East Capital China

The macroeconomic environment remained under pressure in Q4 2025. Recurrent external geopolitical disturbances and weaker-than-expected consumption data led to heightened market volatility and a downward bias. Following the implementation of China–US trade measures, investors entered a phase of digesting policy outcomes, and adopted a more cautious stance toward further easing. Although the Federal Reserve maintained a dovish stance, its December meeting indicated a pause in consecutive rate cuts. This prompted short-term global capital reallocation away from emerging markets. Domestically, the marginal impact of earlier stimulus measures gradually faded, and seasonal year-end liquidity tightening further weighed on market sentiment. 

These macroeconomic and liquidity dynamics resulted in weaker equity market performance during the quarter. In USD terms, the MSCI China All-Shares Index fell 3.7%, reducing its full-year gain to 28.7%. Our fund fell 7.3% during the quarter, and thus underperformed the benchmark by 3.6%. The fund returned 28% for the full year, slightly behind the benchmark’s return of 28.7%, highlighting the resilience of our long-term, value-oriented investment framework. During the quarter, we maintained an active portfolio allocation of 70%, making incremental adjustments to companies with stronger earnings visibility and moderating exposure to higher-valuation areas in response to rising volatility. 

Against this challenging backdrop, policymakers continued to emphasise medium- to long-term economic stabilisation. In Q4, policy priorities centred on expanding domestic demand, advancing high-level opening up, and fostering new productive forces. These measures included launching RMB 500bn in new policy-based financial instruments to support infrastructure investment and initiatives to encourage private capital participation in new infrastructure and advanced manufacturing. Progress on opening up also continued, as the Hainan Free Trade Port officially entered its customs closure phase and implemented zero-tariff policies. Meanwhile, the introduction of the "AI + Manufacturing" Special Action Plan and the revised Price Law aimed to curb excessive "involution-style" competition and improve market efficiency overall. 

Externally, while global trade tensions remained contained, uncertainty around policy continuity persisted. The Federal Reserve's indication of a slower pace of rate cuts temporarily bolstered the US dollar, resulting in modest short-term outflows from emerging markets. China and the US extended the existing tariff buffer period, helping to keep bilateral trade stable. However, investor expectations for further progress in trade negotiations became more cautious. Reflecting these dynamics, northbound funds recorded a slight net outflow in the fourth quarter, and the pace of passive fund allocations slowed. 

Stock-specific fundamentals continued to matter within the portfolio. Ping An Insurance was the largest positive contributor during the quarter, with its share price rising 22.8% and adding 71 basis points to portfolio returns. The company’s performance reflected the combined impact of supportive industry policies and effective execution. This included growth in participating insurance products on the back of interest rate mechanism reforms; strong momentum in new energy vehicle insurance through partnerships with leading automakers; and improved investment performance amid a more stable equity market environment. 

Overall, 2025 marked a clear recovery for China’s equity market. The MSCI China All-Shares Index increased by 28.7% in USD terms, reversing its underperformance relative to other emerging markets since 2022. This recovery was supported by strengthened domestic policy measures, accommodative global liquidity conditions, and a gradual improvement in corporate earnings. In this environment, our China fund achieved a 28% full-year return, thanks to proactive positioning in the first half of the year and flexible portfolio adjustments in response to evolving conditions in the second half. 

Alibaba was the largest contributor of the year, with its share price rising 73.3% and contributing 183 basis points. Its performance was driven by strong growth in cloud and AI-related revenues, substantial investment in computing infrastructure to support the evolution of the "Tongyi Qianwen" large language model, continued consumption upgrading on its e-commerce platforms, and a more normalised regulatory environment. 

As we look ahead to 2026, the market environment will likely be shaped by the interplay of global monetary policy, domestic policy implementation, trade relations, and corporate earnings momentum. Market expectations currently anticipate around 50 basis points of cumulative US rate cuts in 2026, suggesting that global liquidity conditions may remain supportive, albeit less accommodating than in 2025. This could moderate the pace of capital inflows into emerging markets, though it should not significantly impact long-term allocation trends. 

Domestically, the upcoming 15th Five-Year Plan (2026–2030) is expected to prioritise technological innovation, green development, and shared prosperity. These priorities will likely anchor medium- to long-term policy direction, providing sustained support for high-growth sectors. At the same time, targeted fiscal and industrial policies are expected to remain in place to stabilise growth and reinforce confidence. 

Although risks persist, including geopolitical tensions, global economic uncertainty, and commodity price volatility, China’s equity market remains significantly under owned from a global allocation perspective. Valuations are attractive relative to historical averages and those of other emerging markets. Corporate earnings are expected to grow 15–20% in 2026. Against this backdrop, our portfolio will continue to pursue a high-conviction, growth-orientated strategy with a focus on healthcare innovation, advanced manufacturing, and consumption upgrading, where long-term fundamentals and policy priorities are well aligned.