Navigating the Year of the Fire Horse

As we enter the Year of the Fire Horse, it feels like the right moment to step back and think about where China stands, not just as an investment destination, but as a market going through one of the most important transitions in its modern economic history. 

The past few years have been unpredictable for investors, but 2026 is shaping up differently. There are unmistakable signs of stabilization, policy clarity is improving, and we are beginning to see pockets of genuine long‑term opportunity emerging. In other words: this is still a complicated market, but it is no longer a hopeless one.

Let’s walk through what feels most important as we head into this new cycle.

1. Where we are seeing opportunity, and why valuations still matter

If you felt uneasy watching Chinese equities in 2025, you were not alone. Market performance was extraordinarily divergent. Anything connected to AI hardware, semiconductors or health care performed strongly, while other areas lagged. Financials benefited from aggressive policy easing, mortgage relief and state‑backed capital support, which helped stabilize balance sheets and sentiment.

The challenge is that markets have already rewarded these trends. Fundamentals are solid, but valuations in these pockets have become optimistic.

Where we are finding more interesting opportunities is at the other end of the spectrum: areas largely overlooked last year. High‑quality yield names, utilities, cyclicals and select consumer franchises offer stability, dividends and earnings that appear close to bottoming. Their valuations have not yet caught up with fundamentals.

2. Valuations: What’s cheap and what’s not?

Here’s the simple picture:

• Relative to its own history, China is not expensive. MSCI China trades on a forward P/E of around 12.6x.
• Relative to Asia, China remains one of the cheaper large markets.
• Relative to developed markets, China is outright cheap, with global portfolios still heavily underweight.

You can feel this in client conversations. Few seem euphoric about China, but the despair of 2023 and early 2024 appears to have faded. Investors have stopped calling China “un-investable”. Expectations are low. Valuations are fair. And that combination is often the starting point for the best investment stories.

3. Earnings: A quietly improving story

One of the most encouraging shifts heading into 2026 is the stabilization of earnings. Consensus now points to a mid‑teens rebound, led by consumer‑facing sectors where competition has rationalized and margins have recovered. This improvement reflects operational discipline rather than optimistic GDP assumptions.

Compared with the rest of Asia, China sits in a rare sweet spot: solid earnings recovery combined with reasonable valuations, while peers increasingly offer either growth without value or value without growth.

4. The policy backdrop: Property, consumers and the long view

Policy remains a critical driver of sentiment. The encouraging news is that 2026 looks more predictable than recent years.

• Property is slowly becoming less of a problem No one expects a property recovery. But we are seeing a managed, orderly adjustment. Mortgage rates are down, some inventory is being absorbed, and property’s share of GDP is shrinking — a healthy long‑term development. The risk has shifted from systemic collapse to a manageable drag on confidence.
• The consumer has been helped but not transformed Subsidies and incentives continue to support consumption, but their impact fades quickly. Early signs of softer auto and smartphone demand highlight the limits of stimulus alone. Consumer confidence remains the missing ingredient, though not an impossible one to rebuild.

5. The 15th Five‑Year Plan: Where China wants to go

The China’s next Five‑Year Plan offers important long‑term signals. Priorities are clear:

• Technological self‑reliance
• Green energy and advanced manufacturing
• Stronger domestic consumption
• A more efficient unified national market
• Reduced dependence on property‑led growth

There is a clear shift from growth at all costs towards quality, resilience and productivity. That is not the China of a decade ago, and it is not meant to be. 

China is also expanding exports into non‑traditional markets such as Association of Southeast Asian Nations (ASEAN), Africa, Latin America and the Middle East. At the same time, tensions with Western economies have eased from recent extremes.

6. The risks: What keeps us awake at night?

• Property Less dangerous than before, but still a drag.
• Geopolitics A background risk that feels cyclically quieter.
• Regulatory confidence (the big one) Unpredictable policy remains the key swing factor for sentiment. The positive news is greater awareness among policymakers, though this risk still bears close watching.

Final thoughts: Why the Year of the Fire Horse feels different

The symbolism of the Fire Horse feels appropriate. China’s market is slowly regaining momentum, not by returning to its old hyper‑growth model, but by evolving into something more balanced and sustainable. Earnings are improving, valuations remain supportive, policy direction is clearer and sentiment is no longer anchored in despair.

China’s market remains broad, inefficient and sentiment‑driven — frustrating for benchmark investors but fertile ground for stock pickers. With dispersion likely to remain high, we believe this continues to be a favorable environment for active investors seeking long‑term value.