BofA: China Investment Compass - Quarterly 3Q26: Navigating a K-Shaped Market
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BofA Securities outlines a highly bifurcated Chinese equity landscape heading into the third quarter of 2026. During the second quarter, the MSCI China Index declined 7.6% in USD terms, sharply underperforming the MSCI World and MSCI EM benchmarks. Conversely, domestic growth indices surged, with ChiNext and the STAR 50 soaring 38.6% and 78.6%, respectively. This divergence highlights a market heavily driven by concentrated AI capital expenditure, which fueled earnings upgrades across the technology supply chain, while macroeconomic fragility pressured consumer sectors.
BofA notes that current market positioning has become increasingly crowded, with retail leverage amplifying volatility. Although the forward P/E ratio for MSCI China sits at 10.3 times, representing a 12% discount to historical averages, consensus EPS growth estimates for 2026 have been slashed from over 11% in January to a mere 2-3%. Liquidity pressures loom in the third quarter due to nearly HK$540 billion in lock-up expirations and a robust IPO pipeline. While exports remain a bright spot, growing 15.5% year-over-year in the first five months of 2026, domestic demand remains sluggish.
The firm maintains a barbell strategy, favoring value and yield alongside sectors possessing robust earnings and R.E.A.L. moats. BofA continues to view China as a precise stock-picking market. They expect A-shares to outperform H-shares until the global AI momentum subsides. For 3Q26, their quantitative model portfolio upgrades industrials, heavy machinery, electrical equipment, and tech hardware to the top overweight list, while downgrading utilities, renewables, and beverages to underweight.
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