The China Market Is Under-Owned, but Increasingly Divided: BofA Securities

Why It Matters

The widening gap between high‑growth tech stocks and lagging internet firms, combined with shrinking MSCI weight, signals both risk and untapped opportunity for investors willing to navigate China’s fragmented landscape.

Key Takeaways

• Foreign investors continue exiting China, favoring Korea and Taiwan.
• Chinese deep‑tech and semiconductor stocks outpace lagging internet firms.
• Earnings revisions hurt China’s MSCI weight, now ~22% from >30%.
• New AI‑related names lack familiarity, deterring foreign capital.
• Sanction risk and sector concentration amplify outflow pressures.

Summary

Bank of America Securities warned that China’s equity market remains under‑owned and increasingly fragmented. International capital is fleeing to Korea and Taiwan, while the Hong Kong‑listed MSCI China index lags behind peers, its weight dropping from over 30% to roughly 22%.

The firm highlighted a stark performance split: deep‑tech and semiconductor names have surged 20‑30% year‑to‑date, whereas internet‑focused stocks such as those in the Hansen Tech index are down double digits. Earnings revisions have been negative for China’s consumer‑heavy sectors, and AI‑related hardware firms remain unfamiliar to most foreign managers.

BofA cited concrete data – the CHING NEX index’s 20‑30% gain versus the Hansen Tech’s double‑digit loss, and the MSCI weight contraction – as evidence of the divergence. It also warned that newer AI semiconductor issuers face sanction‑risk concerns, further discouraging inflows.

The analysis suggests that while patient investors could capture upside in China’s emerging deep‑tech space, the broader market will likely endure continued outflows unless earnings improve and regulatory clarity returns.

Original Description

BofA Global Research's Winnie Wu says that China remains an underowned market as global investors continue favouring Korea and Taiwan despite improving positioning in Chinese equities. She adds why weak consumer earnings, unfamiliar AI names and geopolitical risks are still keeping foreign capital on the sidelines.