Goldman Sachs - China Equity Market Outlook 2026: Profits Hard to Come By (Annual Investment Themes)

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Source: Finn’s Investment Research Records

Key Themes for 2026: Portfolio Alignment with Policy

Top Ten Chinese Private Enterprises: As regulatory cycles for private companies ease and breakthroughs in AI and technology continue, the market concentration of private enterprises is rising. The current ten leading private companies (P10) are well-positioned to leverage past successes to further strengthen their dominance in China’s stock market, similar to the U.S. “Seven Tech Giants” (M7). These 10 stocks have a total market cap of $1.7 trillion, with a current P/E ratio of 18, accounting for 40% of the MSCI China Index weight, with an average daily trading volume of $7.5 billion. Their earnings are expected to grow at a 13% CAGR over the next two years.

Chart 39: P10 Has Potential to Further Strengthen Market Dominance

Analysis: The main reasons for recommending China’s private P10 are as follows:

1. The core logic of this bull market is AI-centered technology, and the private sector leads in breakthroughs in AI and tech, with inherent R&D efficiency advantages.

2. Private companies account for 60% of GDP, 80% of urban employment, two-thirds of national tax revenue, 63.3% of listed companies, and recent policy shifts favoring economic growth suggest continued easing of regulation for private firms.

3. Compared to the U.S. M7, which accounts for 28% of the total stock market capitalization, and major European countries’ top ten companies at around 50%, P10 only represents 17% of the overall A/H share market cap, leaving significant room for growth.

4. The annual turnover rate of top U.S. companies is 15%, while for A/H shares it ranges from 12% to 17%, indicating that leading companies that prioritize R&D and capex maintain a very stable position. M&A activity by top companies to acquire smaller tech firms will be a key growth driver for P10.

5. China’s future growth in corporate performance will increasingly depend on international markets, and P10 companies have ample budgets to develop overseas, a capability unmatched by smaller tech firms.

6. Currently, U.S. M7 valuations stand at 26x, while Chinese P10 stocks are at 16x. Additionally, the premium of U.S. M7 over the S&P 500 exceeds that of Chinese P10 over MSCI China, making the latter more cost-effective for investors.

Fifteenth Five-Year Plan Portfolio: Our text analysis driven by the large language model (FinBert) can extract and convert policy signals from the five-year plan documents. Historical data shows that aligning portfolios with policy trends can generate significant excess returns. This portfolio includes 50 mid-cap stocks selected based on growth, valuation, and quality criteria. Over the past year, these stocks have returned 58% overall, with an estimated P/E of 26.5x, and market consensus expects a 30% CAGR in EPS over the next two years.

Chart 38: Policy Support and AI Are the Two Common Factors in Recent Top Themes

Analysis: Historical data indicates that long-term strategic allocations aligned with the five-year plans can yield substantial excess returns. For example, sectors like 5G, supercomputers, semiconductors, EVs, generative AI, industrial robots, innovative drugs, aerospace, and defense have outperformed the market significantly during the 14th Five-Year Plan.

Therefore, Goldman Sachs developed a FinBert model that automatically extracts textual information from the Fifteenth Five-Year Plan for deep analysis, producing a stock pool of 50 mid-cap stocks highly benefiting from the plan (list rules are not disclosed; ask AI if needed). Note that mid-cap stocks tend to be more volatile, so long-term holding over five years is recommended for attractive returns.

Global Leaders: China’s export strength may increase its market share globally and positively impact profits. We selected 25 companies rated “Buy” by Goldman Sachs, well-positioned in global competition. On average, 34% of their revenue is overseas, with 60% growth over the past two years. Half of the Top Ten private firms are included, as industry leaders with strong balance sheets, cash flow, advanced technology, and international market entry capabilities.

Chart 43: Retail, Capital Goods, and Tech Hardware Are Key Industries in the Global Leaders Portfolio

Analysis: Goldman Sachs also selected 25 stocks benefiting from the “Going Global” strategy (list available via AI). These companies generate about 34% of revenue overseas, with half being P10 firms, demonstrating strong international competitiveness and resources for global expansion. However, avoid companies with high U.S. exposure to prevent unexpected risks like sudden black swans.

Shareholder Return Portfolio: Chinese listed companies are expected to return a total of about ¥4 trillion RMB in cash to shareholders in 2026. We are optimistic about this portfolio, which includes 30 Goldman Sachs-rated “Buy” stocks across 16 GICS sectors. These stocks have begun returning cash, increasing dividends, or participating in buyback plans.

The list is highly liquid, with a forward P/E of only 10.5x, and offers a 5% dividend yield (consensus). Over the past two years, it has delivered a total return of 68% (Sharpe ratio 1.8), outperforming the MSCI China and CSI 300 indices by 7 and 25 percentage points, respectively. Its stable cash yield provides diversification for AI/tech investments.

Chart 44: Total Cash Returns of Chinese Listed Companies Could Reach ¥4 Trillion RMB in 2026

Analysis: Lastly, the dividend stocks that less experienced investors might overlook (list available via AI). These are the core assets that large funds use as ballast. Experienced investors understand that having some capital base is crucial—surviving cycles is akin to compound interest.

With a solid capital foundation, investors prioritize asset safety. Many young investors with limited resources tend to chase high-risk, high-reward stocks (my younger self). Only after experiencing multiple cycles do they realize that safety comes first; luck alone often leads to losses when faced with reality.

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Editor: Yang Ci