China tech: fundamentals versus sentiment

Please find below our latest thoughts on China:

• China equities have experienced a sharp pullback in recent months. In a pattern that will be familiar to investors globally, many of the stocks that have fallen furthest were also among the strongest performers earlier in the year.
• Technology stocks listed on the China A-share market have therefore borne the brunt of the profit-taking. The Star Board and ChiNext indices, proxies for China’s technology and innovation sectors, are both down by around 40% since the end of Q2, wiping out gains from the first half of the year.¹
• Yet the fundamental picture has arguably changed less than share prices might suggest. Many technology companies have reported strong results and continue to indicate robust AI-related demand. This suggests that sentiment, as well as fundamentals, has played an important role in the pullback.

• In our view, there is no single explanation for the loss of market confidence. Rather, several factors have come together at the same time.
• Recent corporate and individual tax clampdowns have added to fragile sentiment, raising concerns that policymakers are placing greater emphasis on enforcement and revenue collection at a time when private-sector confidence and consumption remain subdued.
• A stronger US dollar and higher US Treasury yields have added to the pressure, contributing to broader outflows from emerging markets.
• Geopolitical concerns have been another factor, particularly for technology stocks. One example is Washington’s moves to restrict Chinese optical transceiver products from US data centres.
• While such headlines inevitably create volatility in a nervous market, the reality of technological decoupling is more complicated. China’s optical transceiver companies account for around 60% of the global high-speed optical module market.²
• But the interdependence runs both ways. China is also a major supplier of indium phosphide, an important material used in the lasers inside optical transceivers. If Beijing were to restrict exports, this could create significant difficulties for optical transceiver manufacturers globally.
• This illustrates just how intertwined modern technology supply chains have become. It also suggests there are practical limits to how quickly the US and China can disentangle their technology industries without creating significant disruption on both sides.
• Looking ahead, a key question is whether the sharp market pullback represents the bursting of a China AI bubble or an opportunity to buy beaten-down technology stocks at significantly lower valuations.
• Standing back from the market noise, our view is that China is still at a relatively early stage of both its push for greater technological self-sufficiency and the broader AI investment cycle.
• We strongly believe that China will continue investing heavily in critical technologies where it remains reliant on US supply chains, particularly semiconductors. And we believe this drive for greater self-sufficiency should create significant opportunities for domestic companies over the coming years.

• Indeed, we have met with many technology companies in our portfolios in recent weeks. Overall, management confidence remains high, with companies continuing to signal healthy demand. These discussions reinforce our view that the weakness in share prices does not reflect a deterioration in their fundamental outlook.
• Timing an investment into China markets can be tricky. Sentiment can shift quickly, often outweighing fundamentals over shorter time horizons.
• That said, we see two key factors that should provide some support to the market, particularly China A-shares - government buying and valuations approaching the lower end of their historical range.
• The so-called “National Team” has stepped up its buying of domestic ETFs, providing direct support to the market.
• The aim is to help put a floor under the market, and with A-shares showing greater stability in recent days, there are signs that this is having some effect. We have seen a similar pattern during previous periods of market stress over the past two years, including following the “Liberation Day” tariff announcements last year.
• Valuations also offer some reassurance. Over the past 15 years, the China A-share market’s equity risk premium has ranged from around 2.5% to 7.0%. At 6.4% today, it is approaching the upper end of that historical range³, suggesting that a meaningful degree of risk is already priced into the market.
• None of this means that volatility is over, and calling the bottom in China has rarely been easy. But with valuations increasingly reflecting a difficult outlook, government support becoming more visible and the longer-term technology story remaining intact, we believe the balance of risk and reward is becoming more attractive for long-term investors.

¹ Source: Bloomberg as at 27 Oct 2026
² Source: LightCounting as at May 2026
³ Source: Bloomberg as at 27 Oct 2026