Investment Rating - The report maintains an Equal Weight (EW) rating on Chinese equities within the Emerging Markets (EM) and Asia Pacific ex-Japan (APxJ) framework, reflecting a balanced outlook amid structural improvements and macro challenges [3][22][39]. Core Insights - The report highlights a structural improvement in the Chinese equity market, particularly since the second half of 2024, driven by a bottoming-out of Return on Equity (ROE), government support for private sectors, and the emergence of technology leaders in AI, Tech, and Smart Manufacturing [2][11][42]. - Index targets for June 2026 have been raised, with projected upside of 3% to 5% for major indices such as MSCI China, Hang Seng, HSCEI, and CSI300, reflecting improved earnings and valuation forecasts [2][19][30]. Summary by Sections Structural Improvements - The report notes that structural improvements in the Chinese equity space are sustainable, supported by corporate self-help initiatives, shareholder return enhancements, and a favorable government stance towards private sectors [2][11][42]. - The MSCI China's ROE has improved from 9.8% in mid-2023 to 11.9%, with expectations to exceed 12.0% by the end of 2026 [47]. Market Dynamics - Recent partial de-escalation in US-China tariff tensions has alleviated investor concerns, contributing to a more favorable outlook for Chinese equities [12][19]. - The offshore market is preferred over the onshore A-share market due to a stronger CNY and less exposure to macro-deflationary sectors [4][39]. Sector Preferences - The report advises a balanced investment approach, favoring high-quality large-cap internet and tech leaders while underweighting energy and real estate sectors [5][40]. - Key trades for the second half of 2025 include increasing exposure to Hong Kong/ADR versus A-shares and selectively investing in Chinese AI/Tech leaders [41]. Earnings Outlook - Corporate earnings are showing signs of stabilization after a prolonged downward revision cycle, providing a cushion as global growth slows [13][14]. - The report anticipates moderate earnings growth for 2025 and 2026, with nominal GDP growth forecasted at 3.7% and 3.6%, respectively [23][17].