China Equities: Navigating the Trade Truce to 13x Valuations

The U.S.-China trade truce of 2025 has introduced a critical inflection point for investors seeking exposure to Chinese equities. With tariff reductions, supply chain stabilization, and geopolitical risk mitigation, Nomura's recent tactical overweight call on MSCI China suggests a compelling opportunity to reallocate capital to this underappreciated market. Here's why the truce's ripple effects could drive a valuation rebound to 13x forward earnings—and where to position portfolios now.

Valuations: A Discounted Market Ripe for Recovery

MSCI China currently trades at a forward P/E of 10.2x, nearly 20% below its five-year average of 12.6x. Nomura's price target of 13x hinges on the truce's ability to reduce risk premiums and unlock pent-up demand. With U.S. tariffs on Chinese goods temporarily slashed from 55% to 30%, the cost of doing business between the two nations has become less punitive. For sectors like tech (semiconductors, rare earth-dependent industries) and consumer discretionary, this translates to margin improvements and higher earnings visibility.

Data shows the current discount to historical averages, suggesting room for expansion if the truce holds.

Geopolitical Risk Reduction: A Fragile but Meaningful Break

The truce's most immediate impact is on geopolitical risk pricing. A 90-day tariff pause—alongside China's commitment to supply rare earths and magnets—has eased supply chain bottlenecks, particularly in defense and electronics. While risks remain (e.g., the July 8 deadline for permanent tariff terms), the reduction of U.S.-China trade volumes by 28.5% YoY underscores the urgency to find a lasting solution.

Key to the truce's staying power is its bipartisan appeal: U.S. policymakers avoid a recessionary tariff spiral, while China gains breathing room to implement domestic stimulus. Analysts at Raymond James note that equity markets have already priced in a 15–17% long-term tariff equilibrium, a level far more manageable than the punitive 55% regime. This stability reduces the cost of capital for Chinese firms and supports a gradual rerating of cyclicals.

Strategic Reallocation: From India to China

The trade truce has reignited capital flows into China, reversing the "India over China" narrative that dominated during the peak of trade tensions. Investors had previously allocated to India to hedge against supply chain disruptions, but the rare earth deal and tariff reductions have shifted the calculus.

Recent inflows into China have outpaced India, signaling a rotation back to its cheaper valuation multiples.

Nomura's call for a tactical overweight is a green light for this shift. With China's GDP growth projected at 4.5–5% in 2025 (versus India's 6–6.5%), the trade truce has narrowed the growth gap while offering superior valuations. For example, MSCI China's 10.2x P/E is half that of India's 20.5x—a gap that could narrow as geopolitical risks abate.

Sector Spotlight: Themes to Capitalize on Trade Stability

The truce's benefits are not uniform—selectivity is key. Focus on three themes:

1. Technology & Semiconductors:
2. Why: The U.S. easing of non-AI chip restrictions and China's rare earth supply deal unlock growth for companies like SMIC and TSMC.

3. Play it: Overweight semiconductor equipment stocks and chip-design firms.

4. Consumer Discretionary:

5. Why: Lower tariffs reduce input costs for exporters (e.g., automotive, textiles) and boost domestic consumption via fiscal stimulus.

6. Play it: Consumer staples and online retail platforms like Alibaba.

7. Infrastructure & Renewables:

8. Why: China's domestic stimulus—targeting green energy and urbanization—aligns with global ESG trends.
9. Play it: Solar manufacturers (e.g., JinkoSolar) and EV battery suppliers.

Risks and Considerations

• Truce Duration: The 90-day window is a test of both nations' commitment. A failure to extend terms could reignite volatility.
• Global Spillover: Conflicts like Israel's strike on Iran highlight the fragility of global stability, which could divert capital from emerging markets.
• Valuation Ceiling: A 13x target is achievable but hinges on earnings upgrades, not just multiple expansion.

Investment Thesis: Act with Conviction, but Stay Selective

Nomura's overweight stance is a catalyst to take incremental positions in MSCI China. The truce has created a "buy the dip" environment, with the index's 13x target implying 27% upside from current levels. Prioritize sectors tied to trade normalization and domestic stimulus, while hedging against geopolitical tailwinds via short-term volatility instruments.

In a world of 2.3% global growth and 4.45% U.S. Treasury yields, China's undervalued equities—and the truce's role in reducing risk premiums—offer a compelling asymmetric bet. The path to 13x is not without potholes, but for patient investors, the destination is worth the ride.

The views expressed here are based on publicly available data and are not financial advice. Always conduct independent research or consult a financial advisor before making investment decisions.