Style divergence in China and Hong Kong equities narrows after the crowded AI trade unwinds

Overview

This report provides JPM's monthly review of China's and Hong Kong's equity markets in July 2026. The key phenomenon was the rapid narrowing of the performance gap between AI and non-AI assets: previously crowded AI trades retreated as global investors reassessed the pace of AI commercialization, hyperscaler free cash flow, the sustainability of AI capital expenditure and financing conditions, while capital rotated into traditional cyclical and defensive sectors such as consumer, financials and property.

Core views

JPM believes the July rotation was consistent with its view on Chinese and Hong Kong equities at the beginning of the month. Looking ahead to August, the report expects the AI trade to regain leadership because the current deleveraging is largely complete and the scope for further forced selling is limited. At the macro level, the July Politburo meeting emphasized fiscal implementation and targeted incremental policy support, with policy priorities still focused on AI, advanced manufacturing and national-security-related investment rather than broad-based demand stimulus. In Hong Kong, JPM favors the support for MXHK from property, banks, retail and upward earnings revisions.

Analysis framework

The report combines index and sector performance, valuation and earnings expectations, JPM's China and Hong Kong QMI, Southbound flows, turnover and short-selling data, and Hong Kong macroeconomic indicators to assess market style rotation, the macro cycle and asset-allocation direction.

Methodology notes

• Macroeconomic quantitative indicatorsJPM Quantitative Macro Indicator (QMI)

  Use QMI to track endogenous macro strength in China and Hong Kong and observe its relationship with year-on-year returns of MSCI China and MSCI HK.

  The report notes that Hong Kong's QMI returned to the expansion zone in May, while China's QMI declined into the slowdown zone, providing a macro framework for assessing the market-cycle position and index-return trends.

• Valuation and earnings12-month forward P/E and IBES EPS expectations

  Use the standard-deviation position of FTM P/E relative to its 10-year average and expected forward EPS growth to assess index valuation attractiveness.

  MXCN ended the month at 10.7x FTM P/E, 0.5 standard deviations below its 10-year average; MXHK was at 14.4x, 0.1 standard deviations below its 10-year average.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI China / MXCN

  Core index of the Chinese equity market

  Strengths

  Valuation is below its 10-year average, while 2026/2027 EPS expectations still imply double-digit growth.

  Weaknesses

  China's QMI indicates that the macro cycle is slowing, while credit, fixed-asset investment and retail remain weak.

  Comparison

  Underperformed MSCI HK and the Hang Seng Index in July, but significantly outperformed A-share growth indices with high AI technology exposure.

  Risks

  Policy support falling short of expectations, continued weak domestic demand and a second round of deleveraging in AI trades.

• MSCI Hong Kong / MXHK

  Core index of the Hong Kong equity market

  Strengths

  Strong Southbound inflows, upward earnings revisions, and improving property and bank fundamentals.

  Weaknesses

  Valuation is close to its 10-year average, while the property-price rebound may slow in the short term.

  Comparison

  MXHK outperformed MXCN in July and became a proxy for traditional cyclicals.

  Risks

  Expectations of Fed rate hikes, capital outflow controls and unresolved Hong Kong property policies.

• AI-related technology hardware

  Previously crowded thematic trade, with a significant pullback in July

  Strengths

  Policy priorities continue to emphasize AI and advanced manufacturing; the sector may regain leadership once global deleveraging is nearly complete.

  Weaknesses

  High valuations and crowded positioning make the sector sensitive to concerns about AI monetization and the sustainability of capital expenditure.

  Comparison

  Significantly underperformed non-AI sectors such as consumer, financials and property in July.

  Risks

  AI commercialization falling short of expectations, pressure on hyperscaler free cash flow, and tighter financing conditions.

• Sun Hung Kai Properties (0016.HK)

  JPM's preferred proxy for the Hong Kong housing market

  Strengths

  Benefits from the Hong Kong housing upcycle, with earnings growth potentially revised up to the mid-single-digit percentage range.

  Weaknesses

  Hong Kong home prices have rebounded rapidly year to date and may slow marginally in 2H.

  Comparison

  Relative to other Hong Kong property stocks, JPM views it as the best proxy for the Hong Kong housing market.

  Risks

  Capital outflow controls, Fed rate hikes and housing-policy uncertainty.

• Techtronic Industries (0669.HK)

  AI-adjacent upside option and US-demand resilience play

  Strengths

  Offers both AI-adjacent upside optionality and resilience to US demand; rated OW.

  Weaknesses

  May still be affected by global risk appetite and valuation volatility across the AI chain.

  Comparison

  Compared with pure-play crowded AI hardware trades, it offers greater resilience through consumer and industrial demand exposure.

  Risks

  A slowdown in US demand, another adjustment in AI-related valuations, and changes in foreign exchange and financing conditions.

Key data

• July index performanceMSCI China +8.6%; MSCI HK +10.9%; HSI +13.1%; CSI300 -7.4%; ChiNext -22.6%; STAR50 -25.5% (in US dollar terms)Reflects the unwinding of crowded AI trades and the catch-up of non-AI lagging assets.
• MXCN valuation and earnings expectations10.7x FTM P/E; IBES expects 2026/2027 EPS growth of 13%/15% year on yearValuation is 0.5 standard deviations below its 10-year average.
• MXHK valuation and earnings expectations14.4x FTM P/E; IBES expects 2026/2027 EPS growth of 17%/5% year on yearValuation is 0.1 standard deviations below its 10-year average, while FTM EPS is up 4.5% year to date.
• Southbound flowsHK$55bn net inflow in July, versus HK$27bn in JuneEquivalent to approximately 21% of Hong Kong turnover, above the 15% average since 2023.
• Market turnoverHong Kong average daily turnover of HK$307bn in July; A-share average daily turnover of Rmb2,703bnThe corresponding June figures were HK$319bn and Rmb3,138bn.
• Hong Kong short-selling ratio17.1%The June figure was 16.5%, 1.0 standard deviation above the 14.6% average since 2014.
• Hong Kong propertyJPM expects Hong Kong home prices to rise 10%-15% in 2026Prices have rebounded 11% year to date and may slow in 2H due to capital outflow controls and expectations of Fed rate hikes.
• Hong Kong economyJune exports +53.4% year on year, imports +45.4% year on year; unemployment rate 3.7%; CPI +2.0% year on year; May retail sales volume +0.7% month on month and value +1.3% month on monthExports were supported by AI-related electronic demand and re-exports, while retail continued to recover.

Impact & implications

In the short term, the unwinding of AI positions in July improved the relative performance of low-valuation consumer, financial and property sectors; in the medium term, if forced deleveraging ends and expectations for AI commercialization stabilize, AI-related assets may once again become the market's main theme. Hong Kong markets are supported jointly by Southbound flows, a property recovery, bank margins and retail recovery, leaving further upside for MXHK.

Risks

• A slower-than-expected AI commercialization timeline could put related assets under renewed pressure.
• Tighter global liquidity or an escalation in Middle East tensions could trigger further risk reduction.
• Continued weakness in Chinese credit, investment and retail data could weigh on the macro recovery.
• The Hong Kong property recovery could be affected by capital outflow controls, higher interest rates or policy uncertainty.
• Slower Southbound inflows or a persistently high Hong Kong short-selling ratio could suppress market performance.

What to watch

• Whether the AI trade can regain leadership in August and whether valuations of AI-related hardware stabilize.
• The share of A-share margin purchases in market turnover, deleveraging progress among Korean leveraged ETFs and global hedge funds.
• The strength of Chinese policy implementation, particularly fiscal execution and investment in AI, advanced manufacturing and national security.
• Changes in Hong Kong Southbound flows, turnover, short-selling ratios and MXHK earnings expectations.
• Hong Kong home prices, inventory months, retail sales, exports and bank-loan growth.