China equity strategy: innovation accelerates, old economy stalls Report Interpretation

Overview

JPMorgan’s China equity strategy argues that innovation-led growth—especially AI—continues to differentiate the market from a weaker traditional economy. It maintains an overweight China allocation, pairing AI exposure with energy, quality growth and selected high-shareholder-return names.

Core views

JPMorgan maintains an overweight allocation to China equities within its emerging-market and Asia portfolios. Its end-2026 base-case targets remain 100 for the MXCN index and 5,200 for CSI-300, versus levels of 73 and 4,480 as of mid-September. The targets imply 37% and 16% upside, respectively, and rest on consensus 2026 EPS growth of 14% for MXCN and 24% for CSI-300. In the base case, MXCN trades at 15.4x 2026 earnings and CSI-300 at 16.6x. The report characterizes domestic liquidity as abundant, although not yet at the excessive levels seen in June; it therefore supports risk assets but may also make the path volatile. AI remains the report’s central growth theme. JPMorgan says 2Q26 results confirmed that the AI complex outperformed the broader China equity market on financial performance, and it expects this relative strength to support a rebound across the AI ecosystem during the rest of 2H26. Its preferred domestic AI supply-chain names are Iluvatar CoreX, V-Test, JCET, AMEC and NAURA. The report also highlights China’s LLM capability-cost trade-off, recurring revenue tracking and market-cap-to-ARR comparisons as tools for evaluating the commercial progress of AI-related companies. The report contrasts innovation with the old economy. Consensus 2026 EPS growth is strongest in CSI-300 information technology at 90.1%, real estate at 83.9%, materials at 61.1% and healthcare at 35.4%, while consumer staples are flat and financials grow 5.6%. For MXCN, the corresponding consensus growth figures include materials at 71.7%, healthcare at 53.5%, energy at 25.4%, information technology at 17.4% and financials at 1.8%. A-share data also show an uneven cycle: 2Q26 capex rose 22% year on year in information technology and 18% in industrials, but declined in communication services, consumer discretionary, consumer staples and utilities. Inventory growth was particularly high in information technology at 31% and communication services at 35%. JPMorgan’s anti-involution assessment points to highly divergent industry conditions. Revenue growth in 2Q26 was strong in lithium at 207%, battery materials at 97% and coal at 37%, while autos, solar, cement, hog farming and liquor remained weak or contracted. The report also notes that overseas revenue exposure continued to rise: MXCN companies’ overseas revenue exposure increased from 15% in 2024 to 18% in 1H26, while CSI-300 exposure rose from 19% to 22%. Information technology has the highest overseas exposure in both benchmarks, at 56% for MXCN and 47% for CSI-300 in 1H26. For diversification beyond AI, JPMorgan’s preferred names include Meituan, Bank of China-H, Bank of Ningbo, CICC-H, Innovent, BYD-H and China Resources Land. It also sees scope for a shareholder-return theme in 2H26 as policymakers seek to balance equity issuance and buybacks. Its screen selects MXCN constituents with dividend plus buyback yield above 5%, positive net cash and operating cash flow, and beta below 1.2. The cited group includes China Feihe, China Hongqiao, Vipshop, COSCO Shipping, Yutong Bus, Midea, Focus Media, Huayu Automotive, Shenzhou International, Orient Overseas, Giant Biogene, Tsingtao Brewery, Bosideng, CRRC and Kunlun Energy. Market leadership has narrowed from its August peak, with improving momentum in AI technology hardware, shipping and semiconductor materials. The report observes that earnings-revision factors have continued to outperform, while price momentum experienced a larger drawdown than EPS momentum during the recent correction. In a slowdown environment, JPMorgan favors Momentum, Value and Quality styles. It also notes that Quality has been the best hedge against rising bond yields this year, while Defensive Value has been the best hedge against higher oil prices. The global-rate discussion argues that valuation pressure from higher yields depends on the earnings regime. JPMorgan’s historical S&P 500 analysis suggests that when EPS growth is above trend at roughly 15% year on year, 10-year yields can rise toward about 5% before equity multiples begin to de-rate. Strong productivity growth is similarly presented as supportive of a higher-multiple environment. These comparisons frame why sustained earnings growth is important to China’s valuation outlook rather than serving as a standalone call on overseas markets. For Hong Kong, JPMorgan sets a 2026 MXHK base-case target of 16,500, implying 16% upside from 14,265, based on 18% consensus 2026 EPS growth and a 16.7x 2026 forward P/E. It sees balanced risk-reward and views Hong Kong as moving from an early to a mid-cycle phase. The Hong Kong QMI has eased into a slowdown quadrant, but GDP revisions underpin MXHK’s rebound and the index is described as closely tracking EPS revisions. JPMorgan is overweight financials and real estate and underweight consumer discretionary; it also identifies the widening onshore-offshore yield gap as a structural tailwind for Hong Kong’s role as an offshore wealth hub. Equity financing in Hong Kong was at a multi-year high in the first eight months of 2026, up 82% year on year, while A-share equity financing was slowing.

Analysis framework

The report combines bottom-up consensus earnings and sector data with index target scenarios, forward P/E valuation, liquidity and fund-flow indicators, factor performance, capex and inventory-cycle evidence, overseas-revenue exposure and JPMorgan’s Quantitative Macro Indicator. It then translates these findings into index, style, sector and thematic positioning.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Forward P/E scenario valuation

  JPMorgan derives MXCN, CSI-300 and MXHK target scenarios by applying forward P/E multiples to consensus EPS forecasts.

• Industry AnalysisVolume-price decomposition

  Earnings, capex, inventory, margin and revenue comparison

  The report compares sector earnings expectations with capex, inventory and operating trends to distinguish AI-led expansion from weaker traditional industries.

• Quantitative, Factor, and Portfolio TheoryStyle factor analysis

  Momentum, value, quality and earnings-revision factor analysis

  JPMorgan uses factor performance and macro-regime observations to support its preference for Momentum, Value and Quality during a slowdown.

• Cycle and Business ConditionsBusiness-Cycle Inflection Analysis

  Quantitative Macro Indicator state cycle

  The QMI is used to place China and Hong Kong in macro-cycle quadrants and assess the likely market backdrop.

Asset mapping & comparison

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

• Iluvatar CoreX (09903.HK)

  Preferred domestic AI supply-chain player

  Strengths

  Included in JPMorgan’s favored AI ecosystem list.

  Risks

  Liquidity turbulence could make the AI rebound path choppy.

• V-Test (688372.SH)

  Preferred domestic AI supply-chain player

  Strengths

  Included in JPMorgan’s favored AI ecosystem list.

  Risks

  Liquidity turbulence could make the AI rebound path choppy.

• JCET (600584.SH), AMEC (688012.SH), NAURA (002371.SZ)

  Preferred domestic AI supply-chain players

  Strengths

  JPMorgan identifies these semiconductor-related companies as favored AI beneficiaries.

  Risks

  AI performance may remain volatile amid liquidity turbulence.

• Meituan (03690.HK), Bank of China-H (03988.HK), Bank of Ningbo (002142.SZ), CICC-H (03908.HK), Innovent (01801.HK), BYD-H (01211.HK), China Resources Land (01109.HK)

  Preferred non-AI diversification names

  Strengths

  Selected by JPMorgan as top picks outside the AI field.

  Risks

  Exposure remains subject to uneven old-economy conditions and market volatility.

Key data

• MXCN end-2026 base-case target100Versus 73 on 16 September 2026; 37% implied upside and 14% consensus 2026 EPS growth.
• CSI-300 end-2026 base-case target5,200Versus 4,480 on 16 September 2026; 16% implied upside and 24% consensus 2026 EPS growth.
• MXHK 2026 base-case target16,500Versus 14,265 on 17 September 2026; 16% implied upside and 18% consensus 2026 EPS growth.
• Hong Kong equity financing+82% y/yFirst eight months of 2026 were at a multi-year high.
• MXCN overseas revenue exposure18%Up from 15% in 2024 and 17% in 2025.

Impact & implications

The report’s positioning favors exposure to AI-driven innovation while using shareholder-return, energy, quality-growth and selected financial, healthcare and real-estate names for diversification. Its constructive index outlook depends on earnings delivery and continued supportive liquidity, while the traditional economy remains uneven.

Risks

• Liquidity turbulence could make the anticipated AI-ecosystem rebound in 2H26 choppy.
• Consensus earnings projections, valuation assumptions and macro conditions may not develop as expected.

What to watch

• Whether AI-related companies sustain their 2Q26 financial outperformance through the remainder of 2H26.
• China equity liquidity, A-share ETF flows and offshore investor exposure.
• Consensus EPS revisions for MXCN, CSI-300 and Hong Kong equities.
• Progress in balancing equity issuance and buybacks and the resulting shareholder-return theme.
• The Hong Kong QMI slowdown signal, GDP revisions and equity-financing conditions.