Bank of America: Look for China Stocks to Stage Second-Half Recovery in 2025
2min read Bank of America’s (BofA) outlook for China’s equity market in 2025 highlights cautious optimism, emphasizing a defensive start to the year while setting the stage for a potential rally in the second half.
With China's equities rebounding by 16 percent in 2024, following a steep 50 percent decline over the prior three years, the market remains attractively valued but uncertain, with key catalysts likely to emerge in the coming quarters.
Key Themes in the China Trade
BofA advises a defensive strategy for the early part of 2025, recommending high-yield value stocks as a hedge against ongoing volatility. The firm suggests investors gradually shift toward quality beta during market corrections or in response to significant stimulus measures, which could set the stage for a more sustainable rally later in the year.
A critical factor in this outlook is credit growth. BofA identifies an increase in credit growth to 9 percent, up by one percentage point, as a key indicator for the market’s trajectory. Such an acceleration would signal increased liquidity and economic momentum, creating conditions for a second-half rally and laying the groundwork for a fundamental recovery in 2026.
Valuation and Market Dynamics
China’s MSCI Index saw a notable recovery in 2024, with its forward price-to-earnings (P/E) ratio climbing from 8x to 10x. While this represents a significant improvement, the current valuation remains below the long-term average of 12x, suggesting room for further upside.
However, this valuation gap reflects lingering investor skepticism about the sustainability of China’s economic recovery and the pace of structural reforms.
Sectoral Preferences
BofA highlights specific sectors poised to outperform in 2025, reflecting areas of resilience and growth potential in China’s economy:
Media and Online Retail: Companies like Alibaba (BABA) stand out due to their dominance in e-commerce and digital ecosystems. These sectors benefit from consumer shifts toward online consumption and the ongoing digitalization of the economy.
Autos: The automotive industry, particularly electric vehicles (EVs), remains a cornerstone of China’s industrial strategy. Supportive policies and strong global demand position this sector as a key driver of growth.
IT Hardware and Semiconductors: As China continues to invest in technological self-sufficiency, IT hardware and semiconductor companies are expected to benefit from robust demand and government-backed innovation initiatives.
Risks and Challenges
While the outlook for a second-half rally is promising, several risks could derail this scenario:
Sluggish Consumer Confidence: Despite stimulus efforts, weak consumer spending remains a headwind, limiting the broader economic recovery.
Geopolitical Tensions: Trade conflicts and concerns over Taiwan continue to weigh on foreign investor sentiment, deterring capital inflows.
Policy Uncertainty: While the People’s Bank of China has hinted at further easing, delays or insufficient stimulus measures could undermine market momentum.
Strategic Implications for Investors
Start Defensive: Focus on high-yield value stocks in the first quarter to protect against potential volatility.
Monitor Credit Growth: Keep a close watch on credit metrics, particularly in the first quarter, as an early signal for market conditions.
Target Growth Sectors: Gradually allocate capital to sectors like media, online retail, autos, and semiconductors, which are well-positioned to benefit from structural trends and policy support.
Prepare for a Second-Half Rally: Be ready to add exposure during market corrections or in response to meaningful stimulus announcements, positioning for potential gains in the latter part of the year.
Conclusion
Bank of America’s outlook for China’s equities underscores a cautious but constructive stance for 2025. While challenges persist, including weak consumer confidence and geopolitical risks, the potential for accelerated credit growth and targeted stimulus measures offers a pathway to recovery.
With a focus on strategic sectoral plays and a balanced approach to risk, investors can position themselves to capitalize on opportunities in China’s evolving market landscape.