J.P. Morgan's Liu Mingdi: A-shares enter a "slow bull" market, and a rebound in foreign capital inflows is anticipated

“After experiencing several major bull markets, A-shares have truly entered a ‘slow bull’ phase this time.” On February 19, Liu Mingdi, Head of Morgan Stanley China’s Mainland and Hong Kong Stock Research Strategy, appeared on The Paper’s “Spring Water Flows East—Chief Connection 2026 Market Outlook” special. He pointed out that unlike previous bull markets where performance reached cyclical peaks, with ample incremental funds but shorter durations, the core logic of this round of “slow bull” is steady and moderate improvement in earnings, supporting the steady rise of stock indices.

Liu Mingdi stated that based on Morgan Stanley’s quantitative macro indicators, market cycles are divided into four stages: recovery (spring), expansion (summer), deceleration (autumn), and contraction (winter). Currently, China’s market performance and economic growth are in the “summer” stage, with an overall positive trend.

Liu Mingdi believes that by 2025, Chinese assets will stand out through innovation, “anti-involution” efforts, and stable earnings performance. In 2026, the global expansion remains at an important juncture. The “14th Five-Year Plan,” earnings realization, and industry rotation will be key variables influencing RMB-denominated stock assets.

Three Highlights of Chinese Assets

Looking back at 2025, Liu Mingdi considers the overall trend better than expected. Global economic growth exceeded early expectations, inflation was roughly in line with forecasts, and fiscal and monetary policies remained supportive. Coupled with investments in AI-related hardware and infrastructure, the overall trend is positive. The MSCI World Stock Index, measured in USD, returned 19.5%, with the best-performing sectors being communication services (31%) and financials (26%). Materials, industrials, and information technology sectors also returned close to 23%.

“From the beginning of the year, the US dollar index fell from 108.5 to 98.3 by year-end, weakening by 9.4%, which made markets outside the US perform better,” Liu Mingdi pointed out. Historical patterns show that if the dollar falls by 10%, the MSCI China Index typically rises by 25%. This logic also applies to emerging markets and Europe.

Regarding China’s assets in 2025, Liu Mingdi summarized three main features. First, innovation, reflected in AI, IT, healthcare, and new consumption sectors. Second, “anti-involution,” which has driven raw materials, some industrial, and information technology sectors, especially after the dollar’s weakening triggered diversified investment demand. The materials sector was boosted by rising precious metals and metals related to renewable energy. Third, stable income and earnings, with standout performance in communication services and insurance, the latter benefiting from the recovery of the mainland stock market.

Foreign Capital Reflows Expected

Regarding how foreign investors view Chinese assets, Liu Mingdi observed that for most of 2024, foreign sentiment toward Chinese stocks was relatively cautious. However, after September 2024, a series of measures by the People’s Bank of China signaled “a put, a floor,” restoring market confidence. Subsequently, the emergence of DeepSeek made foreign investors realize that despite slowing overall economic growth, there are growth opportunities driven by innovation. Later, policies against “involution” showed foreign investors the potential for profit margin improvements in some mainland listed companies.

“If mid-term profit margins can rise from the current median single digits to the high median, ROE will improve significantly. The core logic is supported by earnings,” Liu Mingdi said. Currently, the valuation of MSCI China has basically returned to, or slightly exceeded, its historical average. If Chinese stocks can become a category with both innovation and integrated growth, with structural expansion opportunities in profit margins, valuation premiums could further increase, making them attractive to active foreign funds.

Liu further analyzed that, based on allocations of four types of active equity funds (global, ex-US global, emerging markets, Asia-Pacific excluding Japan), global and Asia-Pacific funds have the lowest underweight positions relative to benchmark indices. Asia-Pacific (excluding Japan) funds, which conduct more regional research on mainland-listed companies, have a deeper understanding of their competitiveness and thus lower underweight levels. Funds including those from the US, due to research on US AI and technological innovation, also recognize China’s technological capabilities.

“An increase in foreign allocation would first benefit the internet sector, as it’s the easiest to understand; second, consumer sectors, which have a globally consistent investment logic; and some industry leaders, such as benchmark energy storage battery companies,” Liu Mingdi analyzed. Passive investors, given the current cycle, tend to favor some small- and mid-cap A-shares.

A-shares Enter ‘Slow Bull’

Looking ahead to 2026, Liu Mingdi believes that global expansion remains at an important juncture, with resilient growth but relatively stagnant employment and cautious corporate attitudes. In the first half of 2026, GDP growth may benefit from fiscal stimulus, boosting corporate confidence in capital expenditure and human capital investment. Key points include the “14th Five-Year Plan” goals and policies, and the performance of various industries.

Regarding the A-share market, Liu Mingdi explicitly stated: “After several major bull markets, this time A-shares have truly entered a ‘slow bull’.” She explained that previous bull markets were often accompanied by performance reaching cyclical peaks, with ample incremental funds but short durations and obvious valuation overextensions. In contrast, “slow bull” phases, while supported by funds, are fundamentally driven by earnings. Some of these earnings are policy-related, while others stem from improvements in corporate operational strategies and capabilities.

Liu Mingdi said that the A-share market is not short of liquidity; rather, it lacks per-share earnings capable of supporting market value. If net profit margins can be reasonably improved, sustained positive returns are expected. If liquidity is like “overflowing wealth,” then compliant and sustainable profits are the foundation for supporting this “overflowing wealth.”

Optimism for Growth and Earnings Stocks

In terms of investment style, Liu Mingdi believes that in the spring “volatile” market of 2026, growth stocks are likely to outperform dividend and defensive stocks. Market leadership shifts quickly, and valuation adjustments for previously momentum-driven sectors will be appropriate. When positive factors turn into negatives, dividend or defensive sectors may have a window of outperformance.

Overall, Liu Mingdi favors growth and earnings-increasing stocks, with the most optimistic themes being AI-related infrastructure, “anti-involution,” exports, K-shaped consumption, and real estate recovery.

“Within each industry and theme, there is significant differentiation. The ‘slow bull’ has been ongoing for a second year, and market segmentation and stock selection will become even more important,” she pointed out. Under growth and momentum strategies, small- and mid-cap stocks are expected to outperform large caps.

Regarding risks, Liu Mingdi highlighted three points. First, macroeconomic data volatility, requiring attention to economic cycle changes. Second, earnings risks, especially for sectors with overly high expectations (such as A-shares IT, Hong Kong healthcare), where consensus earnings in Q4 2025 are high. If earnings fall short, individual stock downgrades may occur. Third, sector rotation risks, as momentum-driven leading stocks may experience significant pullbacks during industry shifts.

Additionally, Liu Mingdi and her team have maintained a cautious optimism on real estate and food & beverages since late November 2025. In real estate, significant adjustments since 2021 have substantially lowered overall home purchase costs. Further relaxation of purchase restrictions in core first-tier cities could boost asset and consumption confidence. The valuation of the food and beverage sector has fallen below its historical average by one standard deviation. Compared to the US and India, growth prospects are not weak, and valuation and dividend levels are relatively attractive. Leading domestic consumer companies are capable of innovating within the global healthy eating trend to meet consumer demand for high-quality, healthy foods.

(Source: The Paper)