George Efstathopoulos

“In recent years, many investors have asked whether China remains investible. Between the property downturn, regulatory tightening, and geopolitical frictions, global capital turned away from Chinese equities in favour of perceived safety elsewhere. Yet markets have a way of challenging consensus, and China’s market performance this year suggests a quiet but meaningful shift. 

“China has proven more resilient than many had expected. Earnings stabilised, corporate reforms accelerated, and confidence is slowly returning. Flows typically follow stock market performance and earnings, and China is now delivering both. For investors, diversification remains the cornerstone of portfolio construction and China now offers not only diversification but also innovation. As such, it is regaining its status as an indispensable component within Asian and emerging-market allocations, precisely at a time when foreign investors remain structurally underweight Chinese equities.

“Perhaps the biggest surprise this year has been China’s resilience. Growth has held up in the face of tariffs and soft global demand, and the government has managed to navigate its relationship with the US more deftly than most expected. In many respects, China has achieved more in negotiations while offering less, shifting dynamics and bargaining power.” 

Rebalancing China’s two engines

“China’s economic model has long relied on two engines: exports and domestic consumption. The former has been operating in overdrive, while the latter continues to lag. To sustain growth, China is in the process of rebalancing towards domestic demand. The signals from the Fourth Plenum suggest policymakers are fully aware of this need. Fiscal policy remains the key. China holds the fiscal keys to help fight its own deflationary forces, rebalance its economy and create more sustainable growth domestically – and by doing so, boosting status as a key trading partner to the rest of the world, which would in turn also elevate the Chinese Yuan’s role in the world stage. 

“For markets, the next phase of the China rally may hinge on inflation dynamics. The return of moderate inflation would signal not just cyclical normalisation but structural health. For years, investors have drawn parallels with Japan’s deflationary episode, fearing a similar “lost decade”. Yet recent data points have been more encouraging. Core inflation has been rising since May, while service-sector inflation – from recreation to healthcare and transport – is broadening. Sequential producer price inflation has improved for three consecutive months, reflecting early success in addressing overcapacity and anti-involution can help earnings broaden beyond tech sector. A convincing exit from deflationary concerns could be the catalyst for further re-rating.”

Looking ahead

“As the narrative on China continues to shift, foreign flows are likely to follow. Yet perhaps the more powerful force lies within China itself. With one of the highest household savings rates globally, China holds a vast pool of untapped domestic capital. Historically, property was the preferred savings channel, but with the property market undergoing structural adjustment, equities may increasingly become a credible alternative.

“Meanwhile, government policies aimed at strengthening the social safety net could gradually reduce the need for precautionary savings. If households begin to deploy even a fraction of their deposits into the equity market, the implications for valuations could be profound. Opportunities span both onshore and offshore markets. Offshore equities, with their heavier weighting in technology and AI, are benefiting from the innovation theme and China’s relative strength in energy infrastructure – a key advantage in an electrifying global economy, while valuations remain much lower than global peers. Onshore markets, which are more exposed to domestic consumption, could be the main beneficiaries if fiscal stimulus surprises to the upside. Mid-caps, in particular, offer high sensitivity to domestic demand recovery. While anti-involution could drive corporate margins and profitability higher, benefiting sectors such as EVs, an industry China has come to dominate worldwide.

“Looking into 2026, the foundations are in place for a sustained rally. China’s macro and corporate resilience, coupled with the gradual return of inflation and a more supportive policy stance, suggest further upside potential. The combination of improving fundamentals, policy pragmatism, and renewed investor confidence marks a distinct departure from the cycle of hope-driven rallies of recent years. China’s equity market is in a bull phase that foreign investors have yet to fully appreciate. For those willing to look beyond the lingering skepticism, the risk-reward balance has shifted decisively. In my view, dips remain opportunities to buy, not to sell. China has turned the corner – not through hope, but through resilience, innovation, and policy conviction.”

By George Efstathopoulos, portfolio manager

The post China’s next chapter – from doubt to dominance appeared first on AdviserVoice.

George Efstathopoulos

In recent decades, markets have predominantly been influenced by globalisation and the outperformance of large-cap stocks, particularly in the United States. However, recent trends suggest a potential shift as global policy divergence grows and regional dynamics gain significance. The rise of tariffs and protectionism is hastening regionalisation, prompting a significant restructuring of supply chains and a move towards onshoring. In this context, domestically focused revenue generation emerges as an attractive theme, with mid-cap companies presenting unique advantages in this evolving landscape. 

This trend is particularly evident outside the US, where the moderation of inflation is enabling central banks to adopt a more accommodative approach, signalling a potential turning point for mid-cap stocks. Furthermore, several evolving dynamics are proving advantageous for mid-caps on a global scale. At present, the valuation gaps between mid-cap and large-cap stocks are historically wide, suggesting that mid-caps may be undervalued. Additionally, mid-caps are positioned to benefit from domestic industrial policies, infrastructure projects, and capital expenditure cycles, which align well with current economic trends. While mid-caps globally present an attractive opportunity, certain markets are experiencing additional tailwinds that could accelerate and sustain this theme. These markets are undergoing multi-decade, if not generational, shifts in dynamics, offering compelling investment opportunities.

Japan’s economic landscape is experiencing substantial shifts, signalling an end to the extended period of stagnation characterised by low growth, low inflation, and low interest rates. The situation is changing, with wage-driven inflation leading to increased domestic demand, which is transforming consumption behaviours after decades of economic inertia. Japan’s mid-cap stocks offer a compelling investment opportunity; they are largely insulated from JPY volatility, making them a stable choice. Additionally, mid-caps are closely aligned with the domestic economy, which is currently undergoing reflation spurred by positive real wage growth. This favourable economic climate is reflected in improving fundamentals, as demonstrated by rising Return on Equity and profit margins among mid-cap companies. The narrative of structural corporate reform also seems to be benefiting mid-caps, evident in the significant increase in dividend yield.

Germany’s fiscally conservative government is moving away from austerity and embracing substantial fiscal stimulus. In this environment, German mid-cap stocks, which are more cyclical, are poised to benefit from the transition from late to early economic cycles. These companies have a stronger correlation with PMIs, given their heavy industrial focus, and seem to have reached a low point. Unlike large caps, mid-caps generate more revenue not only domestically but also across Europe, making them less susceptible to US-driven trade tariffs and competition from China. Furthermore, mid-caps are more responsive to short-term interest rates, and with the European Central Bank on an easing trajectory, further easing is anticipated in the coming quarters. This environment is favourable for mid-caps, whose earnings are more sensitive to GDP growth compared to large caps.

China is probably the only market globally where we see easing across monetary, fiscal, and regulatory policies. With a notably high savings rate, China’s mid-cap stocks could benefit significantly if policymakers choose to stimulate domestic consumption, the second engine of China’s dual circulation economy. This is particularly timely as the first growth engine of exports faces increasing challenges amid escalating global trade tensions. While earnings in the offshore market have been improving, the rest of China’s equity market has been relatively uneventful. However, this could change with further fiscal expansion. In a world increasingly characterised by trade protectionism, it would be advantageous for China to boost domestic demand, rather than rely solely on exports. This strategy would not only mitigate tariff impacts but also help rebalance the economy and tackle deflationary pressures, fostering more sustainable growth. Unlike offshore tech stocks, which can be sensitive to fluctuations in US Treasury yields and trade policies, onshore mid-caps are typically more attuned to the Chinese consumer. By using its fiscal capabilities to combat deflation and rebalance the economy, China can cultivate sustainable domestic growth, positioning onshore mid-caps as prime beneficiaries.

As the equity market regime established after the Global Financial Crisis – characterised by globalisation and large-cap dominance – encounters disruption, the emphasis on domestically generated revenue is becoming increasingly appealing. This approach is especially pertinent in countries experiencing notable economic transitions, such as Germany, Japan, and China. By seeking opportunities in mid-cap stocks within these regions, investors can engage with the shifting dynamics and opportunities arising from these changes, potentially achieving favourable returns in a fragmented global landscape.”

By George Efstathopoulos, Portfolio Manager

The post Shift in global dynamics an opportunity for mid-caps appeared first on AdviserVoice.