Investors get more bullish on China stocks as the Asian giant goes big on AI: Morgan Stanley

[SINGAPORE] Investors are getting increasingly bullish on Chinese stocks – partly fuelled by the country’s strong, differentiated developments in artificial intelligence (AI), said Morgan Stanley equity strategists.

Chief China strategist Laura Wang said she has observed the “highest level of interest from US investors” in Chinese holdings since the Covid pandemic, as at September 2025.

“Over 90 per cent of these investors I spoke with told me they were going to increase allocations to China,” she shared at Morgan Stanley’s Apac Summit 2025 on Wednesday (Nov 19).

The equity strategists noted that structural improvement in the China equity space has been occurring “steadily”, especially since the second half of 2024. This follows an extended period of underperformance and continuous valuation de-rating from 2021 to 2024.

Leaders in China’s AI, technology and smart-manufacturing space are also emerging to participate in global competition. This can enable a “valuation regime shift” for Chinese offshore equities, the analysts said.

“We continue to like AI (as a sector)... Based on the (Chinese) government’s track record, they deliver. So we want to stand by them when they say they will focus on certain sectors on a long-term basis,” said Wang.

China sector strengths

Chinese household names Tencent and Alibaba are “obvious” targets of investors, she noted, given their proven track records of success, and a very strong commitment to AI transformation.

“There’s nothing wrong putting money in these names, as they will protect and offer decent upside (to investors),” said Wang.

However, the country appears to have gone through a “trough” in consumer confidence after its “Deepseek moment”, said Pierre-Henri Cloarec, portfolio manager of the Nordea 1 – Emerging Sustainable Stars Equity Fund, with signs of recovery now emerging.

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“There is still work to be done, but we’re already seeing positive signs in AI and in several companies benefiting from these trends,” he said at a 2026 investment outlook briefing on Tuesday.

Wang from Morgan Stanley acknowledged that China is still seen as number two – behind the US – in the AI sector among investors, broadly speaking.

However, other Chinese sectors such as robotics and automation, and biotech and drug development come out on top, said Wang.

Investors are also increasingly taken in by newer players in Greater China’s manufacturing scene, said Mike Zheng, head of Hong Kong/China equity sales at Morgan Stanley.

“TSMC is typically the most in-demand corporate, and Alibaba and Tencent pre-Covid; but now the top requested one (at this conference) is BYD, reflecting the growing strength of China’s manufacturing scene,” he said.

“(Investors) are really trying to find out what is the next generation of Chinese companies that can compete and perform on an international stage,” Zheng added.

Risks for China, broader Asia players

A key risk that China will face in the AI race is the management of its supply chain, particularly in the area of “advanced physical AI” which requires a significant amount of memory and computing power, said Gina Kim, portfolio manager, emerging market equities at Nordea Asset Management.

“If the supply chain within China is unable to be as efficient as the supply chain outside of it, then I do see that development stalling to a certain point in the short term,” she posited.

Chip quality and availability would thereby be a “key bottleneck”, Kim said.

Beyond China, Wang noted that investors have increasingly become more interested in Asia markets.

“US investors do appreciate the depth and breadth of Asia markets – with quant funds, in particular, drawing attention,” she noted.

Various parts of Asia are the “backbone” of enabling AI, said Nordea Asset Management’s Kim, pointing out that Taiwan and South Korea in many ways are the “pick and shovel makers” in this field.

Despite a supply-side consolidation in the space, she maintained that there continues to be “plenty of upside” in these parts of Asia.

“The valuations that we’re seeing right now do not adequately reflect their potential earnings for the next three to five years, because of this consolidation.”

Cloarec also reiterated how South Korea, China and Taiwan have been “central” to the AI supply chain and performed very well in 2025. “We expect that importance – particularly in relation to Nvidia and the broader AI ecosystem – to continue.”