption needs at a cultural level,” with lower penetration and larger growth potential. However, she also cautions that overall valuations for new consumption sectors are high, requiring careful stock selection. “For companies with valuations already adjusted, I remain optimistic; but for those still with high valuations, I will be more cautious.”

Hong Kong Stocks and A-shares Share Fundamentals

Regarding the Hong Kong market, Zhou believes that Hong Kong stocks share the same fundamentals as A-shares because most listed companies are Chinese enterprises. Their trends will be highly similar, but with notable differences in pace. “Hong Kong is a more free market, more affected by foreign capital inflows and outflows, and generally exhibits higher volatility than A-shares.”

She also notes that the Fed’s rate cuts will directly benefit Hong Kong stocks, helping to absorb dollar spillover capital after rate reductions. Plus, Hong Kong stocks still trade at a 20%-30% discount compared to A-shares, making them attractive from a valuation perspective.

Zhou highlighted three types of Hong Kong-listed stocks. First are internet platform companies. She believes that in the new AI era, these companies are making increasing efforts, narrowing the gap with some overseas counterparts, or even surpassing some. However, from a valuation standpoint, most Chinese internet platform tech stocks still trade at about a 40% discount.

Second are AI algorithm and application companies. She points out that the structural changes driven by overall AI demand are very significant, and their growth prospects are outstanding. The third are non-Chinese assets listed in Hong Kong, such as European utilities and global banks. Zhou believes these holdings serve as a balance to Chinese companies and generally perform well in governance and shareholder returns.

Limited Impact of Geopolitical Risks on A-shares

When discussing potential negative factors in 2026, Zhou highlights two main concerns.

First is geopolitical risk. She considers this the biggest risk for 2026. “The current international environment is becoming increasingly complex, and I believe this is the greatest source of volatility for equity markets.” Second is the adjustment pressure on overseas tech stocks. “The key is whether AI applications can find new breakthroughs in implementation, and whether AI infrastructure construction might be somewhat overshot. If demand underperforms expectations, it could lead to significant corrections,” she explained.

However, Zhou emphasizes that these risks will have limited impact on A-shares and may even reinforce the trend of a weaker dollar. “For global asset allocators, the demand for non-dollar assets will accelerate, and RMB assets will become an attractive option.” Additionally, she notes that the structure of China’s tech growth sector is more dispersed and resilient, which should mitigate overall impact. “Overall, the influence on A-shares remains relatively limited.”

(Article source: The Paper)